Remittances and the brain drain

In most destination countries, immigration policies are increasingly tilted toward the most skilled individuals. Whether this shift hurts economic prospects in sending countries, as argued by the traditional brain drain literature, is somewhat controversial. The most recent literature has focused on the link between skilled out-migration and educational achievements. In this paper, we emphasize a different channel. It is often argued that skilled migrants raise economic welfare at home thanks to a relatively larger flow of remittances. Skilled migrants typically earn relatively more and, ceteris paribus, will therefore remit more. However, they are also likely to spend a longer span of time abroad and also are more likely to reunite with their close family in the host country. Both factors should be associated with a relatively smaller flow of remittances from skilled migrants. Hence, the sign of the impact of the brain drain on total remittances is an empirical question. We first develop a simple model showing that skilled migrants may have indeed a lower propensity to remit home out of a given flow of earnings abroad. We then derive an empirical equation of remittances and estimate it on a large panel of developing countries. As a measure of the brain drain, we use the dataset by Docquier and Marfouk (2004) that in turn builds on the pioneering work of Carrington and Detragiache (2004). We find considerable evidence that the brain drain is associated with a smaller flow of remittances.remittances, migration, brain drain

The Brain Drain: an Unmitigated Blessing?

Increasingly, immigration policies tend to favour the entry of skilled workers, raising substantial concerns among sending countries. The “revisionist” approach to the analysis of the brain drain holds that such concerns are largely unwarranted. First, sustained migratory flows may be associated with an equally large flow of remittances. Second, migrants may return home after having acquired a set of productive skills. Finally, the ability to migrate abroad may boost the incentive to acquire skills by home residents. This paper takes a further look at the link between skilled migration, education, and remittances. It finds little support for the revisionist approach. First, a higher skilled content of migration is found to be associated with a lower flow of remittances. Second, there is little evidence suggesting that raising the skill composition of migration has a positive effect on the educational achievements in the home country.

Foreign aid and fiscal policy

Foreign aid has been on a downward trend since at least the early eighties. Despite the commitments of donor governments, the GDP share of foreign aid for DAC countries has fallen to slightly more than 0,2% in the early part of this decade. The purpose of this paper is to explore the macro determinants of the amount of foreign aid. Surprisingly enough, not much attention has been devoted in the literature to this issue. Most of the research has focussed either on the effectiveness of aid (“does aid promote growth and help alleviating poverty”?) or to the cross country allocation of a given amount of foreign aid (“is foreign aid motivated by donor’s political and commercial interests or by recipients’ needs?”). In both cases, the total aid budget is taken as given and its determinants remain therefore unexplored. Our main finding is that the size of the budget aid is a function of the donor country’s fiscal situation, even after controlling for the government’s political orientation, the cyclical position of the donor economy, and its income per capita level. In light of these results, we argue that advocates of foreign aid should strongly lobby in favour of fiscal discipline. The alternative strategy of pushing for a more lenient budgetary treatment of foreign aid may be loaded with risks, and even turn to be counterproductive, particularly if the list of “virtuous” exceptions becomes exceedingly long. This is exactly what seems to have happened with the revision of the Stability and Growth pact.foreign aid, fiscal policy

Is the Brain Drain an Unmitigated Blessing?

migration, brain drain, eduction, remittances

Who runs the IFIs?

The World Bank and the International Monetary Fund play a key role in the international economic architecture. Yet, they are also ‘political’ institutions and their activities inevitably respond to the national interest of one or a group of shareholders. Assessing the role of ‘influential’ shareholders is however made difficult by the fact that votes in the Boards of either institutions are rarely recorded and at any rate are not made public. We take a different route and look at the pattern of lending of both institutions as a function of their institutional mission and the commercial and financial interests of their main shareholders. We find that the Bank and especially the Fund are quick to respond to the borrowing needs of their members, particularly during a balance of payments crisis. Apart from that, however, the lending pattern of the two institutions is influenced by the commercial and the financial interests of the US and, to a lesser extent, of the EU. European countries in particular seems to be much more concerned by their commercial interests. The role of Japan is even smaller and more regional, being largely confined to decisions concerning Asia.

Differentiating cyclical and long-term income elasticities of import demand

Determining how imports react to cyclical and secular (long term) factors has been a recurrent theme in the empirical trade literature. The evidence suggests that cyclical income elasticities of import demand are generally higher than long term elasticities - particularly for basic materials and semi-manufactured goods. Traditional models generally underestimate the cyclical response in imports, and overestimate the long term response. For example, estimates of income elasticity using a traditional import model average 1.4 and 1.2 respectively. The authors'model suggests a cyclical elasticity averaging 2.6. This result suggests that the two elasticities may differ by an even larger factor for developing countries. Relative prices generally are more important in determining import demand in Latin America and Asian-Pacific countries, in this model, but seem to have little effect in the African and (surprisingly) Mediterranean countries. In countries for which both cyclical and long-term income elasticities are significantly different from zero, relative price coefficients are also significantly different than in countries for which income parameters are not significantly different from zero.Environmental Economics&Policies,Economic Theory&Research,Inequality,Economic Conditions and Volatility,Achieving Shared Growth

Fiscal issues in adjustment : an introduction

Adjustment to the macroeconomic crises of the eighties was least successful on the fiscal front. The authors, in this introduction to a symposium on fiscal issues in adjustment, summarize the issues raised by papers in the symposium. Those papers deal with various aspects of the fiscal crisis that many developing countries faced in the eighties. After a brief introduction on the magnitude of the crisis, the authors summarize issues discussed in three areas. On the macroeconomics of adjustment, they discuss the size of fiscal adjustment, the impact of deficit reductions, and the methods of reducing the deficit. On fiscal system reform, they survey reforms occasioned by the fiscal crisis: choice of spending cuts and reform of the tax system. They close with a discussion of new directions for research: the growth effects of fiscal policy and the political economy of fiscal policy.Environmental Economics&Policies,Economic Theory&Research,Economic Stabilization,National Governance,Public Sector Economics&Finance

Adjustment, investment, and the real exchange rate in developing countries

At the center of the controversy about effectiveness of"adjustment with growth"loan packages from the IMF and the World Bank has been the heavy emphasis on real exchange rate depreciation as a way to restore external balance and elicit a positive supply response. The authors find that adjustment has been far more successful for countries exporting manufactured goods than for countries exporting primary goods. Devaluation of the exchange rate in countries exporting primary goods appears to be ineffective. Most of their adjustment has taken the form of reduced spending rather than increased supply. As a result, they have not resumed sustainable growth. The longer term prospects for exporters of manufactured goods are much brighter. They show more signs of improving efficiency and less decline in investment than do exporters of primary goods.Economic Theory&Research,Environmental Economics&Policies,Economic Stabilization,Macroeconomic Management,Achieving Shared Growth

The macroeconomics of the public sector deficit : the case of Morocco

This paper tries to uncover the reasons underlying the performance of the Moroccan economy. The author argues that wage moderation and judicious monetary policies were instrumental in restraining inflation. With one brief exception in 1983, monetary authorities remained firmly committed to eschew any inflationary financing of the budget deficit. This strategy could only succeed however because of the wide ranging system of credit and monetary regulations which worked to channel domestic funds toward the Treasury at relatively low costs. The prospects for the continuation of such a strategy are not favourable however. As far as the growth performance is concerned, it appears that it can be attributed to an outstanding export response to the new trade regime on the one hand and a set of favourable supply shocks, including a string of recordagricultural harvests and the collapse of real oil prices, on the other. The paper studies the evolution of the budget and its different components and argues that the reluctance by Morocco's policy makers to monetize existing budget deficits is well explained by the sharply unfavourable trade-offs between higher monetization and inflation existing in Morocco. It analyzes the implications that continuing budgetary disequilibria has on investment and saving decisions and finds that such implications may be substantial, even though they may not work their way exclusively through traditional interest rates channels.Economic Theory&Research,Environmental Economics&Policies,Banks&Banking Reform,Public Sector Economics&Finance,Financial Intermediation

Trade liberalization in a globalizing world

Globalization is not only about the rise of trade, FDI, and migration. It is also about the changing linkages among these flows. The main findings of the paper can be summarized as follows. First, at least in the nineties, import trade liberalization fostered not only trade but also inward investment, confirming that trade and FDI toward developing countries have become largely complements. Second, the presence of a skilled labour force is a relevant factor to attract FDI. Moreover, trade policies and the stock of FDI have a positive impact on the incentives to invest in education. This set of findings highlights the possibility of a low equilibrium trap where the lack of human capital discourages FDI and inadequate investment from abroad limits the domestic incentives to acquire education. Rich countries, by encouraging skilled immigration from relatively poor countries, are definitely aggravating such a risk. Third, we find little evidence supporting the contrary argument of a brain gain, where the possibility for skilled workers to migrate abroad raises the return to education and the investment in human capital. Overall, our results highlight the need to study globalization in a fully integrated way, not just as the sum of its different components. They also show that backtracking in one area (e.g. trade) feeds negatively on other areas (e.g. FDI).