Brain Drain-Induced Brain Gain and the Bhagwati Tax: Are Early and Recent Paradigms Compatible?

Abstract

Based on a welfare-maximization model of skilled migration where education generates a positive externality, this paper examines whether the early view regarding brain drain’s (BD) negative impact on source countries – and the Bhagwati tax (𝐵𝑇) associated with it – is compatible with the recent more optimistic BD-induced brain gain view. I derive BD’s impact on education, welfare, the optimal education subsidy (𝑠), and a combination of 𝑠 and (the optimal) 𝐵𝑇, when residents’ (emigrants’) weight in the government’s objective function is 1 (1−𝛽), with 𝛽 𝜖 [0,1]. I find that: i) education, welfare and 𝑠 levels are higher (lower) under an open than under a closed economy for 1−𝛽>(<) 𝑦0/𝑦𝑑, the ratio of origin-country to destination-country income; ii) 𝑠 and 𝐵𝑇 are ‘policy complements,’ i.e., they are positively related; and iii) 𝐵𝑇 increases with 𝛽, reaching a maximum at 𝛽=1 (where government only care about residents). Two implications and a proposal are: a) The early literature focused on resident – rather than on migrant – welfare (the 𝛽=1 case), which is precisely the case where 𝐵𝑇 is largest; b) A second policy instrument should be useful, especially if constraints exist on making changes in the other. Thus, as opening up the economy implies a lower 𝑠, raising 𝐵𝑇 should be beneficial if, say, parents’ and teachers’ organizations make it politically difficult if not impossible to reduce 𝑠; c) A proposal for collecting the tax is presented.