Editor: A. R. Kemal

Literary Editor: Professor Aurangzeb A. Hashmi

The Author

NADEEM UL HAQUE worked for twenty-two years for the International Monetary Fund and led programmes in public sector

restructuring, economic analysis, training, and policy research. He was educated at the University of Chicago and the London School of Economics. Author of many articles and research monographs, he has also contributed to various practical modernisation projects including that of the Central in . He served as Adviser to the Ministry of Commerce, Government of Pakistan before his nomination

as Director of the Pakistan Institute of Development Economics, Islamabad.

ISBN 969-461-130-X

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means—electronic, mechanical, photocopying, recording or otherwise—without prior permission of the author and or the Pakistan Institute of Development Economics, P. O. Box 1091, Islamabad.

© Pakistan Institute of Development Economics, 2005.

Pakistan Institute of Development Economics Quaid-i-Azam University Campus P. O. Box 1091, Islamabad 44000, Pakistan

E-mail: [email protected] Website: http://www.pide.org.pk Fax: +92-51-9210886 2 Lectures in Development Economics No. 11

BRAIN DRAIN OR

HUMAN

Nadeem Ul Haque

PAKISTAN INSTITUTE OF DEVELOPMENT ECONOMICS 3

Contents

Page Introduction 1

1. Brain Drain: A Literature Before Its Time 4

2. and Skills Matter When Growth is Endogenous 6

3. Brain Drain vs. The Brain Gain 9

4. Defining and Measuring HCF: Heterogeneity and Professional Development 13 5. The Impossibility of an Independent Incomes Policy: Incentives (Not Curbs) to Retaining Skills 30 6. Dealing with the Problem: A Policy for Human Capital Management 39 7. and 43 Conclusion 44 References 46

Abstract 51 4

We trust our health to the physician our fortune and sometimes our life and reputation to the lawyer and attorney. Such confidence could not be reposed in people of very mean or low condition. Their reward must be such, therefore, as may give them that rank in the society which so important a trust requires. The long time and great expense laid out in their education, when combined with this circumstance, necessarily enhance the price of Labour [Adam Smith, Wealth of Nations (1976) I 118].

INTRODUCTION* The Brain drain literature has recently been revived. Several new papers have been written while several international organisations and universities are initiating long term research projects. economists and activists have long voiced their concerns for the short supply of domestic skills in their countries.1 Unfortunately, the new literature seems somewhat removed from this expression of concern from the affected people. Rather than examine the detail of the skill shortage and what it implies, the new research is trying to reprove for human capital what we already know for both

Author’s Note: The author would like to thank Surjit Bhalla, Ahmed Galal, Mohsin Khan, Rodney Ramcharan, Paul Streeten, and participants at seminars at the Pakistan Institute of Development Economics and the University of Cairo for comments and suggestions; also Natalie Baumer for editorial assistance. All errors and omission, of course, remain the sole responsibility of the author. 1Developing countries have been trying to highlight the problem and attract the attention of the profession for a while. See http:// sansa.nrf.ac.za/interface/Publications.htm and http://www.thailink. com/. 2 the goods and the capital markets that “openness is better than autarky”. Moreover for empirical evidence rather than rely on survey data or anecdotal evidence for these countries, the new studies use US migrant data US in cross country growth regressions. Such data cannot tell us how short the government might be in skills for economic analysis, infrastructure management, legal and judicial skills, as well as for market regulation, (see Box 1). And it is this short supply that people refer to in their discussions of the brain drain.

Box 1 Skills in Government in Low-income Countries

 Economic ministries and central work with an extremely limited number of economists.

 Universities are staffed with professors with manifestly obsolete skills; and hospitals lack specialised skills.

 It is commonplace to observe overmanned government departments being run by a handful of underpaid professionals barely managing to keep their heads above the work.

 Most of the policy analysis and technical work is now routinely done by technical assistance advisors. The result is a piling up of reports with few people capable of, or with enough incentive to absorb them.

This paper argues that we should view the issue of the “brain drain” in much the same way as we look at capital 3 flight. In the latter literature, no one now argues that capital flight is a “boon or a curse?”2 Indeed, it can be argued that in times of war or extreme disorder, or in countries where investment opportunities might not exist, flight of capital might be optimal for not only does it preserve the capital but also obtains a higher rate of return. The phenomenon of capital flight is treated much like a barometer of economic and political stability and good housekeeping; increased capital flight is treated as an indicator of the need for policy correction.

Capital flight per se is considered neither good nor bad merely a portfolio choice of domestic citizens. However it can be used by the citizens to militate against poor economic policy as in Mexico in 1994. Most of the discussion on the subject is therefore to develop good policy, markets and instruments to induce the citizens to invest at home. The brain drain literature does not take the view that individuals are voting with their feet against poor policy. Instead it regards curbs on migration as the only policy response. Consequently, the paper argues that we could learn about the brain drain while maintaining the analogy with capital flight.

The rest of the paper is as follows. The first two sections will very briefly summarise the brain drain literature arguing that with the emergence of the new growth theories the issue is now far more important than when the idea originated. The third section summarises some of the salient features of the models of brain drain to understand the growth impact as well as the issue of the brain drain. This is followed by a discussion of how to

2Commander, et al. (2002) presents an excellent and up to date survey of the paper entitled “Boon or Curse?” 4 measure the brain drain and why average educational achievements may not be appropriate. The fifth section argues that one important ramification of the phenomenon of HCF may limit a country’s capacity to conduct an independent incomes policy. Section 6 notes another important implication of this phenomenon may be that poor countries also need to follow the policies of their richer counterparts and follow a human resource management that targets the global talent pool. Finally, issues of remittances and diasporas are dealt with briefly. The paper ends with a conclusion.

1. BRAIN DRAIN: A LITERATURE BEFORE ITS TIME In the sixties and seventies, the loss of the educated referred to as the “brain drain” received a lot of attention. However, it was always a bit of an intellectual curiosity as it could not be theoretically motivated to show that it had real effects on incomes and growth. It was a “hot topic” at a time when the dominant growth models—Solow and Cass-Koopmans—were based on smooth concave production functions and homogenous labour. Constant returns to scale, homogenous and abundant labour and decreasing marginal products left virtually no room for . Technology was exogenous delivered by nature by a process unknown. Steady state of incomes and growth was attainable by all countries and all that was necessary was to fill investment gaps [Easterly (2001)]. It was a period of proliferation of aid and infinite supplies of labour. Not surprisingly, talk of ‘brain drain’ was treated somewhat disdainfully by the economics 5 profession.3 In this world, an arising from the migration of the educated was very hard to motivate. World incomes would improve with movements of capital. Since labour was abundantly available, why retain it at home? In the standard neoclassical model, each individual obtains and consumes her marginal product; therefore withdraws nothing that the individual would have consumed anyway. Consequently, of the more skilled workers increases the earnings of migrants without reducing the welfare of those left behind. World income is therefore increased [see Grubel and Scott (1966) and Johnson (1967)].

Bhagwati and Hamada (1974) pointed out that there could be a possibility of a loss of welfare of the non-migrants as a result of migration if there are externalities associated with a loss of the scarce skills or from a policy of subsidy to the acquisition of the departed skill. However, there was no motivation for such an externality and hence the case for any policy response to the “brain drain” was never considered to be fully made. Moreover, the kind of policy responses that were being proposed in that period did not elicit any confidence. On the one hand curbs on movement of educated people were being proposed and on the other Bhagwati (1972) recommended a “brain drain” tax.4 As is obvious, despite the academic interest

3Is the brain drain significant? The scant anecdotal evidence, summarised in Haque and Aziz (1997) (Tables 4 and 5) suggests that the problem may not be trivial. Given the relatively short supply of skills in these countries, even non-spectacular numbers appear to have consequences for institutional capacity (see Box 1). 4The proposed tax was to be levied on the highly educated migrants only and collected by the country of migration for a period of say 10 years. The revenues from such a tax which were estimated to be about US$ 750 million in 1972 were to be made available to the UN for use in its financing of development. 6 in it, the tax proposal was never seriously considered for implementation despite impressive revenue estimates.5 As a result of this early literature on the brain drain, it has been dismissed as the manifestation of mere nationalism and indeed some nationalistic leaders have used brain drain rhetoric to argue for control on migration or demand payments for the migration. One group argues that the brain drain reflects the need in international markets for specialised human capital: human capital tends to move to regions and occupations where its productivity is high. Nationalists regard a minimum level of professional skills as required for the functioning of the nation state and hold that these skills are the property of the nation state. The debate is then often obscured by into the age-old question of “should governments curb individual freedom of movement?”

Interestingly enough the term “brain drain” was never really defined. It was merely the loss of skills or the highly educated. Since then the profession has been looking to understand the impact of migration of those with more than a certain number of years of education.

2. HUMAN CAPITAL AND SKILLS MATTER WHEN GROWTH IS ENDOGENOUS Human capital has received renewed attention as well as relevance in recent research on endogenous growth. These models of growth have endogenised growth by allowing for increasing returns through endogenous technical change such as that which arises from innovation or discovery of new

5This proposal received very serious attention among academics in the mid-seventies. A major conference was held on the issue of instituting a tax on the brain drain in Bellagio in 1975. The proceedings of this conference are published in Bhagwati and Partington (1976) and Bhagwati (1976). 7 goods through increased R & D [Romer (1986, 1990) and Grossman and Helpman (1991)]. Lucas (1988) even talks of a direct externality associated with the transmission of human capital through the generations. This research has also emphasised the role of good institutions, competent and modern legal and regulatory frameworks and even development of social capital and civil society [Barro and Sala-i-Martin (1995) and Barro (1997)]. It is hard to see how these growth-enhancing changes would not require competence and leadership at various levels in society. Endogenous growth models have consistently identified human capital as an important determinant of . Following Romer’s endogenous technical change and Grossman and Helpman’s innovation models, increasingly the emphasis has been on the development of new ideas and technologies as a driver of growth and productivity. This was strongly underscored by the 90s technology led productivity increase in the US. Even casual empiricism suggests that the US, the richest country in the World leads in quality education, research and innovation.

US leads the world in research, research funding, the number of researchers, as well as the number of patents. While in 2001 the US per capita income was 42 times that of the average for low income countries, its research funding was 218 times that of these countries. Figure 1 shows the distribution of patents in the world in the last 30 years. US owns about 40 percent of such patents and the distribution quickly tails off (an important point to keep in mind). Interestingly enough the USPTO data shows that in 1999, IBM alone holds more patents (2756) than the group of 134 developing countries (2643). Even this picture of developing country patent holding is misleading: the bulk of these 8 patents are held by five large developing countries, India, China, Brazil, and Mexico. Most of the developing countries are in any case held by non-residents [see Eaton and Kortum (2001)]. Figure 2 shows the disparities in human capital as measured by researchers and engineers per 10 thousand workers. It is clear from evidence 9 Fig. 1. Distribution of Patents Across Countries.

80.00

70.00 Share 63-80 60.00 Share 01 Share Total 50.00

40.00

30.00

20.00

10.00

0.00 s n y e a s S i K u a K n c s ic W U p a n H A a U a s O J m u + d N r r a R e F R n n i a G h E C O R

Fig. 2.

Researcher and Eng/10,000 Workers

90

80

70

60

50

40

30

20

10

0 Japan US EU China LCDs Exc Asia 10 such as this that developing countries are really not playing the innovation/research game in any manner as they own virtually no patents.

Empirically the impact of education on economic growth has not shown itself as robustly as theory would imply.6 Thus the role of education though held firm in theory remains somewhat of a curiosity. Perhaps this is because the education variable is measured as merely years of school attendance, without taking into consideration quality, certification and professional or technical attainment (another subject to which we will return). However, the distribution of patents, research human capital and research funding tentatively suggests that there is a nonlinear impact of education (increasing) impact of educational attainment on economic growth. And it is this evidence we should focus on for understanding the HCF as well as the human capital utilisation issue in poor countries.

While economists are debating the impact of the brain drain, policies in the advanced countries to fuel their innovation industry, have been increasingly directed toward poaching human capital (see Box 2).

3. BRAIN DRAIN VS. THE BRAIN GAIN To fix ideas let us consider a simple general equili- brium model with two countries with heterogeneous agents.7

6Pritchett (2001) shows that considerable educational investments in low income countries do not seem to have the desired impact on growth. Largely because we measure quantity rather than quality. 7See Haque and Kim (1995), Stark (2002) and Mountford (1997) for models of this type. 11

Box 2 Poaching US NSF tells us:

 USA relies heavily on imported . In 1995, 12 percent of all science and engineering degrees in USA were of foreign origin; over 72 percent of these were born in a developing country. The higher the diploma the bigger the proportion of the foreign-born population. 23 percent of those having a are not USA born citizens and this proportion is even much higher in some key areas such as engineering and computer sciences (40 percent). [Source: The SESTAT database of the National Science Foundation (NSF) see NSF (1998)].  Every year US receives 500,000 foreign students who contribute $ 7 billion to the economy making education one of US’s finest exports. Foreign students have grown at 5 percent per annum in the US over the last 20 years. Half the US PhD recipients are foreigners [Regets (2001)].  50 percent of all PhDs remain in the US after completing their education [Regets (2001)]. Skills are welcomed in advanced countries (a revealing fact). US congress discussed BRAIN (Bringing Resources from Academia for the Industry of our Nation Act) in 2000 to further ease access to highly qualified foreign students. Historically, US has had a most successful “brain gain” immigration policy. Recently, , UK, , and other advanced countries have substantially liberalised policy for highly skilled migrants. Point scoring systems that award high marks for educational achievements are now on offer.

12 Growth in each country is driven by the accumulation of human capital by economic agents. Agents choose to acquire education in their youth but retain the choice of migrating with that education in the later more productive part of their life. Since agents in the model are endowed with differing abilities, they also differ in their human and other decisions. The two countries have differing tax policies to capture any number of government- imposed restrictions—from incomes policy to government monopsonistic or price leadership position in the labour market. Migration takes advantage of this wage differential and contends with costs associated with it and with assimilation in the foreign country. Individual education and consumption decisions as well as the choice of residence in old age are thus taken jointly to maximise the present value of earnings over the two-period lifetime.

Almost all of these models show the obvious results that 1. The more able agents spend more time on education. 2. If domestic tax/incomes policy reduces the rate of return to the more talented, the upper tail of the talent distribution will migrate, (talent migration will be in direct proportion to the earnings differential). 3. Unquestionably, openness is preferred to autarky. Migration possibilities increase the incentive to gain an education. The latest literature on the subject goes to considerable lengths to show that migration possibilities improve the incentive to education.8 This is gleefully termed as the “brain gain”. This is a trivial extension of the “openness is superior to autarky” result that we learnt

8See Mountford (1997), Bienne, et al. (2002) and Stark (2002). In Haque and Kim (1995) we found this to be so trivially obvious that it is tucked into a small proposition. 13 in elementary trade theory and detracting from the more serious level at which this subject should be studied. The real issue is not the superiority of openness but the understanding the counterfactual: maintaining the assumption of openness (so that incentives to acquiring education are in place), let us examine if growth would have accelerated or not with greater incentives to skill retention at home. Unfortunately, the fixation of economist on the earlier curbs as a policy response to the migration of skills has precluded a sensible debate and understanding and forced an almost needless debate on this issue.

In a growth model with heterogeneous agents and a Lucas externality of education, (i.e. loss of skills from the upper tail of the skill distribution) generates a permanent reduction of per capita growth in the home country and that the magnitude of this reduction is proportional to the fraction of the population that has migrated [see Haque and Kim (1995)]. Because of brain drain there may be no convergence in incomes. Not only are permanent differences in growth likely to result but so in a permanent difference in level of incomes across countries. The more skill poor the country the greater the impact of human capital flight on its growth since growth depends on the cumulative human capital distribution.9 The experiment here is maintaining the assumption of openness and

9This framework also allows us to examine tax-subsidy policy in the context of HCF. In a closed economy, a education subsidy can induce a positive growth effect while in an open economy (where labour is mobile) such a policy could have a negative impact on growth. In a closed economy, a uniform subsidy to all levels leads to higher growth and has lower tax requirement than a proportional subsidy. In an open economy (where labour is mobile) a subsidy to lower levels of education has a more positive effect on growth compared to a uniform subsidy because of human capital flight consequences of subsidy to higher education [see Haque and Kim (1995)]. 14 comparing the counterfactual of policy to retain the skills as opposed to the policy of letting the drain take place.

4. DEFINING AND MEASURING HCF: HETEROGE- NEITY AND PROFESSIONAL DEVELOPMENT Brain drain is often defined as the international transfer of resources in the form of human capital that is not recorded in the BOP. As always, human capital is left undefined. Most empirical studies of brain drain today continue to use the number of years of education of the migrant as a measure of skill. This measure is seriously flawed for at least 2 reasons.  First we know that the quality of schooling varies enormously across countries and most likely in proportion to per capita income or the level of development. For political reasons governments in poor countries have expanded university capacity without worrying about quality. Large numbers are graduated with poor educational facilities and limited job opportunities. Periodically, the graduate unemployment is solved by hiring of these unemployed graduates into government. These graduates are not comparable to those coming out of major universities in advanced universities and indeed some of their degrees are not even recognised overseas. Moreover when some of these people migrate, they are not always employed in situations that they were trained for.10

10Bienne, et al. (2002) measure the brain gain using the impact of migration on the education levels data without regard to this autonomous politically inspired increase in education. Perhaps one approach might be to correct for educated unemployment or the size of government employment in such estimations. 15  Second, schooling levels vary even within a country: the rich can access quality private schooling or send their children overseas. Many children from poor countries are studying in the best schools in and America. Even within countries (even in the US, and especially in Europe) the crop of the elite schools is what most people look toward as for the supply of private and public leaders. When the multinationals or international agencies are looking for candidates, they draw upon this group and not those who have been through the average low quality public university which is understaffed and resource starved. To measure HCF, we should be interested in the loss of key skills (such as scientific research, fine regulatory and policy-making and the provision of world class graduate education) from an economy and these skills are certainly not captured by the measuring the number of years that some portion of immigration might have spent in poor quality schools in some poor country, the diplomas of which are not even internationally accepted. We must therefore understand heterogeneity not just in the talent distribution within a country but also in the distribution of quality of schooling across countries.

In some sense when we talk of brain loss or missing human capital, we are referring to vital professional skills that are lacking. If this is the case, we should be looking at the development of professions in a country and see how migration of quality professionals may be impacting on such professional development. For obvious reasons, we assume that talent is identically and normally distributed across countries, we cannot argue that professional skills are identically distributed across countries or even that they are normally distributed. Skills 16 depend on the quality of the education system, the level of professional development in the country and the availability of research funding and facilities. Unfortunately, the level of professional development in poor countries is not an area that receives a lot of attention and hence perhaps remains much under-researched.11 In my view this is an important approach to understanding just the issue of HCF but also several issues related to the development of governance, education and the civil society.

We can derive some understanding of professional development across countries by using data available on citations in a wide range of subjects. Using citations data, we can derive a distribution of professional quality within professions as well as across countries. How professional achievements are distributed within the professions will give us a framework for measuring the degree of professional achievement within a country. The differences between countries indicate to us the variation in professional quality between countries.

Two important observations can be made on this picture of citations data:  The distribution of paper and citations highly skewed across countries. This skewness is maintained even the individual level. Very few individuals publishing extensively or being cited widely and a vast majority who make up the bulk of the profession. After all look at the attention that Hawking, Einstein Freidman etc. get. But then their contributions also match their attention.  Several countries do not even make it on the citations indexes (see Figure 3). The poor countries are again not

11Even the subject of professions itself has received limited attention from economists [see Savage (1996)]. 17 18 Fig. 3. Distribution of Citations and Papers Published Across Countries.

50.00 45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00

USA ITALY SPAIN JAPAN RUSSIA FRANCECANADA SWEDEN BELGIUM FINLANDAUSTRIA ENGLANDGERMANY AUSTRALIA SCOTLAND NETHERLANDSSWITZERLAND PEOPLES R CHINA PAPERS CITATIONS

in that game. Clearly this should raise some questions on the level of professional development in poor countries and their ability to interface with the professional progress overseas. This distribution of professional attainment shows that measuring the quality of human capital by years of education completed will be misleading. Education remains a form of apprenticeship and that apprenticeship depends on the leadership in the profession. And most certainly, the leadership in the professions in poor countries is not showing up in the production of paper, patents and is not receiving attention in the form of citations.

We can conclude that professional skill quality follows a form of a Pareto distribution.12 Thus if we can rank all the

12Much more detailed citation information can be obtained to substantiate the hypotheses presented here. See for example, Garfield (1998) and Batty (2002) on the geographical distribution of knowledge. 19 professionals in a profession by their achievements such as citations or published papers, say from 1……….r where 1 is the lowest rank. Then the cumulative distribution function of ranking of these professionals would be

P(X>r) = r–a … … … … … … (1)

Figure 4 presents a somewhat stylised version of professional achievement within a profession. As it shows professional leadership where most innovation takes place is very small perhaps involving only a handful of people. Pareto distributions (or Power Laws) suggest that there are a large number of average quality professionals but very few winners or professionals of high quality.13 Fig. 4. Distribution of Professional Quality.

1.2

1

0.8

0.6

0.4 % of professionof %

0.2

0 Professional quality

13This “winner take all” form of labour or professional configuration is reminiscent of Lucas (1977) and Rosen (1989). Labour market and industrial organisation literature has long recognised heterogeneity to be important for understanding the wages and firm size distributions. “Superstars”— managers and leaders by managing more of their less-talented counterparts can spread their productivity widely and hence increase aggregate productivity. Skill complementarities hence become important. 20 I suggest that when we talk of HCF or the kind of human capital that is a loss to society which will impact poorly on growth, we are talking of the few who are in the right tail of the Pareto distribution of professional quality. It is the leaders of the profession who create an interface between local profession and progress in the profession at an international level. But we also know that while professional skills are distributed according to the power law, they are not identically distributed across countries. A situation such as Figure 5 is quite likely to prevail where the skill quality of the profession in rich countries (urbania) dominates skill quality in poor countries (ruralia) everywhere. Mounting evidence on the poor quality of schooling in developing countries substantiates this hypothesis.

The brain drain then is as depicted in Figure 5. The leaders of a profession from a poor country migrate seriously eroding the average quality of the profession.

Fig. 5. Professions Across Countries.

1.2

1

0.8 Skill distribution 0.6 truncated here 0.4

0.2 % profession of resident

0 Professional quality

Urbania Ruralia

21 In sum, we should move away from trying to study the simple educational attainments migrants to understand the HCF problem. Instead a better handle would be to develop profiles of professions and see if migration of key professionals who could have been leaders has impacted negatively on professional development. Moreover, in framing policy, rather than worry about migration of the professionals, let us develop innovative approaches to creating professional depth in poor countries.14

The Power law distribution can also be translated into “the knowledge pyramid,” which frames every profession within a country. The general practitioners including primary and secondary school teachers some skilled government and private sector workers make up the base of the pyramid. As you climb up the pyramid, professional with a deeper knowledge of what their professions are needed. They must know their subject in greater depth and have the ability to keep up with what is happening in their professions. As we are all aware, disciplines and professions advance at an extremely rapid rate. Unless there are an adequate number of researchers/advanced academics at the tip of the pyramid, the ability of the entire profession to keep pace with the frontiers of the discipline will be seriously impeded. With the best professionals migrating, many countries develop professions that are “leaderless” or “headless” (see Figure 6).

14For example, no developing country allows open international recruitment for university professionals and researchers like the US. Nor do they allow their researchers to hold joint appointments with US universities. Israel has developed leading professionals using this mechanism. 22

Fig. 6. The Pyramid of Education.

100% Fundamental Researchers

80% University Professors 60%% College Teachers

40%% Secondary School 20%% Teachers Primary School %0% Teachers 1

Should we worry about the loss of the upper tail of the professional skill distribution? Or should, as argued by the “brain gain” research, the demonstration effect of their migration induce higher professional attainment by the stayers? To treat this important issue meaningfully, we need to move beyond the mere use of average educational attainment data in the framework of a growth regression. The impact of human capital and especially professional development on growth, institutional development, and the development and maintenance of social capital is not yet fully understood by the profession. However, there are numerous hypotheses and conjectures that one can draw out of economic and sociological literature that should be 23 investigated for a fuller understanding of the role of human capital and hence the impact of human capital flight. Some of these are:

(i) Benefiting from knowledge spillovers: Innovative activity tends to be concentrated with the US and being the largest source of innovations. However, innovations tend to be fairly mobile having roughly a 2/3 impact abroad of what they have at home [Eaton and Kortum (2001a)]. In recent years countries such as Sweden, Ireland and Korea have broken into the innovation/imitation game. However, they have achieved this through gearing up their research efforts. For example, in per capita terms, Sweden now spends more on research and employs a larger number of researchers than most European countries. It is by this intensive effort at developing research capacity that Sweden, Finland and Ireland have been able to participate in global innovation. Eaton and Kortum (2001a) conclude that “Long run spillovers depend on country’s ability to absorb new technologies”, and that “absorption depends on research effort, which in turn depends on resources devoted to research and knowledge base it is working from”. Of course openness and trade help to connect a country to the network of innovation but if spillovers are to be achieved, it must have the absorptive capacity.15

15In further papers, Eaton and Kortum (2001b) develop models of growth where country productivity is a function of its efficiency as researcher which is a combination of its research effort and its ability to impart knowledge and learn from others. 24 Indeed smallness and remoteness may not be inherently inimical to comparative advantage in research. Countries that achieved higher level of research productivity and growth (Australia, Finland) had significant public and university sector research. All countries achieving high research productivity and growth had achieved high levels of educational attainment prior to their research success. It is obvious that for developing research and knowledge capacity, countries must seek to retain or obtain “brains”.

It seems that even if a country does not lead or share in innovation, it must retain the capacity to be able to share in the diffusion of innovation. A country must therefore invest in R&D to be able to share in innovation (Figure 7 presents a

Fig. 7.

The Frontier: Global Fundamental Research

Spillover Link depends on the ability of the fundamental Government research complex Academia and business to draw upon trough of global Fundamental UNIV knowledge Researchers RES

The peak of the Knowledge Pyramid— the fundamental research complex

25 schematic illustrating this). This would of course mean investing in professional and scientific developments to keep pace with the rapidly growing research in the world. Consequently, even if the country is not truly competing for patents it must seek to do so to keep abreast of expanding knowledge.

(ii) The vicious cycle of poor governance and the brain drain: Box 1 presents some well known stylised facts of skills in government in poor countries while Box 3 presents IMF analysis of skills that are required for developing good institutions in poor countries. It is clear from these two boxes that the supply of skills do not march the demands of modern management and governance. All the IFIs as well as other donors have been busy for the last 2 decades in what known as capacity building. Additionally, the World Bank has been doing civil service reform extensively backed by large grants and loans.16 The results of capacity building and TA have both been largely “less than successful” [World Bank (2002)]. One important reason for poor governance is the maintenance of outmoded human resource management policies in government in many poor countries.17 For political reasons, governments in poor countries have found it expedient to expand employment while capping wage growth. Similar considerations have led to the pursuit of egalitarian policy in the government cadre so that wage scales have been compressed and salary increases and promotions are not

16It has conducted 169 civil service reform operations supported by structural adjusted loans in about 80 countries [World Bank (2002)]. 17Indeed a major cause of HCF as well as corruption is the poor HRM in government [see Haque and Sahay (1996) and Haque (1998)]. 26

Box 3

Skills Required for Good Governance

“Institutional capacity” is often used as a shorthand for a country’s administrative and management capacity, particularly with respect to implementing economic policies. This encompasses a wide range of activities:

 the ability to collect the statistical information needed for effective policy implementation, and to do so in line with internationally accepted standards;

 the ability to effectively plan government expenditure and the delivery of public services at both the central and local government levels;

 the public sector’s aid absorption and project implementation capacity;

 the effectiveness of agencies to fight corruption and enhance governance;

 the establishment and operation of appropriate regulatory and/or prudential frameworks for companies and banks;

 the making and enforcement of rules and laws and judicial reforms;

 the protection of property rights;

 and the promotion of competition and of a market-based economic system in general.

Where capacity is weak—that is, where a government is unable to effectively carry out its own policies—the consequences for society can be very costly. A good example is the capacity to make reasonably accurate budget forecasts and run a competent monetary and exchange rate policy (my addition).

From “The Role of Capacity-Building In Reduction” IMF March 2002

27 merit-based. The result is that there has been a large flow from these public sectors not only to the IFIs but also to the multinational sector, internationally as well as domestically. The net result is the steady denudation of the very capacity that the donor support is trying to build.18

With poor institutions and poor governance public sector infrastructure—personal security, infrastructure, such as roads and railways, a clean environment, facilities to raise children and provide a future for them—is poorly or inadequately provided. The declining quality of such services has often been cited as a cause of migration. Poor governance can therefore be self- reinforcing. Once it sets, in it ratchets taxes upwards and encourages evasion; lowers professional standards, encouraging the migration of the better professional leaving the poor quality professional to manage the profession with ever weakening standards. Murphy, Schleifer, and Vishny (1991) and Haque and Aziz (1997) have developed interesting models to illustrate how poor incentives can lead to a poor allocation of talent to the detriment of governance and growth. Such societies can be stuck in a low growth trap which may be very difficult to break out of.

Despite numerous consultant and technical assistance reports for capacity building and civil service reform citing the lack of scarce skills as an important constraint to development, to date no systematic attempts at developing an assessment of needed skills in the poor countries has been undertaken.19 Yet it

18See Samad (1993). Developing countries remain concerned yet little research funding is available for this subject. 19Considerable sums are being spent to collect data on corruption, political and institutional arrangements, living standards etc. but hardly any on the assessment of whether universities have teachers of adequate quality. Such assessment may be important if domestic institution-building is a concern given that ghost workers and unqualified appointments in professional positions can create the impression of adequate staffing. 28 is immediately obvious to those involved in technical assistance and training, that for the maintenance of systems for supervision and regulation, provision of social development (including health and education), development and maintenance of infrastructure and governance in general, key skills such as academic, accounting, engineering, managerial, and medical are required at various levels of quality (see Box 3). At a more general level, the continuous loss of the educated will retard the modernisation process as well as the development of domestic policy formulation.20

(iii) Professional standards cannot be maintained with HCF: The Human Development Report (1992) notes, “Emigration also reduces Africa’s capacity to train a new generation of professionals”.21 A “headless” profession also runs the risk of setting in motion an adverse selection process that denudes professional quality and resists globalisation. This happens in two ways. (a) First, the headless pyramid finds itself continually unable to keep pace with global developments. For example, syllabi begin to increasingly show their age of the leaders who either lack the motivation or the ability to keep pace with global research.

20My hypothesis is that this phenomenon is one important factor in the rise of fundamentalism in the Muslim countries. As the better educated, more globalised professionals left the more religiously inclined and less scientifically motivate took hold of the professions and fostered fundamentalism. 21Surprisingly, little has been done to evaluate and understand the problem. The International Organisation for Migration has had since 1983 a program for “Return and Reintegration of Qualified African Nationals”. Since the beginning of the programme about 1200 nationals have been assisted in returning to 6 targeted countries. The IOM is targeting another 1000 by the end of 1998 [Davies (1994)]. 29 (b) Secondly, the leaders of professions seek to set and enforce standards that reinforce their leadership (Figure 8). In Pakistan, for example, science and history syllabi were left to those who had managed to divorce themselves from the global frontier of knowledge and used fundamentalism as refuge. By this means not only were they able to maintain their own pre- eminence but also to feed students either outmoded or false knowledge. The harm that was done was great. Yet the system had no one to challenge the standard setters or standards that were set. K. K. Aziz, one of the country’s best historians wrote about it as did Parvez Hoodhbhoy, an MIT Physicist. But since those who did not accept global standards now controlled the universities, there was no debate.22

Fig. 8. Setting Standards.

Ideas and analysis The Peak for policy

Syllabi for all education/ quality of teachers Ability to bring frontier ideas into research

Quality assurance for education

Organic and endogenous knowledge development vs. Dependence on external TA Quality of professional—Policy and knowledge transfers analyst, manager, media etc.

Institutions and organizations required by economic growth

22A good quality globalised profession is perhaps the best defense against rising fundamentalism. For this policy must be focused on retention of good quality professionals. 30 (iv) “Policy elites”, ownership and social capital: Increasingly externally-driven reform such as the Washington Consensus have been foundered because they were either poor in design or lacked adequate ownership at home among the population at home or that domestic implementation capacity was limited (Box 1). In the absence of domestic policy-making capacity, the policy development effort is undertaken by the donor community. There are several weaknesses in this approach as outlined in Box 4. As externally driven ideas have been found wanting or have been resisted by the local population, it has become clear that domestically owned and developed ideas must be generated.

Consequently, efforts to build capacity for policy development and implementation at a home have been underway for a while, but with limited success. Research in this area has increasingly led to a focus on “policy elites” and “design teams.”23 Chicago boys in Chile, Lee Kwan Yew in and Maggie Thatcher’s “Next Steps” office are all reminiscent of such teams. The domestic technocracy plays a critical role in designing appropriate reform as well as in developing ownership of such reform. (Figure 9). It is hard to see how good and “owned” policy can be developed at home when the skills for making and understanding it are not available.

In their search for a recipe for growth, economists have turned to the foundations of good institutions and trust (social capital). Perhaps building institutions and social capital requires leaders, icons and role models? Could these in turn require some domestic human capital?

23Grindle (2001). 31

Box 4 How is Policy Analysis conducted when domestic skills are scarce? The answer is that it becomes the responsibility of the international agency by default. All information on socio- economic development in these countries is to be found in the reports of these agencies. Domestically, there are no more than a handful who understand these issues and reports, and they are heavily involved in the negotiations and the work of the international agencies. The debate on the issues is restricted to the staff of the international agency and the senior technocratic officials with the former having the luxury of the time and resources to actually conduct serious inquiry. The latter, being in such short supply and spread thinly over the many administrative functions of the country can, at best, act as informed discussants. Policy ideas originate in donor and international agency offices and are transmitted to the government. Between these two groups decisions are taken. At times, a limited effort is made through a seminar to inform concerned people of the findings. Understandably, such initiatives are often resisted locally or nullified through lackluster implementation. There are two important differences between this process of policy initiation and that which is followed in the advanced countries for the development of policy ideas. First, most of the policy initiatives in the west are generated through research of domestic academia and policy institutions in the west. Second, they are continually reviewed for their academic quality by the standards set by the concerned professions. Additionally, to the extent that the “policy-think” burden is increasingly taken on by the donor consultants, there is less incentive on the part of domestic governments to develop their own thinking capacity. In that sense, domestic talent gets crowded out.

32 Fig. 9. Generating Ownership.

The Frontier: Global Fundamental Research

Need openness and deregulation— The Peak private participation

Societal awareness Organic and endogenous knowledge development vs. Dependence on external TA spread of modern ideas or and knowledge transfers Fundamental research

Institutions and Domestic policy debate ---- organizations required Ownership by economic growth

In sum, for generating growth and economic development we must understand the process of skill development, utilisation and retention. We must work with heterogeneous agents and a la Lucas and Rosen understand how talented professionals can have an impact on the productivity of those around them.

5. THE IMPOSSIBILITY OF AN INDEPENDENT INCOMES POLICY: INCENTIVES (NOT CURBS) TO RETAINING SKILLS

(a) Why “Human Capital Flight?” Despite this increasing recognition of these new factors that generate growth, the international movement of human capital has not generated the same interest in recent years as has that of its counterpart factor of production—physical capital. In one of the early models of capital flight, Khan and Haque (1985) showed that differing perceptions of risk associated with domestic and foreign investments would 33 drive a wedge in any expectations of a parity of returns and lead to a capital outflow. In a world where differences between the rich and poor are determined by their capital stock alone, this outflow reduces available investment resources and hence results in slower growth.24

What is perplexing is why the profession and development agencies remain fixated on curbs on professional movement as the only response to the migration of talent. Analogous to capital flight, flight of human capital or the migration of the more skilled could also occur as a result of higher rates of return to skill accumulation in the foreign country compared to home. These differences in rates of return may or may not arise because of policy and may persist even if preference for staying at home is taken into account.25 Haque and Kim have examined the impact of migration of human capital on the growth and levels of incomes in the context of an endogenous growth model. The migration of the skilled can be a response to poor policies at home as well as other factors (such as capital-skill complementarities) that seek to retain skills and can lead to not only in sustained differences in growth but also in levels of income between countries.

Here the analogy with capital flight must be held to somewhat tightly. Just as no serious economic policy recommendation suggests that capital controls are needed to keep capital in the country, controls on migration should not be seriously viewed as an answer to the problem of skill loss. Again as with capital, the policy recommendation on this

24Since then, numerous studies have emphasised this. 25The higher rate of return or wage rate could be calculated adjusting for an equalising difference for a preference for location in home country. 34 issue should be based on equalising risk and transaction cost adjusted exchange rates. Recognition of the contribution of quality professionals and sound professional development as well as of the importance of innovation and knowledge spillovers to the growth process has serious implications for the policies to deal with HCF. Curbs on migration will no longer be effective because knowledge is perhaps the most globalised commodity but it must also be developed and imbibed in a globalised fashion. By that I mean that there will be cross border joint research, conferences and apprenticeships. Furthermore as Box 4 shows the market for quality professionals and researchers is now fully globalised with advanced countries poaching as a matter of policy. Entry barriers for these individuals are lowered and proactive incentive policies are in place in the advanced countries. There is only one conclusion to be drawn from this and that is that poor countries have to stop thinking in terms of independent incomes policies.

(b) The Causes and SIP The causes of brain drain and the measures required to stem it are often confused primarily because both proponents and opponents become preoccupied with the curbs on migration. The analogy with capital is perhaps appropriate here. Just as capital controls are considered as undesirable for the prevention of capital flight, it should be taken as given that curbs on migration, no matter how cleverly designed, are an inappropriate response. The prescriptions for retaining domestic human capital are also similar to those normally suggested for attracting and retaining foreign investment: policies that foster market determined domestic returns to factors of production as well as friendly and stable socio- political environments. 35 One approach to understanding the issue is to view an “incentives parity” relationship in the same ways as we look at a interest rate parity.

In order to do so, we must understand why such migration takes place. Emigration of professional skills occurs for three broad reasons.

First, incentive of a higher rate of return, often at a lower risk, to human capital in the host country. This occurs for at least the following two reasons.

One, host countries are often able to offer market- determined salaries at lower taxes, unlike the countries of origin where public sector dominates the professions and has an ethos of non-competitive wages.

Two, host countries have a stable macroeconomic and socio-political environment that provides security as well as substantial creature comforts, both of which often are in question in the home country.

Second, for professional survival and growth, it might be important to be in the professional centres that are mainly in the advanced industrial countries. Without participation in such centres, the risk of professional marginalisation and obsolescence is great.

Third, and related to the second is that poor countries, because of resource shortages or mismanagements, are frequently unable to provide complementary inputs for the practice of the concerned profession. For example, research scientists in universities may not have laboratory facilities; doctors may not have hospital equipment, etc. 36 These factors can be encapsulated in the following “skill- incentive parity” equation.

WS H (1– t S H) = WS F (1–t S F) – D – PD – QL………………..SIP

The after-tax wage at home for a skill level S, can be lower than the foreign wage rate for the same skill level to the extent that individuals have a strong desire to live at home, D, to the extent that other factors for continuous skill development, PD (such as research and professional development) are available at home, and to the extent that the quality of life QL is generally appreciated by the domestic residents. Whereas the residents of most poor countries have a strong preference for living at home i.e., a high D, high levels of taxation and poor governance lead to very negative levels of PD and QL, making foreign residence more attractive. The impact of issues like the quality of life, career development and salary differences are captured well in a survey of factors leading to the brain drain in Australia (summarised in Box 5). Unfortunately, no such exercise has been done in poor countries!

The design of an appropriate policy response must recognise the need for the retention of the professional human capital through market means and not curbs. Such an approach does not seek to place curbs on migration. Instead, it places more emphasis on skill retention through policies that set WS H, D and PD, in keeping with the “skill-incentives parity” equation above. If this form of parity is kept in mind, domestic human capital will have an incentive to stay at home. A lot of factors are subsumed in the two parameters, D and PD above. For example, a survey of Canadian doctors who migrated to the US showed that the principal reasons for such migration were 37

Box 5 Evidence from Australia (This is the type of survey-based data that is required to adequately assess the problem)

 Over 60 percent of respondents reported that their group had lost researchers to overseas institutions over the last five years. The losses in engineering, information and communications technology (ICT) and in mathematics were even higher.  For the more established researchers, the survey found that the strongest attraction is the superior research facilities and funding available overseas, followed by the better salaries and conditions. The survey also found that younger researchers are also attracted by the superior research facilities and funding, followed by better career growth opportunities.  On the recruitment side of the equation, the survey found that there is great difficulty being experienced not only in replacing lost research talent, but in recruiting suitably qualified research staff generally.  The biggest impediment to recruitment of talented researchers from overseas is clearly the low salary structure in Australia compared with other countries. It is apparent that a lack of research funding, and uncompetitive salaries compared with industry also feature as serious impediments to recruitment from within Australia.  Comments provided by respondents, presented a litany of problems faced by the research community, including the low salary structure, a lack of career opportunities in general (and for young researchers in particular), and increasing teaching and administrative loads falling on fewer and fewer researchers.  The survey found that there is an overall feeling of gloom and despair in the Australian academic research community about its ability to recruit and retain talented research staff. –Boyd (2001) survey of Australian university professors.

38 better opportunities including higher rates of return to professional achievements, a respect for meritocracy, lower taxes, and greater availability of research funding. All of these factors pull down PD and QL. Of course all migrants including these Canadian doctors expressed a keenness to live at home, a high level of D. Looked at in this manner, governments now have to place more emphasis on domestic tax structures, wage policies, PD and QL for retaining skills at home.

The SIP expression should also take into account globalisation. Any casual analysis of immigration policies around the world reveals how rich countries are continuously biasing their immigration policies for attracting skills. American rules have for years sought out the World’s best scientists. More recently, Australia, and even European countries have changed immigration policies to accommodate the migration of software developers. WS H (1–t S H) = WS F (1–t S F) – D – PD – QL – CM(S)………………..SIP’ Where CM = V(S) + A(S) + T……. V’ <0 and A’ < 0

CM is the total cost of migration comprising of the visa costs, V, assimilation costs A and the direct costs of migration, T such as buying a ticket, settling in etc. V captures the impact of immigration policy i.e., that doctors and computer engineers are given a green card easily and hence in negatively related to skill costs.26 Similarly, the

26In light of industrial country aging populations as well as oil rich countries labour shortages, it could be argued that V(S) is nonlinear with costs being lowered by host country policy for the low skilled as well high skilled. Hence entry barriers exist only for the mid-skill ranges. 39 high skilled with a greater level of education are more exposed to globalisation and hence find it easier to assimilate.27

Given the plausibility of the SIP, governments may not be free to practice any form of a domestic incomes policy for any appreciable length of time without generating human capital flight.

Over the development era of the last fifty years, governments in the poor countries have pursued a policy of expanding the role of the government, where the government becomes the largest employer and relies on high tax rates to finance its mandate of development. Government employment became the substitute of unemployment insurance. This commitment to provide employment was not backed by adequate budgetary resources [see Haque and Sahay (1996)]. As a result, a form of incomes policy was pursued where the real wage was allowed to erode in the public sector while also attempting to retain an overall egalitarian posture (see Figure 10). The result was that the low was pampered while the highly skilled and professional worker was taxed.28

27In some periods CM has been made negative for the highly skilled. For example, in the sixties and seventies, doctors were given a job offer in the US that provided a green card as well as all costs of migration. All they had to do was accept. Similarly, the Bangalore software people were courted by many immigration agencies in Bangalore at the height of the dotcom boom. 28In many cases, these countries have continued to pursue outmoded human resource management policies where non-meritocratic policies are pursued and often training is neither provided nor valued. 40 Fig. 10. Public Sector Pay Line as a Cause

of Skill Movement. Public sector payline, Salary fostering HCF Public sector paying more at lower levels Public sector seriously uncompetitive at higher levels

Grade or level Private sector payline

In addition, the government also virtually nationalised all the professions since all science, health, education and engineering projects were in the public sector. Hospitals, airlines, transport, media, schools and university were all owned by the government. Not only were tax rates high, but the government also sought to pursue uniform national pay scales where all its employees were forces into a preordained income scale. Equality concerns motivated policy to keep this distribution quite compressed.29 The result has been a clear violation of the SIP which has been prompting HCF as well as an institutional decline.

29See Haque and Sahay (1994) and Haque, Montiel, and Sheppard (2000) for evidence on wage compression and the declining public sector wage in developing countries. 41

6. DEALING WITH THE PROBLEM: A POLICY FOR HUMAN CAPITAL MANAGEMENT

(a) Open Domestic Talent Market As the SIP argues, to deal with the HCF problem, we must work on the incentives rather than curbs. In short, poor countries must have a talent management policy if they are to develop needed institutions for growth. Structures of governance cannot be run as unemployment insurance pools without regard to productivity. Skills are required to run governance institutions such as legal and regulatory systems, central banking, revenue collection, public health and education, and the maintenance and provision of complex modern infrastructure.

What sort of talent management policy or HCM policy should we develop in these countries? Perhaps it is time to take a page from the US and industrial country immigration practices and recognise that what matters is that the requisite skills are deployed in key areas for the optimal delivery of governance and not that those skills are of domestic origin (Box 2). Like the US and many other countries, the global market place should be used to get those skills and the country should be willing to compete internationally for talent. Of course domestic residents will show a greater desire for these jobs at each skill level and be prepared to work for a discount or at least not demand a compensation for moving. But like their richer counterparts, less developed countries too, should not be parochial, relying only on nationals, when it comes to 42 manning key managerial, administrative and research positions. Instead they should open up all such positions to the global talent pool.30

If we think in these terms the emphasis moves from naïve ideas of curbing or taxing the “brain drain” to managing the desired skill requirements at home. Human capital flight then becomes relevant only insofar as it takes away from the required skills at home. Rather than worry about who stays or who goes, we worry about measuring required skills and how to get the SIP right in the economy. At the same time, by placing emphasis on the human capital requirements of the economy, and maintaining the analogy with capital, we can then move from the current view of retaining human capital of domestic origins to the current practice in advanced countries of attracting the requisite skills from anywhere. This will make developing countries also active in the global market for human capital that is currently only accessed by the advanced countries. For example, it is difficult to understand why the academic market is fully globalised in the richer countries, with them picking professors from all countries while in the poor countries it remains the monopoly of domestic residents? When governance skills are not widely available, why should governments not delve in the international market for skills?

30One of the most protected markets in many low income countries is the talent market. Many laws are written that require key positions such as the manager of the central bank, the stock exchange, and presidents of universities to be nationals. Other positions, such as professors and regulators are also considered to be only open for nationals. Yet quite perversely, most of the policy and thinking work is done by consultants financed by donors. Might it not be better to let the best talent, not necessarily national, take over management and not have to continuously rely on consultants [see Samad (1993) and Haque and Khan (1997)]. 43 Moving the emphasis to SIP and HCM will bring these issues to the forefront. (b) Professional Development as an Objective What should be our measure of skill development in an economy? Consider the US government when it is looking for skilled professionals to fill key positions or provide some critical informed input into the preparation of a particular policy. Most often, it relies on professional accreditation and signaling. Unfortunately, in poor countries, there are no quality institutions that provide information on skilled professionals; nor are their any professional bodies or associations that will verify such skills or foster the competitive environment that will develop the required information.

In considering the human capital needs of a society, it seems therefore that it is appropriate to consider the state of the professions as a barometer. There are several advantages to the professions as a point of analysis rather than measuring quantity of individual education.31 Professional quality standards are set by the professional associations and institutions and an informed debate is only conducted within professional boundaries. Professions provide institutional memory of all aspects related to the discipline, its methodology and territorial dimensions. Peer review and professional conduct standards keep members under

31In most developing countries, the approach has been to implement policies received through some form of donor assistance. Chile perhaps represents a most interesting contrast where the Chicago group concentrated on developing Catholic University and a cadre of competent economists. After a gestation lag, the debate in the country was elevated and the technical backup to policy was improved. Much of Chile’s success can be traced to that early investment by Harberger and the University of Chicago [Valdes (1995)]. 44 constant and critical review (provide reference and accreditation). Even more important professions keep existing policy development under review as well as prepare independent policy analyses. In that sense professional associations may be a critical component of civil society for dissemination and critique.

How do we study professional development? One reasonable approach might be to look at the state of key professions to see if they are in a self sustaining position. A reasonable goal for research in this direction should be to derive hard statistical quantitative indicators. Guidelines for such research can be along the following lines to judge whether the profession is developed well enough to  have a core of internationally competitive professionals (a significant number although we cannot be hard on the number);  these individuals are networked together in a professional association domestically; and  the professionals as well as their domestic association is networked with international profession and professional associations;  How are universities, and other academic institutions linked into professions and professional development?

Considerable resources have gone into developing data on human capital across countries. Yet we are no closer to understanding the wide variation in the quality of education among countries. Quality remains in issue as many studies have shown that education is not as effective as theory and historical evidence would suggest. It seems to me that the varying levels of professional development may offer us a better opportunity to understand the level and the quality of 45 human capital development among countries. Research along the lines suggested here needs to be pursued.

7. REMITTANCES AND DIASPORAS In a search for self-correcting mechanisms, many economists point to remittances, the role of diasporas, and a possible eventual return migration. Remittances do provide many of the poor countries with substantial relief but it is not immediately obvious that the benefit outweighs the human capital externality that will arise out of a well managed HCM policy. In any case the two should not be regarded as substitutes.

Moreover, studies of countries like Pakistan show that remittances are typically sent by the more unskilled migrants since they are the ones who have poor families back home who need the money. The more skilled and educated come from relatively richer families and hence often have means at home to look after their families. Their remittance volumes may be much smaller. They will eventually have investable resources that they can bring back but only if the county appears attractive for the purpose. In that sense they are more likely to behave as somewhat more informed foreign investors. For policy, it seems therefore that remittances may not be a good substitute for HCM.

The return of the intellectual of even the networking of it with the domestic professional is an important source of skill development at home. It happened quite fruitfully in India in the recent dotcom revolution. It is reasonable to expect that it could happen in some countries but under certain circumstances. However, the hypothesis that is worth looking at is that if there is a proper HCM 46 policy as proposed here as well as a reasonably adequate headway in the development of the professions, such positive intellectual Diaspora effects could be strengthened. It would be hard to see how the impact of poor institutions and governance structures can be compensated for by the increased participation of the Diaspora. Ultimately, incumbents have to skillfully perform tasks such as policy- making and implementation and teaching research and innovation. Without adequate incentives and structures, Diaspora influences will not mean much.

CONCLUSION The issue of human capital flight is critical to understanding the problem of continued slow growth in poor countries. It may be an important reason why governance has deteriorated, education standards are declining, new technology diffusion remains low, and domestic reform does not take root. Unfortunately, the subject continues to remain confined by earlier thinking of a welfare era. One strand of the literature continues to develop models for how “openness may lead to greater accumulation of human capital” an obvious result that should be beyond question now. Related to this issue are the naïve policy proposals of the sixties and seventies that placed emphasis on curbs on migration or taxation of the migrant. Once again, given globalisation and the nature of the professional quality development process, this approach is obviously self defeating. Furthermore, HCF or the brain drain continues to be measured by the number of years of education of the migrants without adjusting for quality. These raw numbers have proven to be uninformative in all manner of studies including the growth panel regressions. 47

Here, we have argued that we need to focus on market based solutions and think of incentives to human capital in much the same way as we think of incentives to attracting capital. Policies for the two factors off production—physical and human capital—must be similar. Analogous to the policy for physical capital—the maintenance of incentive parity—we argue and develop incentive parity for human capital. Of course, this would mean abandoning domestic efforts at incomes policy that many governments in poor countries shave been maintaining for many years.

It is argued that human capital management policies based on skill incentives parity and with an eye to the level and quality of professional development is a better approach to dealing with the HCF problem. The scarce resource in a poor country is the right tail of the professional quality distribution which cannot be captured by just measuring the number of years of education completed. It is professional development that has large positive externalities on governance, professional development, a clearly articulated and domestically owned policy agenda and an eventual ownership of development. Global knowledge spillovers occur through international professional networks. To benefit from this, domestic professional quality must be capable of interacting with the global knowledge pool. Consequently, inadequacy in professional development this is the appropriate measure of skill shortage.

Talented people are being hunted down by the richer countries. There is no reason that poor countries should also not benefit by entering that market. To do this what is required is to develop and understand the human capital 48 management policies in these countries and to identify skill shortages and their persistence. A particular way to do so might be to look at the state of professional development in these countries. Doing so will develop a better under- standing of quality levels of education. Such an approach points to the folly of regarding the talent market as purely national. Like the rich countries, the poor countries must also understand the advantages of drawing on the global talent market. There is a need to raise this awareness among these countries.

The donor community too has to be conscious of its role in fostering such a community of talent in a poor economy. In particular, donors have to remain alert to the possibility of “crowding out” talent and fueling the brain drain which could happen when they take over the thinking and policy-formulation capacity of government. More effort might need to be placed on policies for “crowding in” human capital through targeting the development of domestic professions.32

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ABSTRACT The paper argues that “brain drain” (BD) and “capital flight” (CF) are factor responses to developments in the domestic economy and hence should not be viewed differently (push for CF and pull for BD), with divergent metaphors (scared into flight for CF and pulled by gravity for BD) and sharply differing policy approaches (maintain interest parity for CF and curbs for BD). Consequently, it is proposed that Human Capital Flight (HCF) might be the better metaphor.

Globalisation has increased the possibilities for the highly educated, hence obviating domestic efforts at incomes policy which many governments in poor countries have maintained for many years. Recognising this, an incentive parity for retaining and attracting skills, called a skill incentive parity (SIP), is derived. Like the rich countries, the poor countries must also take advantage of the global talent market and cease the policy of protecting domestic jobs for national talent. There is a need to raise awareness on this issue among LDCs.

The traditional approach for measuring HCF relies on average educational attainment figures such as years of education completed. This measure is likely to be inaccurate since it does not account for the extent to which educational attainment is of global quality. Global knowledge spillovers require professional development to a common global quality level. Policy must, therefore, take as its objective professional development to an international level rather than mere quantity indicators for education.