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5. Impact of emigration on developing countries

 

July 26, 2011

Carlos Lipari, FreeBalance Washington

This is a blog series discussing factors that impact development in developing countries. As a For Profit Social Enterprise (FOPSE), improving country growth through good governance is the core company mandate at FreeBalance. As such, FreeBalance participates in governance, development, foreign aid, ICT for development and transparency discussions globally.

When analyzing this topic from the developing nation’s perspective, emigration can be a way of boosting development as it can become a way of limiting a country’s ability to grow and develop itself.

Downsides of emigration on developing nations

Emigration reduces the stock of human capital and therefore, when it occurs and everything else is kept constant, the GDP potential of a nation is reduced.

This reduction in the stock of human capital can be considered the main downside of emigration but the extent to what this downside is costly will depend fundamentally on two main issues: the quality of the human capital loss and the amount of human capital unemployed and underemployed in the developing country (especially the amount of human capital unemployed or underemployed with similar skills).

The quality of human capital loss is of great concern also for two main reasons. One has to do with the substitution costs, more precisely the investment that society will have to incur in order to substitute this human capital (costs of raising a child, education, training and more). The second reason has to do with the potential value that this human capital, also referred to as labor, could produce in the developing country, with this value increasing in line with the level of instruction and training.

When analyzing the potential loss of income in a developing nation due to a reduction of its most educated labor force, one should have in mind that research has been conducted concluding that a simple increase in one year on the average level of education in one country can increase its yearly rate of growth by 0.44%, achieving a social rate of return of 7% (Robert J. Barro in is paper of Human Capital and Growth, American Economic Review, page 14, of May 2001), therefore, losing skilled workers can potentially have a significant negative impact on developing nations but there are other variables that might change the final outcome. Another recent research points out to the existence of an optimal brain drain, stating that some brain drain might actually be beneficial to developing nations (Lowell, B. Lindsay, 2002). The authors of this study argue that emigration of skilled labor can stimulate domestic education, actually increasing the overall amount of skilled labor in developing nations due to an increase in enrolments. Such an increase in enrolments is spurred by the chance that people perceive of emigrating and might offset the direct losses of skilled labor.

In addition to this, emigration of skilled labor is also expected to provide higher remittances and increased productivity when emigrants return home. It is also expected to expand the country’s international network, making use of its diasporas, and to provide technology transfers.

This leads the authors, Lowell and Lindsay, as well as many economists to believe that, in fact, there is an optimal brain drain level and to recognize that this optimal level does not depend exclusively on the amount of potential brain waste in developing countries (skilled labor that is unemployed or underemployed).

Upsides of emigration on developing countries

Besides providing remittances, technology transfers, expanding a country’s network via diasporas and boosting productivity as migrants return, emigration can reduce poverty.

According to (Richard H. Adams & John Page, December 2003), an “increase of 10% in the share of international migrants in a country’s population will lead to a 1.9% decline in the share of people living in poverty (1 dollar/person/day)”. This was found to be mostly due to remittances.

Another interesting aspect of emigration found by Richard Adams and Page is evidence that who emigrates comes mostly from families above the poverty line. In addition to this, they find that extremely poor countries tend to have less emigration than countries with middle levels of poverty (they describe this as a U–shaped curve emigration. Poverty increases emigration only to the point where people can still afford to finance their way out of the developing country).

Finally, assuming that emigration consists fundamentally of unskilled labor, one can expect net gains from emigration to be particularly high in countries with high unemployment rates and considerably lower in countries with a very low unemployment rate. This is so because emigration in low unemployment countries has larger opportunity costs, producing more inflation, pushing up salary levels and being responsible for scarcity of labor in the economy. Emigration of countries with high unemployment, though, mostly benefit from reductions on the social and economic burden of unemployment while at the same time benefiting from higher remittances.

Impact of Remittances

According to Peter Gammeltoft, in his 2002 paper on “Remittances and Other Financial Flows to Developing Countries”, migrants remittances some up around US $ 100 billion dollars, with about 60% of this amount going to developing nations. The author found that remittances had become a larger source of income for developing countries than official development assistance (ODA), as this last type of assistance only represented a yearly average of less than 50 billion dollars during the same period. The author highlighted the fact that ODA had been falling over time while remittances increasing.

In countries such as Philippines, remittances represented, back in 2009, 11% of its GDP (The Economist, Feb 9 2010) and in for African countries, remittances are estimated to represent on a country-by-country average 5% of GDP, the equivalent to 27% of their exports (International Found for Agricultural Development).

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Doug Hadden

Doug Hadden

Executive Vice President, Innovation at FreeBalance
Doug is responsible for identifying new global markets, new technologies and trends, and new and enhanced internal processes. Doug leads a cross-functional international team that is responsible for developing product prototypes and innovative go-to-market strategies.

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