Brain drain could be good!

Here are four reasons:

1. Gains to migrants themselves. Why is this often ignored in brain drain discussions? Perhaps it reflects a neglect of the rights and well-being of individuals and an overemphasis on the nation-state as the object of development. The migrant is better off with higher living standards, not to mention satisfying her revealed preference to live in a country other than where she was born.

2. Gains to migrants’ families. Remittances is the most obvious and commonly-cited benefit of the brain drain. Even using official figures, which likely far undercount the value of remittances by excluding informal channels, remittances sent back by Africans abroad outweigh the cost of educating them at home. Why pass up a high return opportunity (Africans earning high incomes abroad and remitting) and insist on a low return activity (educated Africans underemployed at home)? Not to mention that families also get satisfaction from seeing their offspring realize their dreams.

3. Brain circulation.  Brains don’t just leave Africa, never to return.  Africans who have been educated or worked abroad do come back to their home countries to visit, to establish dual residence, to start businesses and universities, and, sometimes, to stay. These people bring back new ideas and skills—crucial ingredients to economic growth. Similar processes brought enormous benefits already to Asia and Latin America, so why would donors want to shut down this motor of opportunity only for Africa?

4. Stimulation of skill accumulation (“brain gain”). The possibility of migration and the example of role models who find success abroad (the Kofi Annan factor) provide incentives for young students to work hard and gain skills that will help them overcome the hurdles to migration. The authors argue that the new human capital created through these incentives offsets the loss of skilled people who do eventually leave.

Previously, Clemens and Mckenzie also argued that brain drain might benefit for both the receiving  as well as sending countries. Meanwhile, a ADB paper shows that unskilled migrants remit more than skilled migrants.

Rodrik's paradox!

Assume political power such that we have to make a transfer of $X to each worker in a certain industry. This could be done by:

1. Giving each worker now in the industry $X
2. Giving $X to all current and future workers
3. Giving an employment subsidy that raises wages by $X
4. Giving a production subsidy that raises wages by $X
5. Imposing a tariff that raises wages by $X

In terms of welfare ranking, 1>2>3>4>5

But, why do most countries choose 5 even if in terms of welfare 1 is better?

Possible reasons:

• Pro-revenue bias
• Commitment mechanism: deliberately use inefficient income redistribution to impose self-restraint
• Uncertainty, ignorance
• obfuscation (?)
• terms of trade

Source: Krugman

The Sun as a Natural Dryer!

Source: The Kathmandu Post

Trade and Skilled Wages in Developing Countries

Most trade theories suggest that an expansion of trade raises wages of skilled workers and lower those of unskilled workers in developed countries. But what about the impact of international trade on wage premium of skilled workers in developing countries? Mitcher and Yan argue that wage skill premiums have increased in developing countries though wage premiums in China narrowed during the first two decades of the twentieth century. Their analysis is focused on the Chinese experience with wage and trade.

The reasons for wage premiums to go up: Trade in intermediate inputs, increases in capital flows, and capital for use with skilled labor increases wage premiums.

Using empirical evidence, as well simulation results from a general equilibrium model of trade, we show that the growth in Chinese trade and the price shock of World War I largely account for the flattening out of the skill premium in the 1910s and the subsequent 8% fall in the skill premium between 1920 and 1928.

Real wage premium in China (1900=100)

Our findings suggest that, when trade is dominated by the movement of relatively homogenous goods across borders, it may have a considerable effect on wages. The declining wage inequality in China during the second two decades of the twentieth century stands in contrast to studies examining the recent period of globalisation, which emphasise how trade and globalisation have widened skill premiums in developing countries.

The growth in Chinese exports during the first three decades of the twentieth century was centred on products that used unskilled labour intensively and this earlier era of globalisation was less influenced by trade in intermediate inputs (i.e., outsourcing), increases in capital flows, and capital for use with skilled labour. It is these factors that have likely played a role in widening skill premiums today in developing countries.

Financial Risk and Banks Explained in 3 Minutes

Costs of Nepal banda (Nepali version)

No, I did not write the article (बन्दको मूल्य)in Nepali language! My friend Bijaya Babu Shiwakoti translated my previous article “Costs of Nepal bandas” into Nepali language. It was published today in the most popular Nepali language daily (Nagarik) in Nepal.

If you understand Nepali language, read the article here :)

Botswana versus USA

The U.S. financial system was clever in figuring out how to exploit poor Americans, but it was unable to figure out how to serve them well. In Botswana, one of the more successful countries in Africa, I have seen how banks reach out to poor villages to provide basic financial services to people whose incomes are but a fraction of those of even the poorest Americans. (Botswana’s average per capita income is still only $13,604.) But in poor parts of America, individuals turn to check-cashing services to cash their checks, paying a fee as high as 20 percent of the value of the checks. It is a major industry-- another way that the poor are exploited.

That is from page 178 of Stiglitz’s new book Freefall: America, Free Markets, and the Sinking of the World Economy. It is fascinating book about the financial crisis, the role of the government, and the need for a “New Capitalism”.

In the innovative economy of the twenty-first century, government may need to take a more central role-- in providing the basic research on which the whole edifice rests; in shaping the direction of research, for instance, through grants and prizes to incentivize research directed at national needs; and in achieving a better balance in the intellectual property regime so that society can get more of the benefits of the incentives that it can provide without the associated costs, including that of monopolization. (pp.206)

There is an interesting discussion about the role of government and how it has been crucial in saving the economy and the private sector at times of crisis. He argues that one of the key roles of the government is to write the rules and provide the referees. “The rules are the laws that govern the market economy. The referees include the regulators and the judges who help enforce and interpret the laws. The old rules, whether they worked well in the past, are not the right rules for the twenty-first century.” More on next blog post!