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Definition of the ‘Brain Drain’. The brain drain problem refers to the situation where a country loses its best workers. For example, skilled workers in developing countries such as India or Pakistan may be attracted by better rates of pay and working conditions in developed countries, such as the US and Western Europe.

The brain drain means that developing countries can struggle to develop because their best-skilled labour leaves the economy. Thus it becomes hard to break the cycle of losing the best workers. Because of this ‘brain drain’ the developing countries lose in many ways:

In the past 25 years, there has been a substantial emigration of workers from Central and Eastern Europe – mostly Western Europe. Whilst this migration has benefits for the EU as a whole and the workers who emigrate, those countries who see large net outflows of (mostly young) skilled workers have seen significant externalities and costs.

However, net emigration is not without benefits. Migrants send money back to their country and they can return with improved skills and knowledge of business.

Problems of the ‘Brain Drain’ – net emigration

  • Less tax revenue from losing income tax. Young workers aged 25-60 make the biggest contribution to a nation’s finances because they pay income tax, but don’t receive pensions or education spending. Baltic countries with large net emigration are forecast to see a rise in dependency ratio – the number of pensioners to working age population.
  • Decline in competitiveness. A shortage of skilled labour can push up wages faster than productivity. Remittances sent home can also cause appreciation in the exchange rate. Remittances can also lead to lower labour supply as those who receive remittances have less incentive to work for a low hourly wage.
  • Loses potential entrepreneurs. Those who emigrate tend to be the ablest and willing to take risks. Migrants are potential entrepreneurs who, if they stayed in country of origin, might set up business which would contribute to economic growth and create employment
  • It can lead to a shortage of key skilled workers. It is often skilled workers (nurses, doctors, engineers who find it easiest to emigrate to countries with higher incomes). This can leave the original country short of workers. According to the Economist, the loss of skilled workers is a significant problem in many Eastern European economies (Economist Jan 2017)
    • Polls of Bulgarian medical students show that 80-90% plan to emigrate after graduating.
    • The working population of Latvia has declined 25% since 2000
  • Reduces confidence in the economy; people aspire to leave rather than stay.
  • Non-economic costs. If young skilled workers emigrate, it can have an affect on political and social institutions – with a lower representation of young, aspirational graduates in political institutions. According to IMF  “Control of corruption, voice and accountability, rule of law, and government ,effectiveness indicators are currently all notably weaker in SEE countries, which also faced larger outflows of better-educated people in earlier years than CE-5 and Baltic countries.” IMF 20 July 2016
  • Lower growth. According to the IMF – even allowing for the impact of remittances, net emigration has caused GDP to be lower than it would have been without net emigration.

“Empirical analysis suggests that in 2012, cumulative real GDP growth would have been 7 percentage points higher on average in CESEE in the absence of emigration during 1995–2012, with skilled emigration playing a key contributing factor.” IMF 20 July 2016

Benefits of net emigration and the brain drain

Although developing countries may lose their best workers, it is possible that there are several benefits for allowing migrants to leave and work elsewhere.

  1. Workers may gain more experience and from working in other countries. This knowledge can then be used when they return and set up business in their native countries.
  2. Migrant workers often send remittances – money back to their families in countries of origin. This can make a substantial contribution to the balance of payments and improving GDP. Remittances can enable investment and financial deepening.

    source: World Bank Migration and Development Brief, pdf. This shows that remittances from migrant workers are a substantial source of capital flows to developing economies.

  3. Migration is often short-term. Many workers who move to higher paid jobs often return after a few years.
  4. Rise in real wages living standards. Eastern European countries who have seen net emigration have also seen a rise in living standards and real wages since joining the European Union. The free movement of labour and capital isn’t one way. Multinationals have been keen to invest in Eastern Europe to take advantage of lower labour costs and growing markets. According to the Economist – the relative shortage of labour has caused firms to raise real wages. In the Baltic countrie, wages have been rising faster than productivity – which has forced firms to invest more in automation to remain competitive.

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