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LIETUVA - Too High or Just Right - Cost-Benefit Approach to Emigration Question

LIETUVA - Too High or Just Right - Cost-Benefit Approach to Emigration Question

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- 28 -
 ISSN 1392-2785 ENGINEERING ECONOMICS. 2009. No 1 (61)
THE ECONOMIC CONDITIONS OF ENTERPRISE FUNCTIONING
Too High or Just Right? Cost-Benefit Approach to Emigration Question
Linas
Č
ekanavi
č
ius, Gindra Kasnauskien
ė
 
Vilniaus universiteto Tarptautinio verslo mokyklaSaul 
ė
tekio al. 22, LT-10225 Vilnius If raising of the infamous “iron curtain” just half-opened the door for labour emigration from the post-communist countries, the full-fledged membership to the European Union threw that door wide open. As a result most of these countries experienced significant upsurge of labour emigration after they entered EU. Most demographers and economists of the Eastern Europeancountries tend to conclude that the loss of human capital due to international migration is detrimental to donor nation’s productive capacity and reduces its economic growth and wellbeing. The following adverse effects of emigration are usually cited: depletion of the country’shuman capital assets, resulting in lower productivity; lossof return on investment in education; smaller tax base;larger inequality in the donor country. It is rather obvious that if country looses its skilled,educated and demanded workforce this could retard itsdevelopment. However, “could” does not necessarilymeans “should”, and the “net-impact” of migration is subject to the kind and scale of feedback effects. Whileoutward negative consequences of emigration areemphasized in many academic studies and publicdiscussions, the issues of potential positive feedback effectsof it on the donor country are generally ignored. Acknowledging the existence of direct and indirect adverseeffects of workforce emigration, particularly of braindrain, this article nevertheless attempts to challengeconventional assumption of the “unequivocal” calamity of emigration by pointing out that it can also trigger quite a few offsetting feedback effects that would bring gains for the sending country. Those hidden benefits of emigration for the donor country include, but are not limited to,decrease of unemployment and entailed reduction of demand in welfare payments, remittance flows, stimulationof exports and technological advancement, shrinkage of  shadow economy. The authors advocate the cost-benefit approach to migration, and suggest that in the long-term perspective these positive effects, enhanced by economicmultipliers, might offset or even outweigh for sending countryimmediate losses caused by the workforce emigration.While usually such optimism is not reserved for “braindrain” phenomenon, the authors argue that in the long runit probably will bring efficiency gains to all parties, bothdonor and recipient, as well. Theoretical insights of the paper are illustrated, wherever possible, by theappropriate statistical evidence from Lithuania as thecountry with one of the highest rates of emigration in the European Union.
Keywords:
emigration, brain drain, consequences, feedback,costs, benefits, policy.
Introduction
Globalization processes lead towards fading, at least ineconomic terms, of state borders and consequentlyintensify international migration. In fact, internationallabour migration is as much the concurrent part of globalization and economic development, as is theinternational movement of trade goods or capital, even if the barriers for labour mobility are the last to subside.Raising the infamous “iron curtain” half-opened thedoor for migration from the post-communist countries,however it was the full-fledged membership to theEuropean Union and the subsequent removal of manymigration barriers that threw that door wide open. As aresult many Eastern European countries experiencedsignificant swell of emigration flows after the entrance to theEU on May, 1, 2004.Lithuania was among the most significantly affected:according to the World Bank statistics (World Bank, 2006),about 3.6% of total working age population of Lithuaniawere lost to emigration during just first 20 months of EU-membership. Lithuania had by far the largest negative netmigration rates in EU in 2004 and 2005 (-2.8 and -2.6 per thousand of population, respectively), and with -1.7 netmigration rate in 2007 Lithuania ranked forth from the top, being superseded only by Poland, Bulgaria and Romania
1
. Itis estimated that since 1990 Lithuania has lost nearly 11% of its population due to emigration outflow (StatisticsLithuania, 2006).After Eastern enlargement of the EU the upsurge of migration flows sparked a number of attempts to analyzeand evaluate the consequences of this phenomenon.Interesting enough, the attention of Western Europeanresearchers was and is mainly focused on the cost and benefits of migration for the
receiving 
country. While someauthors discussed potential benefits of immigration (Borjas,1995, Hansen, 2002), others pointed out that it will likelyresult in increased unemployment of unskilled natives,redistribution of welfare payments and other indirectnegative effects (see Coleman, 1992, Coleman, 1995,Hansen, 2003, Boeri and Brücker, 2005).On the contrary, most demographers and economistsof the post-transition countries tend to conclude thatemigration caused large workforce losses are prevalentlydetrimental to the
donor 
country (Rangelova andVladimirova, 2004, Wolfson, 2006, Kaczmarczyk and
1
See EUROSTAT (2005, 2006, 2008). These are official estimates of migration. However, results of statistical survey conducted by the StatisticsLithuania indicate that non-declared and thus unaccounted emigration is morethan twice as large as the declared one (Statistics Lithuania 2006, 2008a).
 
 
- 29 -Okolski, 2008). Adverse effects of emigration for the homecountry are emphasized in many academic studies and public discussions in Lithuania (Kazlauskien
ė
andRinkevi
č
ius, 2006; Nacionalin
ė
s pl
ė
tros institutas, 2006;Karpavi
č
ius, 2007), and are often inflated by the media.As it is aptly noted by linguists (see R. Marcinkevi
č
ien
ė
,2004) the very semantics of public discourse on emigrationquestion carries an unmistakable negative connotation:emigration is more often than not defined as disaster,calamity, tragedy or even catastrophe, and usually ischaracterised by the “wet” colloquialisms, such as “wave”and “drain”.The purpose of this article is to challenge theassumption of the “unequivocal” calamity of emigration by pointing out that it can also trigger quite a few offsettingfeedback effects that could bring gains for the sendingcountry. The object of the research is emigration phenomenon and its economic consequences for the donor country. The methods of comparative analysis and descriptivestatistics were employed for this research.
Costs and benefits of emigration
An ever growing number of studies indicate that positive effects of international migration accrue to bothreceiving
and 
sending country, and they might offset or even outweigh costs. Existence of the offsetting feedback effects of emigration, enhanced by economic multipliers,has led some researchers (e.g. Beine, Docquier andRapoport, 2001) to the speculation that there may be an
optimal 
level of emigration– not too large, but not zeroeither- at which
net benefit 
of migration for the donor country is the largest. The term “net benefit” here refers tothe difference between positive and negative effects of migration for the sending country. If such approachtowards emigration is assumed, then the main policyquestion is not “what to do to prevent emigration”, but“what to do to enhance the net benefit of emigration”.Theoretically speaking,
optimal 
emigration would beachieved at the point when its marginal benefit equalsmarginal cost. However, actual finding of that particular  point is quite complicated as this would require evaluationand modeling of both direct and feedback effects of migration and their institutional setting, as well asreflection of their dynamic role in the development of  particular countries and regions. Meanwhile, the first stepwould be to establish if emigration is
efficient 
, that is if its positive contribution to the development of donor countryexceeds incurred loses. Naturally, such approach raises thequestion of comprehensive assessment of both losses (costs)and gains (benefits) related to emigration.Comprehensiveness in this case means that both direct andindirect, primary and secondary, short term and long termeffects should be taken into consideration.Usually the following negative impacts (costs) of emigration are cited:
 
Depletion of country’s human capital assets,resulting in lower productivity and retarded development;
 
Smaller tax base;
 
Loss of return on investment in education;
 
Larger poverty and inequality in donor country.To start with, it shall be pointed out that migrationdoes not necessary imply labour shortages or immediateloss of productivity for the source country. Intensity of international migration flows usually strongly correlateswith unemployment levels at the source country. If thosewho leave have been unemployed or underemployed athome, their departure may not actually result in a huge lossto the donor country. According to the survey conducted by Statistics Lithuania, in the period of 2001-2005 everythird undeclared working-age emigrant was unemployed inthe home country (Statistics Lithuania, 2006). In purelyeconomic terms, such migration is to be taken as a simplereallocation of labour resources – from the relativelylabour-abundant areas to the ones experiencing labour-shortage, and as such it is likely to lead to the higher overall efficiency. If unemployment numbers aresignificant in the donor country, emigration presumablywill create new employment opportunities for previouslyunemployed or underemployed. This can lead to severalgains: decline of unemployment level due to internallabour mobility and filling in job vacancies by the previously unemployed and, as secondary effect, entailedreduction of demand in unemployment benefits and other welfare payments. Analysis of relevant data for Lithuaniareveals closely related patterns of growth in the number of working-age (over age 16) of emigrants and decline of unemployment numbers (Figure 1).It is obvious though that if country loses its skilled
and 
demanded workforce, then emigration could retard itsdevelopment. However, “could” does not necessarily mean“should”, as it can also trigger 
 feedback 
effects that bringgains for sending country in the long run.One of the latter, as it is often pointed out, is that someof those who leave might later return with greater skillsand experience. To the extent that returnees are more productive and still retain working capacity, they wouldgive an extra impulse to the home country’s development.However, what really counts for development is not thereturn of emigrants by itself but the return of skilledworkforce. If returnees come back only to retire, their contribution to the home country’s economy might belimited only to the increased consumption demand (plusincome multipliers that their spending creates). Furthermore, penchant to return is inversely proportional to the time thatmigrants stay abroad: the longer they stay, the more theyintegrate into host communities, and the less likely theywill return to home country before retirement, if at all.Thus, often voiced self-comforting hopes that emigrantswill some day return
en masse
can be delusive.On the other hand, the assumption that emigrationleads to the increase of inequality and poverty in donor country can be as much delusive. Sure enough,
 prima facie
 data of emigration impact seemingly supports such premise.Surveys of emigration fairly consistently reveal thatthe most vulnerable to emigration “pull” are middle-income households, as they are likely to have both will andmeans to emigrate. Rich households, notwithstandingrelativity of their opulence compared to the level of life inricher countries, have much less reason to consider migration.
 
 
- 30 - 
Figure 1.
 
 Patterns of emigration and unemployment, Lithuania, 2001-2007 Source: Authors’ calculations, based on data provided by Statistics Lithuania (2006, 2008a, 2008b)
The noted findings of R. Easterlin indicate thatfeelings of fulfilment and happiness depend not so muchon the level of accumulated wealth as on the relativerichness in particular society (Easterlin, 1974). Whereas poor households while having a strong incentive to migrateoften can not afford costs of international migration.Dwindling of the middle-income segment of societyinevitably contributes to the increase of inequality. Thiseffect is enhanced by remittances that pioneer migrantssend back home in order to support their immediate andextended family: the same middle-income migrant-sendinghouseholds are first to reap direct benefit of remittances.Recent economic studies, however, have come up withevidence that such inequality-raising impact might be of atemporary nature. As reported by Taylor 
et a
l. (Taylor,2005)
 ,
analysis of 
 
data obtained in rural Mexico indicatesthat remittances from international migration tend toincrease inequality in regions with a small percentage of migration, however inequality diminishes in regions wheremigration, and accordingly remittance volume, is high.This leads us to the hypothesis that effect of remittances oninequality is somewhat similar to the famous“environmental Kuznets curve” that relates levels of atmosphere pollution in city to the level of prosperity of itsinhabitants. That is, the impact of migration on inequality,“migration Kuznets curve”, is likely shaped as an inverse“U” – increasing initially (up to certain migration andremittances level) and then descending.There is little doubt that remittances, irrespectively of their direct income-equalizing effect on the households indonor countries, positively contribute to their economicdevelopment. For example, as reported by Taylor (Taylor,2006), international remittances were equivalent to 11% of gross domestic product of Guatemala and 16% of GDP of El Salvador in 2004. In the same year remittancesconstituted 78% of El Salvador exports value, and for  Nicaragua this figure was as high as 108%. In a way, onemight presume that human workforce “export” is the mostimportant foreign exchange generator for those developingcountries. Comparable data for  Eastern Europe and Former Soviet Union, given by
 
Mansoor and Quillin (2007)
 ,
 indicate that relatively largest remittance flows in 2004went to Moldova – they represented some 27% of GDPvalue. This was closely followed by Bosnia andHerzegovina (22% of GDP value) and Albania (about 15%of GDP).Compared to those countries Lithuania’s portion of remittances is quite modest: in 2007 they were estimated to be equivalent to 3.7% of GDP and to about 8.3% of exports value. Nevertheless, statistical overview of remittance flows over the past 12 years indicates that their volume increased dramatically during that period, and itsgrowth pattern was closely following the cumulativeemigration numbers (Figure 2).Interesting enough, according to the official data thereal spurt of remittance flows took place only in the year 2000 when officially recorded remittances increased nearly17 times compared to the previous year. Such radicalchange should be regarded cautiously, as it most probablyreflects improved statistics rather than a sudden warmingup of migrants towards their remaining families. Nonetheless, some part of it can be due to the fact thatusually it takes some time until earnings of migrants rise tothe level at which they are able to afford substantialremittances. Furthermore, one should bear in mind thatofficial data on remittances is to be taken only as a lower estimate of real flows because it does not include sumssend outside the formal financial channels. Some analysts believe that the hidden amount of remittances is severaltimes higher than the observable one. In any case, theamount of remittances received by Lithuania by far exceeds financial contributions from the EU cohesion fundand structural funds (Figure 3).The amount of remittances notwithstanding, their impact on economic growth can vary. From the theoretical point of view it is clear that remittances can fuel rates of investment and consumption in the country, and contributeto financing of trade deficit (Pradhan
et al 
., 2008). However,

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