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Term Paper
HUL 762

Siddharth Jain
Sourav Sinha
Harshul Kumar

Migration is a hot topic, doing the rounds of international policy discussions. The issue of migration is
viewed not only from the perspective of immigration of valuable human capital into geographical
regions that can provide better opportunities and return, but also from the focus of immigration of
such human capital from territories that are unable to cater to the needs, aspirations and challenges of
such capital. It is the latter issue that has gained considerable momentum in developing economies,
considering the massive flight of human capital from such states in an increasingly globalised
economy, not to mention the concentration effects of such international mobility. This viewpoint
emphasizes that a significant cause of impoverishment of developing countries can be attributed to the
emigration of skilled labour, a phenomenon known in layman terms as brain drain.
Another topic that has been an important domain of development research is economic growth and
poverty traps, known in academic terms as development traps. Most mathematical models that focus
on traps can be characterised by multiple equilibria and the fate of the economy in absence of
intervention, is determined by the historical endowment of the country.
The paper, this report is based on; attempts to link these two topics through the integration of an
endogenous international migration model into a simple growth model to study regimes of
development determined by the interaction of technology and policy parameters. What is significant
about this model is how the variations in technological assumptions can affect the fate of the
economy. Simultaneously, this model draws attention to the importance of a policy parameter in
determining the countrys future.


In this section, we will talk about some of the important assumptions and conclusions of this model.
We will attempt to explain these points through their link to previous literature.

1. Though influenced by De la Croix and Docquier 2010 [1], which is an expectations driven
poverty trap model, this paper belongs to the alternate category of history driven poverty
traps, where the dynamics are completely deterministic.
2. The dynamics that this paper upholds are caused by the interplay of two main elementspositive externalities a la Romer 1990 [2], and a migration mechanism that low real wages in
home country compared to real wages abroad will fuel migration of skilled population from
home country to abroad.
3. The potentially different dynamic regions can be attributed to two sets of parameterstechnology and policy.
4. Technology can be summed up in two parameters- the returns to scale a la Solow (1956) for
skilled labour and degree of productive externalities (1990) linked by a production function.
This paper shows that the development path of the economy will be determined by which of
these two effects dominate. If diminishing returns dominate, it results in Solowian effects.
The economy is more stable and converges to a single equilibrium point, irrespective of its
historical endowment. However, if production externalities dominate, then it can result in
several development regimes, multiple equilibria, poverty traps and high income equilibria.
Which of these conditions arise, as shown in this paper will depend on the single policy
parameter. This policy parameter is basically a heterogeneous factor combining all efforts by
public or private ventures in order to boost human capital growth. In more common terms,
this policy parameter can be considered as a proxy for the amount of investment in higher
education especially tertiary education, the quality and accessibility of such education, the
training provided to individuals to build specific capabilities. In another context, this could
also mean the level of immigration quota in order to attract human capital from abroad or the
return benefit to erstwhile emigrants. It has been shown that under the second condition of
dominating positive externalities in production, the policy parameter has two characteristic
values. For very low policy parameter values, the economy can fall in stable steady state low
income equilibrium, irrespective of its history. For median values the economy will exhibit a

case of multiple equilibria characterised by a stable low equilibrium and unstable middle
equilibrium and a stable high equilibrium. Where the country converges to will depend on
where the country starts off. For high values of policy parameter, the economy will converge
to a single stable steady state high income equilibrium point.
5. A very significant result of this model under the conditions of dominating positive externality
is that a high stock of skilled labour will result in high real wages of skilled labour in the
home country.

However, this model and its conclusions should only be considered only in the light of the
assumptions and the concomitant complexities that it circumvents. In the next section, we will try
to analyse some of these issues through reference to literature and empirical studies.


In this section, we will try and exposit on some of the assumptions in this model and lend a
critical thought on their justification. We will take forward this analysis in the following lines.


This paper like many of its precedents: Bhagwati and Hamada (1974), Groubel and Scott
(1966), is based within the confines of the context that migration of skilled labour from a
source country adversely affects its economy. However, there has been a slew of recent
research that has posited on the positive effects of brain drain. This line of research has been
studied by Beine et al (2001), Gibson and McKenzie (2012), Mountford (1997), Stark (2004)
and Easterly and Nyarko (2009). There are many different theories regarding the positive
impact of migrating skilled labour.
In Beine et al [3] it has been shown that under certain conditions of uncertainty regarding
opportunity of migration, there is a pre-migration brain gain effect and post migration brain
drain effect. If the source economy is initially poor in human capital and has low real wages,

then incentives to acquire education and therefore accumulate human capital in the long run
does not exist if the source economy disallows emigration. However, when the source
country allows emigration, then people will have an incentive to invest in and acquire higher
education boosting human capital. Even though some might emigrate abroad, a fraction of
the skilled human capital will still stay back in the source country under reasonable
assumptions of barriers to migration, tangible as well as intangible. This has been called the
beneficial brain drain (BBD) effect.
In another paper [4], it has been shown that under three conditions of opportunity, incentive
and information brain drain can have a positive effect because of return immigrants. In this
particular model, the information available to employers of host countries is critical to the
dynamic evolution of migration of skilled as well as unskilled labour, discovery and
evaluation of skill levels and ultimately selection and rejection of high skilled versus low
skilled labour. However, the time period between migration and such discovery is likely to
boost the skill level even in low skilled labour, thus increasing the human capital level when
such relatively low skilled labour return to their home countries.
In another model [5] Brezis et al has studied student migration as distinct from worker
migration but have tried to correlate the two through the aspect of information. Student
migration is quite distinct from the international mobility in the labour market because of two
different reasons. The first reason is the lower restriction on migration of students to acquire
education in countries that are known to provide high quality of tertiary education, as against
restrictions on the number of immigrant workers seeking permanent residence in the host
country. The second reason as evidenced in this paper is the distinction between the quality
of education and real wages. It has been shown in this paper that countries with high wages
are not necessarily the ones with high quality of education and also that students tend to
migrate to countries that have high quality of education. Whether or not they stay back in
their host countries post education period is again a matter of information available to them

regarding the value of their degree and acquired skill sets in the host country versus their
home country.
Therefore, literature suggests that migration of skilled labour if studied only from the aspect
of brain drain might give tangentially different results than if they are looked at through the
perspective of brain gain effects. The positive impact of brain drain is primarily through the
return of skilled migrants to their home country, knowledge spill-overs and important
network building efforts. This is extremely evident in the case of India, where the growth of
the IT sector can be primarily attributed to the network that migrant skilled labour in the
Silicon Valley had with their India counterparts. In a comment on Kochchar et al by Abhijeet
Banerjee (2006), he says that the IT sector grew out of individuals in India with contacts in
the US and who had low opportunity costs of getting outsourced work done in their spare
time. The effects of brain gain can also be accounted for by the remittances that individuals
tend to send back to their country to support their families or other ventures.
It is therefore important to incorporate the effects of brain gain in order to get a more realistic
result from this model.

This paper assumes that the only incentive to migration to the skilled labour within the home
country is the real wage rate of skilled labour. However, the authors of this report would like
to contend this assumption in the following lines:
A more practical assumption to the incentive to migration would be wage differential
between the two countries as used in De la Croix and Docquier. In fact, in a 1962 paper by
Sjastaad, it has been shown that the two most important incentives to migration are wage
differential and migration costs. It can also be shown that the rate of migration is not
monotonic with wage differential.
Empirical literature suggests that migration is highest for middle income countries, where
people have incentives to migrate as well as the ability to cover to migration costs. Migration

costs could entail a host of factors including travel, visa applications, communication with
family at home, as well as more microeconomic factors like difficulties in acclimatization to
new environment, culture and physical distance between their host and home country.
Migrants from low income countries may be faced with liquidity issues, thus deterring
migration. However, high-income-country individuals maybe looking for an entirely
different set of incentives to consider migration to another country. These may be factors like
climate, lifestyle issues or something as economic as tax incentives (case of UAE). Again the
determinants of migration depend on the section of individuals who are migrating. If this is
workforce that is people looking for jobs then for them incentives may be wage rates and
migration costs. However as evidenced in the paper by Elise Brezis [5] if this section is
students then their incentives may be the quality of education and cost of education rather
than wage rates. Therefore, the determinants of migration are as diverse as the stock of
migrants themselves. Incorporating only real wages may not be exactly realistic.

In this paper, the focus has been on the policy parameter z. Under conditions of dominating
positive externalities, it has been shown that changes in the policy parameter will shift the
economy from one state to another. However, we would like to show that there are other
factors in the model, most importantly the attrition factor that can be varied in order to transit
between these three equilibria conditions.
The focus on attrition factor is primarily because this can be treated as a very important
policy parameter from the producer point of view. Better work environment, higher
incentives, other than monetary in the form of learning opportunities, exposure, challenges
and growth, will improve the attrition factor. The attrition factor can also be improved by
government policies, for example increasing the retirement ages, or increasing the limit on
age for entry into certain government sector services like the civil services. It can be shown
that if the policy parameter value is more than a lower limiting value, then the economy can

move from one equilibrium to another, more specifically, it can escape from the poverty trap
to high income equilibrium only by increasing the attrition factor. However, this condition is
again valid under dominating positive externalities in production.


This model does not incorporate capital anywhere, neither in the intermediate sector nor in
the final output sector. However, it is a very realistic case that wherever high skilled
individuals are employed, the sector tends to be extremely capital intensive. This is because
high skilled labour will predominantly be involved in generation of new technology and this
requires a high investment of capital. In the Romer 1990 model, this has been incorporated
by including a third sector that generates technology for use in the intermediate sector. This
model however, does not leave room for any such incorporation.


In this model the policy parameter z has been introduced with no further consideration on
cost-benefit effect of whosoever invests for a higher z. If the investment is on part of the
public sector then the fiscal cost of investment should be covered for by taxation and other
policies. If this investment is done in the private sector then their profits should account for
this investment.

The current model in the paper by Benassy and Brezis is groundwork in the context of involving
an exogenous policy parameter that under conditions of dominating positive externality can move
the economy out of a poverty trap into high income equilibrium. In this report we have tried to
critically analyze some of the assumptions in this model in the light of literature survey.

1] De la Croix, Docquier D., Do Brain Drain and Poverty Result from Coordination Failures?,
Working Paper, UC Louvain
[2] Romer P.M., Endogenous Technological Change, Journal of Political Economy, 98 (1990), 71-102
[3] Beine Michael, Docquier Frederic, Rapoport Hillel, Brain Drain and Economic Growth: Theory
and Evidence, Journal of Development Economics, Vol 64 (2001), 275-289
[4] Stark Oded, Helmenstein Christina, Prskawetz Alexia, A Brain Gain with a Brain Drain,
Economic Letters, 55 (1997), 227-234
[5] Brezis Elise S., Soueri Ariel, Why do studets migrate? Where do they migrate to? AlmaLaurea
Working Papers, ISSN 2239-9453
[6] Gibson John, McKenzie David, Eight questions about Brain Drain, Discussion Paper Series, IZA
DP No 5730, May 2011
[7] Mountford Andrew, Can a brain drain be good for growth in the source economy?, Journal of
Developmental Economics, 53 (1997), p 287-303
[8] Beine M., Docquier D., Rapoport H., Brain Drain and Human Capital Formation in Developing
Countries: Winners and Losers, Discussion Paper, May 2006