Editor:

A. R. Kemal

Literary Editor:

Professor Aurangzeb A. Hashmi

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: publications@pide.org.pk

Website: http://www.pide.org.pk

Fax: +92-51-9210886

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 Bank in Sri Lanka. 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.

2

Lectures in Development Economics

No. 11

BRAIN DRAIN

OR

HUMAN CAPITAL FLIGHT

Nadeem Ul Haque

PAKISTAN INSTITUTE OF DEVELOPMENT ECONOMICS

3

Contents

Page

Introduction 1

1. Brain Drain: A Literature Before

Its Time 4

2. Human Capital 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. Remittances and Diasporas 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. Developing country

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.

This paper argues that we should view the issue of the

“brain drain” in much the same way as we look at capital

Box 1

Skills in Government in Low-income Countries

Economic ministries and central banks 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.

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

externalities. Technology was exogenous delivered by

nature by a process unknown. Steady state convergence 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 externality 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; immigration therefore withdraws

nothing that the individual would have consumed anyway.

Consequently, emigration 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

economic growth. 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, South Africa 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

60.00

50.00

40.00

30.00

20.00

10.00

0.00

US

Japan

UK

Ger

man

y

France

Russi

a

Ch

ina+

HK

RO

E a

nd A

us

Nic

s

RO

W

Share 63-80

Share 01

Share Total

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 scientists. 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 doctorate 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, Germany, UK, Australia, Canada 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 capital

accumulation 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, human capital flight (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 Europe

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.

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

50.00

USA

ENGLAN

D

GERM

ANY

JAPAN

FRANCE

CANAD

A

ITA

LY

NETH

ERLAND

S

SWIT

ZERLAND

AUSTRA

LIA

SWEDEN

SPAIN

SCOTLAND

BELGIU

M

ISRAEL

DEN

MA

RK

RUSSIA

FINLAN

D

AUSTRIA

PEOPLES R C

HINA

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.

0

0.2

0.4

0.6

0.8

1

1.2

Professional quality

% o

f p

rofe

ss

ion

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.

0

0.2

0.4

0.6

0.8

1

1.2

Professional quality

% o

f re

sid

en

t p

rofe

ssio

n

Urbania Ruralia

Skill

distribution

truncated

here

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

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

0%

20%

%

40%

%

60%

%

80%

%

100%

1

Fundamental

Researchers

University

Professors

College Teachers

Secondary School

Teachers

Primary School

Teachers

Fig. 6. The Pyramid of Education.

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 Western Europe 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

Link depends on

the ability of the

fundamental

research complex

to draw upon

trough of global

knowledge

AcademiaGovernment

and business

Fundamental

Researchers

RES

UNIV

The peak of the

Knowledge Pyramid—

the fundamental

research complex

Spillover

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 Poverty 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.

The Peak

Quality assurance for education

Quality of professional—Policy

analyst, manager, media etc.

Syllabi for all education/ quality

of teachers

Organic and endogenous knowledge

development vs. Dependence on external TA

and knowledge transfers

Institutions and organizations

required by economic growth

Ideas and analysis

for policy

Ability to bring frontier

ideas into research

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 Singapore

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—

private participation

Societal awareness

spread of modern ideas or

Fundamental research

Domestic policy debate ----

Ownership

The Peak

Organic and endogenous

knowledge development vs.

Dependence on external TA

and knowledge transfers

Institutions and

organizations required

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 green card rules have for years sought out the

World’s best scientists. More recently, Australia, New

Zealand 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 skilled worker 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.

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.

Grade or level

Salary

Public sector

seriously

uncompetitive at

higher levels

Public sector

paying more at

lower levels

Public

sector

payline,

fostering

HCF

Private

sector

payline

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 remittance 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 Diaspora 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.