HUMAN CAPITAL FLIGHT

(Project towards partial fulfillment of Assessment in subject of Theories of

Development and Indian Economy)

Submitted By: Submitted To:

Ujjwal Bharadwaj Dr. Kranti Kapoor
B.A. LLB. (Hons.) Faculty of Policy Science
Semester – VI
Roll No: 1489

NATIONAL LAW UNIVERSITY, JODHPUR

WINTER SESSION
(JANUARY- MAY 2019)
 TABLE OF CONTENTS

TABLE OF CONTENTS ........................................................................................................... 2

RESEARCH METHODOLOGY............................................................................................... 3

UNDERSTANDING HUMAN CAPITAL FLIGHT ................................................................ 4

How it Differs from Migration? ............................................................................................. 4

THEORIES OF MIGRATION AND THEIR RELATION WITH ECONOMICS ................... 6

Neo-Classical Theory............................................................................................................. 6

New Economics of Migration ................................................................................................ 8

Dual labor market theory ....................................................................................................... 9

ECONOMIC IMPACT OF BRAIN DRAIN IN DEVELOPING COUNTRIES .................... 10

NEGATIVE IMPACT OF Human capital flight ................................................................. 10

POSITIVE IMPACTS OF BRAIN DRAIN ........................................................................ 12

Vis-a-Vis INDIA ..................................................................................................................... 13

CAUSES OF BRAIN DRAIN IN INDIA ........................................................................... 13

PROBLEM OF BRAIN DRAIN IN INDIA ........................................................................ 14

FACTORS FAVORING RETURN OF IMMIGRANTS TO INDIA ................................. 15

BACK TO INDIA: CONVERTING BRAIN DRAIN INTO BRAIN GAIN ...................... 15

CONCLUSION ........................................................................................................................ 17

2
 RESEARCH METHODOLOGY

Research methodology adopted for this project is doctrinal research which is based primarily
on the primary and secondary sources. Substantive source of the project are Articles and
Reports available in web on the topic by scholars and economists on the subject of theories of
economics in Indian context. Books concerning the relevant subject of Indian economy have
also been referred to.

3
 UNDERSTANDING HUMAN CAPITAL FLIGHT

Human capital flight is the term which is used to suggest brain drain. As the name suggest,
human mind is considered as a resource and a capital, so when they migrate to other countries
it is referred as human capital flight. In simplified terms, it is the migration of highly skilled
labour for an extended period of time. This exodus of labour is usually qualified by loss of
economic potential and is a problem that has been plaguing developing economies for a long
time.1 It can also be described as a process in which a country loses its most educated and
talented workers to other countries through migration.

In this project I shall focus on brain drain problem in India majorly and some other
developing economies. This trend is considered a problem, because the most highly skilled
and competent individuals leave the country, and contribute their expertise to the economy of
other countries. The country they leave can suffer economic hardships because those who
remain don't have the 'know-how' to make a difference.
Firstly I shall first try to understand how it is different from other kinds of migration.
Secondly, how various theories propounded by Economists explain this phenomenon.

HOW IT DIFFERS FROM MIGRATION?

The Jews migrated from Eastern Europe to America in large numbers in the earlier part of the
20th Century because they were being persecuted. In these cases the people were compelled to
leave their homelands due to extreme situations. Thus some kind of force or pressure
motivated them for migration.

What makes this brain drain different from other kinds of migration is that the people in such
situations no force or pressure is compelling to leave their country where skilled class is
moving to developed countries like US. Although the countries are developing but people
still skilled labour is migrating to more developed countries due to a variety of reasons such
as better living standard and working environment. These reasons have categorized by most
authors in the terms of ‘push-pull’ factors2 in context of economic theory.

1
Ramamurthy, B., “International Labour Migrants: Unsung heroes of globalization”, Sida studies no.8,
Edita Sverige AB, 2003
2
Bach S. International Migration of Health Workers: Labour and Social Issues. Geneva: International Labour
Office, (2003).

4
The push factors are negative characteristics of the home country that form the impetus for
intelligent people migrating from Lesser Developed Countries (LDC). In addition to
unemployment and political instability, some other push factors are the absence of research
facilities, employment discrimination, economic underdevelopment, lack of freedom, and
poor working conditions. Pull factors are the positive characteristics of the developed country
from which the migrant would like to benefit. Higher paying jobs and a better quality of life
are examples of pull factors. Other pull factors include superior economic outlook, the
prestige of foreign training, relatively stable political environment, a modernized educational
system to allow for superior training, intellectual freedom, and rich cultures.3

Following table shows the drivers for human capital flight;

Another significant difference is that most of the labour migrating in normal circumstances
migrates irrespective of the skills they possess whereas in the context of ‘Brain-Drain’ skill
possessed, as the name suggest moving of human mind. It is generally cited that the disparity
in the working conditions between richer and poorer countries and opportunities to avail
higher education are the principle reason behind such migration.

3
https://study.com/academy/lesson/what-is-brain-drain-in-economics-definition-causes-effects-examples.html

5
 THEORIES OF MIGRATION AND THEIR RELATION WITH ECONOMICS

When brain drain is prevalent in a developing country, there may be some negative
repercussions that can affect the economy. These effects include but are not limited to:

 Loss of tax revenue.

 Loss of potential future entrepreneurs.
 A shortage of important, skilled workers.
 The exodus may lead to loss of confidence in the economy, which will cause persons
to desire to leave rather than stay.
 Loss of innovative ideas.
 Loss of the country's investment in education.

An endogenous growth model with heterogeneous agents is analyzed to show that "human
capital flight" or "brain drain" can lead to a permanent reduction in income and growth of the
country of emigration relative to the country of immigration.

While theoretically examining migration as a process, there are a number of theories dealing
with this phenomenon. I would cover Neo-classical macro and micro theories, New economic
theory and Dual labor market theory.

NEO-CLASSICAL THEORY
This neo-classical theory is classified into micro and macro analysis. The neoclassical theory
understands migration to be driven by differences in returns to labour across markets.
According to this theory, migration is driven by geographic differences in labour supply and
demand and the resulting differentials in wages between labour-rich versus capital-rich
countries. The central argument of the neoclassical approach thus concentrates on wages.4
Micro-theory was introduced by Sjaastad5 and further elaborated by Todaro. He presented the
decision to migrate as a human capital investment problem in which the potential migrant

4
Lucia Kurekova: Theories of migration: Conceptual review and empirical testing in the context of the EU East
West flows
5
Sjaastad L.A., “The costs and returns of human migration”, Journal of Political Economy, (1962) 70, pgs: 80-
93.

6
does a cost-benefit analysis before he makes the decision to migrate. 6 If the cost-benefit
analysis leads to the person expecting a positive net-return then the person decides to migrate.

On the other side, macro aspect was developed by prominent economists such as Lewis7 and
Hicks8. It was initially developed to explain the role international migration plays in the
process of economic development. In countries where the amount of labour available in
relation to the capital available is less than the wages are higher compared to countries where
amount of labour available is higher. According to this theory this wage differential triggers
migration. 9

This micro aspect theory was further elaborated by Todaro. A model of labour migration and
urban unemployment in of less developed countries, he takes into account the (anticipated)
probability of obtaining employment following migration. Todaro hypothesized that people
migrate as long as the wage differential is large, even if unemployment rate in the receiving
area is high. He stressed that people weigh both costs and benefits before moving to other
areas. This idea has been incorporated in the “new economics of labour migration”, which
views the out-migrant as maintaining close contacts with the origin household through
remittances, which help both sustain the household and protect the migrant’s claims to a
future inheritance.10

On the counter part, macro theory tries to make an analogy between the flow of labour and
flow of capital. It states that capital flows from capital rich countries to capital poor countries
because it yields a higher rate of return, in a similar vein labour moves from a labour-
abundant country to a labour-scarce country and hence yields a higher rate of return.11

Thus difference between the macro and micro theory is that whereas in the macro theory the
wage differential is the only criterion taken into consideration before migrating in the micro
theory the person takes a few more things into account before he decides to migrate. 12 This

6
International Organization for Migration (IOM), (2003): World Migration 2003: Managing Migration
Challenges and Responses for People on the Move, Vol.2, Geneva, p.14.
7
Lewis A., “Economic Development with unlimited Supplies of labour”, Manchester School of Economic and
Social Studies, (1954), at pgs 139-191.
8
Hicks, J., “The theory of Wages”, London, Macmillan, 1963 (1 st published in 1932).
9
Eva Olejarova, “Labour Migration as a Socio-Economic Phenomenon-Slovakia and Czech Republic a
Comparative Perspective”, Central European University (2007).
10
https://is.mendelu.cz/eknihovna/opory/zobraz_cast.pl?cast=61469;lang=cz
11
Id.
12
Supra, at 9.

7
could include factors such as the time required to get a job or the difference between the
uncertain higher income abroad and the sure-shot income at home.13

The neoclassical theory of migration has been subject to a conceptual critique and rich
empirical testing. While rigorous, it has been viewed as mechanically reducing migration
determinants, ignoring market imperfections, homogenizing migrants and migrant societies
and being ahistorical and static. It generally ignores the effects of home and host states and
leaves out the importance of politics and policies, which are only considered as distortion
factors or additional migration costs. Human capital theory has been criticized for presenting
an overly optimistic view of migration which is not always a voluntary process to maximize
gains.14

NEW ECONOMICS OF MIGRATION

The new economics of migration (NEM) theory has come to challenge some of the
assumptions of the neoclassical approach, offering a new level of analysis and different
nature of migration determinants and it shifted the focus of migration research from
individual independence to mutual interdependence.15 They criticize the micro theory by
stating that it is not individual actors that take the decision to migrate but larger units of
people such as families or households.16 Migration acts as a security net for such families
who live in countries where adequate social security nets in the insurance or governmental
programs are not available.17 As such, migrant decisions are not based purely on individual
utility-maximizing calculations but are rather a household response to both income risk and
to the failures of a variety of markets – labor market, credit market, or insurance market.18

The theory also tries to argue that migration and local employment are not mutually
exclusive, but on the contrary related to each other. An increase in net returns in local
activities makes it a more attractive proposition to migrate because through this there is more
capital available through the income earned abroad to invest in local activities and the risk

13
Todaro M.P.,” A model of labour migration and urban unemployment in less developed countries”, American
Economic Review, (March 1969), 59(1), pp 138-148.
14
Lucia Kurekova: Theories of migration: Conceptual review and empirical testing in the context of the EU
East West flows
15
Stark O., D.E. Bloom, The new economies of labor migration, American Economic Review, (1985), 75, pp
173-178.
16
Id.
17
Supra, at 9, pp 21.
18
Massey, D.S, (1990): “Social Structure, Household Strategies and the Cumulative Cuasation of Migration”,
Population Index, Vol. 56 (1), pp.3-26.

8
accrued is also lesser.19 Migration in the absence of meaningful wage differentials or the
absence of migration in the presence of wage differentials, does not imply irrationality but
rather compels us to consider a set of other variables related to relative deprivation (a
household - performing relatively worse to other households will be readier to send a member
abroad) and risk-aversion and risk-minimization of household income.20

Thus this theory argues that households not only send workers to increase their income in
absolute terms but also to increase their income in relative terms compared to the rest of the
households living around them.21

DUAL LABOR MARKET THEORY

Dual labor market theory, like world system theory, links migration to structural changes in
the economy but explains migration dynamics with the demand side.22 This theory is
developed by Piore (1979), this theory posits a bifurcated occupational structure and a dual
pattern of economic organization in advanced economies. The theory argues that migration is
driven by conditions of labor demand rather than supply: the character of the economy in
advanced countries creates a demand for low-skilled jobs which domestic workers refuse to
take up due to, for example, status. Duality unfolds along the lines of two types of
organization in the economy, namely capital-intensive where both skilled and unskilled labor
is utilized, and labor intensive where unskilled labor prevails. The theory excludes sending
countries and overemphasizes formal recruitment practices. Empirical estimates are
contingent on the distinction between primary and secondary sector, which is usually
arbitrary, and therefore can lead to instable results. On the other hand, it provides an
intelligent explanation for the coexistence of chronic labor demand for foreign nationals
alongside structural unemployment in receiving countries (Arango 2000)23

19
Supra, at 12, pp 439.
20
Stark 1991; Stark 2003
21
Id.
22
Massey, D.S, (1990): “Social Structure, Household Strategies and the Cumulative Cuasation of Migration”,
Population Index, Vol. 56 (1).
23
Lucia Kurekova: Theories of migration: Conceptual review and empirical testing in the context of the EU
East West flows

9
 ECONOMIC IMPACT OF BRAIN DRAIN IN DEVELOPING COUNTRIES

According to Dodani and LaPorte (2005), brain drain mostly affects “skilled human resources
for trade, education and trained health professionals”. Brain drain can have positive effects
such as the talented, skillful people leaving their countries of origin in order to have the
opportunity to grow and explore themselves, enabling the migrants to spend time in other
countries.24 Brain drain brings talented people into a growing atmosphere and it promotes
globalization, making the world part of one big family. This raises the average level of
human capital and the productivity levels of the economy.25

Brain drain or this human capital flight causes more negative impact on the countries. Lack of
human capital is one of the reasons why developing countries remain poor. This situation is
aggravated when the skilled human capital in developing countries is lost through the skilled
migration or human flight.

Detail analysis of the impact it causes has been discussed below.

NEGATIVE IMPACT OF HUMAN CAPITAL FLIGHT

First and foremost, brain drain causes developing countries to lose the ability to progress.
Talented people are born, raised, and educated in their country, and when it comes time to
work and give back what they were provided, they leave and seek employment elsewhere.26

Countries develop slower once they lose their talented and skillful human capital. Losing
human resources is a serious problem for the developing countries. The deficit of skilled
labor is detrimental to progress of countries especially in the sectors which demand skilled
labor such as education and healthcare, moreover as pointed above it also represents the loss
of nation’s investment in the worker’s training and education, leading to the situation where
investment itself becomes counterproductive i.e. investment of our nation’s wealth is
producing in the foreign country. Developing countries continue to face many problems, such
as poverty and lack of technological advancements, as well as fewer opportunities. With the

24
Dodani, S., & LaPorte, R.E. (2005). Brain drain from developing countries: How can brain drain be
converted into wisdom gain? Journal of the Royal Society of Medicine, 98(11), 487 491. doi:
10.1258/jsrm.98.11.487-488.
25
Stark, O.(2004). Rethinking the brain drain. World Development, 32(1), 15-22. doi:
10.1016/j.worlddev.2003.06.013.
26
Dr. Babita Srivastava; "Economic Impact of Brain Drain in Developed and Developing Countries", William
Paterson University

10
economic development of developing countries, the brain drain rate decreases.(As shown in
figure below)

Broadly, the negative impacts can be summarized as follows;

1. Lack of Human Resource.

The flight of the human capital results in shortage of manpower and thus human resource. It
causes the shortage of skilled doctors, engineers, IT professionals, etc. which effects the
country’s ability to adopt new technologies or deal with any health related crisis.

2. Loss of Social Capital.

For the training of these skilled class, a large sum is invested on them in form of
infrastructure and other facilities. The government undertakes not only such infrastructural
investment but also provides subsidies for the education of these youths. This investment
forms the part of social capital which a nations is making with the expectation of future return
in form country’s growth. However the flight of these individuals creates a void which the
governments of the developing nations are unable to fill due to their economic constraints.
Thus brain drain entails significant losses for those left behind and increases global
inequality.27

3. Isolation of country and loss of Revenue.

27
Bhagwati, J., and K. Hamada. “The brain drain, international integration of markets for professionals and
unemployment: A theoretical analysis.” Journal of Development Economics 1:1 (1974): 19–42.

11
Without growth and the improvement that could have been provided by the skillful and
educated people who left, the country then can no longer attempt to compete globally and are
left isolated from the rest of the world. This isolation can slow development and progress
even further and cause a nation to grow even poorer. These skilled labor working abroad
though send remittances to their family residing in the home country, yet they do not pay
taxes on what they earn and thus causes a loss of revenue to the home country.

POSITIVE IMPACTS OF BRAIN DRAIN

The recent studies in the over the effect of brain drain have suggested certain positive impacts
of the brain drain over the developing countries.

1. Remittances
Remittances by migrant skilled workers to their family/ relatives help replenishing the stock
of human capital that is depleted by the brain drain. There has been strong evidence of
relationship between education and the amount remitted by the migrants 28 . Thus it helps the
developing countries to increase their stock of skilled labor through further investment.

2. Circular Migration
Circular migration allows the host and home country to share the benefits of highly-skilled
labour mobility. The knowledge and capital acquired abroad generates important benefits,
especially for technology adoption, entrepreneurship, and productivity in the home country.

3. Reduction of Transactional Cost between Home and Host Countries

High-skilled migrants can reduce transaction costs between countries and thus facilitate trade,
foreign direct investment, and technology transfers between host and home countries. There
can also be diaspora externalities for institutional quality and for promoting democracy in the
home country.

28
Bollard, A., D. McKenzie, M. Morten, and H. Rapoport. “Remittances and the brain drain revisited: The
microdata show that more educated migrants remit more.” World Bank Economic Review 25:1 (2011): 132–
156.

12
 Vis-a-Vis INDIA

India since 1950’s has experienced a strong wave of out migration of skilled workers which
is still continuing with increasing magnitude. Technocrats and expert professionals moved
towards the western countries such as the USA, Canada, UK and Australia as permanent
migrants largely. As per the UNDP estimates, India loses $ 2 billion a year due to
immigration of computer experts to the US. Every year thousands of the best brain of this
country leave it in search of better avenues. India with an estimated stock of 11.4 million
emigrants was the second emigration country in the world, behind Mexico (11.9 million).29
Globalization to an extent has increased this problem because a person sitting in India is
contributing to the overseas company while nothing is gained through its productivity by the
Indian economy.

CAUSES OF BRAIN DRAIN IN INDIA

There are various reasons for the brain drain in India. The two important aspect of this
phenomenon are countries and individuals. The reason for choosing a country may be lack of
opportunities, economic depression and health risks while in terms of individuals it may be
due to the influence of family and personal preferences. Keeping both the major issues in
mind, some of the causes have been identified:

1. Higher Education:
The enrollment of Indians in foreign universities has increased 10 times post independence.
In the year 2006, of the 1,23,000 students studying outside India, 76,000 have chosen USA
(94,563 in 2007-2008, 83,833 in 2006-2007) as a country of their choice followed by UK,
Canada and Australia. In 2009, enrolment in higher education in India was only 16%
compared to 89% in the United States, 55% in France and 24% in China. Despite the low rate
of enrolment in higher education, in terms of absolute numbers, India is the third largest
higher-education system in the world, behind only the United States and China30 The

29
World Bank, Migration and Remittances Factbook 2011.
30
(UNESCO-UIS) Education (all levels) profile – India, United States and World Bank (Data/Indicators) –
Education.

13
enrollment in India post independence have shown a secular trend with 40% enrollment
coming from lower castes and 35% of the total numbers from women.31
2. Employment:
The Indian youths can be found working in all types of job descriptions whether it is skilled
semi-skilled, employed or unemployed. The human resource in India due to its veracity finds
demand all over the world. The difference in terms of salary, living standards, working
conditions and facilities force the Indian labor to find work outside their country.
3. Favorable migration policy:
Indians are considered to be brain reservoirs of the modern economic world and keeping in
mind the importance given to knowledge in today’s world, the demand for Indians are
heating up. Economic Unions like EU has shifted from specialized temporary programs such
as Green cards to highly-skilled migrant programmes for permanent employment, allowing
settlement. This pattern of policy has opened avenues for foreign students (especially
Indians) to settle on permanent basis after acquiring their degrees. Table 2 mentioned below
shows the verifies the argument mentioned above.

Table2: New residence permits issued to Indians in 2010 in EU-27

PROBLEM OF BRAIN DRAIN IN INDIA

According to official estimates of India Overseas Employment Corporation, close to 36,000
professionals, including doctors, engineers and teachers, have migrated to other countries in
the last 30 years. As per the data of the US Department of Health, there one Indian doctor for
every 1, 325 Americans. However, there is one Indian doctor for over 2400 Indians. The data
is disturbing yet true. Moreover the median income of an Indian in US is much above the

31
World Bank, Higher Education in India, Country Summary of Higher Education.

14
national average of the United States. The expatriation rte among Indian doctors is 8% which
is much higher than their Chinese counterpart (1%) and other developed countries like
Canada (2%) and USA.
Most of the students who go abroad for higher studies do not return to India. After seeing, the
affluent life of foreign countries they lose all interest in their own country. Many Indians are
involved in teaching at various foreign Universities while its domestic institutions like IIT
and IIM’s are facing faculty shortage. Another advantage that Indians find in foreign country
is that while learning they can also earn their living. The stipends paid in foreign firms and
university is enough to sustain one’s livelihood which is very difficult in the Indian scenario.

FACTORS FAVORING RETURN OF IMMIGRANTS TO INDIA

India’s multidimensional growth has created its attraction towards its own highly-skilled
migrants. India is the second fastest-growing economy in the world, second only to China,
averaging over 6 percent growth per year over the past decade and a half. During the global
recession, 2008-09, China and India witnessed slightly slower rates of growth, consequently
their economies continued to catch up even during the crisis. This situation has created a spur
of reverse migration to India. Many Indian professionals settled in US have returned to India
during the period of 2010-2012.32

BACK TO INDIA: CONVERTING BRAIN DRAIN INTO BRAIN GAIN

1. Increasing Remittances of Migrants in India:
It has been through increasing knowledge established that in long run brain drain can be
converted into brain grain, something that is relevant in Indian context. Estimated at 30
million, the Indians produce an income of around $400 million equivalent to 30 percent of the
India’s GDP33
The remittances received by India from abroad in 2010 were $55 billion accounting for 3.9 %
of the India’s GDP. Even the crises of 2008 could not affect the remittances received by India
from its migrant community.34 Naturally, these financial resources contributed to
development processes in India. But in addition to direct financial advantage, Indian

32
Kala Seetharam Sridhar & V Sridhar, The risks of coming home, Business Standard, 18 June 2011.
33
Annual Report of the Ministry of Overseas Indian Affairs, Government of India, 2009-10.
34
World Bank, Migration and Remittances Factbook 2011.

15
expatriates abroad, especially highly–qualified expatriates bring other benefits such as image
improvement for the country, knowledge transfers, access to new markets, business networks.

2. Encouraging transition of Knowledge to Indian Economy:

The growth of Indian software industry with the contribution of US-based Indian It
specialists is an example of how international mobility of skilled Indian professionals could
help India’s transition to a knowledge and innovation based economy. Knowledge intensive
activities comprises of india’s 14% of net domestic product35. The IT-BPO sector is not only
leading the growth of the Indian economy but is also providing millions of direct and indirect
jobs to the Indian masses. The share of this sector in GDP has increased from 1.2% in 1998 to
5.8% in 2009.36
3. Encouraging migrants to initiate investment in India:
The Indian prowess in Information technology has encouraged the companies like Microsoft,
IBM, Hughes Software, Intel, Oracle, GE, CISCO established R&D centres in India. The
number of centres related to ICTs grew from fewer than 100 in 2003 to about 750 by the end
of 2009. It has been the role of the Indian It professionals that India has become a major IT-
exporter country in the world. It is necessary that such investments are also encouraged in
other sectors as to improve the Indian situation in the export of goods and services.

35
UNESCO 2010, UNESCO Science Report 2010, The current Status of Science around the World.
36
NASSCOM 2009, Indian IT-BPO Industry 2009: NASSCOM Analysis, March 2009.

16
 CONCLUSION

We would like to conclude by saying that in order to bring about a reversal in the trends, and
to lay the foundations for a systemic transition from a phenomenon of ‘Brain Drain’ to ‘Brain
Gain’, strong resolve is needed from the side of the government, civil society and business
leaders. This systemic transition can be brought about by improving the regulatory
environment, creating centres of excellence as well as by promoting meritocracy. This
transition will require full involvement of all the stakeholders. Only time can tell whether
India can reverse this trend of ‘Brain Drain’

17