Oded Stark: The Economics of the Brain Drain Turned on its Head

Oded Stark addressed an IUB audience yesterday evening on the subject of his paper “Inducing Human Capital Formation: Migration as a Substitute for Subsidies.”

[ Oct 18, 2001]  Oded Stark, speaking in a lively and engaging manner, presented a model that challenges traditional views on the "brain drain," questioning the perception that permitting workers to emigrate reduces the welfare of a country. Stark's model suggests that this is often not the case and that in fact the opportunity for such emigration can have the opposite effect – that is, improve the welfare of those left behind.

In the introduction of the paper which Stark co-authored with Yong Wang, Department of Economics and Finance, City University of Hong Kong, we read: "There is a strong consensus that deficiency in human capital is a major reason why poor countries remain poor. Much – though not all – of the human capital in a country is a result of decisions made by individuals. But individual choices seldom add up to the social optimum. In particular, individuals do not consider the positive externalities that human capital confers in production. The result is that they acquire less human capital than is desirable. If individuals could be persuaded to form more human capital, the human capital that is acquired in an economy could rise to the socially optimal level of human capital. What makes an unfortunate state of affairs worse is that whatever quantities of human capital are formed, some – and often more than a mere some – are lost through the migration leakage. It comes as little surprise then that the concern heretofore has been to contain this leakage."

Stark turns this concern on its head. He argues that the opening of an economy to the migration opportunity provides an incentive to workers to better educate themselves, to improve their skills, to acquire more human capital. He demonstrates that because not all these workers will end up migrating to the better jobs, some will remain behind equipped with a higher level of human capital than would have been the case had the migration opportunity been absent. This can have a positive effect on the welfare of all workers in such countries.