Thursday, August 11, 2005

Human capital "externalities"

I mentioned in the last post something about "externalities" associated with human capital. First off, externalities are benefits or costs of actions that are imposed without going through a market transaction. Ordinarily, to enjoy an economic good I would need to buy it; but in the case of an external benefit you just soak it in, as it were. It is alleged that human capital has this effect. If I get educated, it's not only I who benefits, but the rest of the society which interacts with me. They may benefit in a variety of ways - I may develop or sharpen ideas, which end up hastening the rate of innovation; I support and improve basic institutions that keep the economy running smoothly (e.g. I make wiser choices during elections); I influence my society towards greater civility, harmony, participation, etc.

So an OFW (overseas foreign worker) who gets an education here and hies of abroad, may not be able to share the externality with his or her countrymen (except, these days, the voting part). In fact, other societies get to soak up his or her good ideas!

This suggests a good argument against the brain drain. It's not enough that brainier workers go abroad and send home the money; their brains should all come together here and reach a critical mass of ideas that lead to innovation and ignite economic growth.

The idea sounds good, but unfortunately the empirical confirmation about the existence of significant externalities is inconclusive. I for one am not about to bring home the OFWs just because of this alleged externality. However, I do find massive OFW deployment to be symptomatic of weak employment generation in the domestic economy (plus an excess of government subsidy for the footloose.) It is these root causes that need to be addressed, in order to keep the brains from being drained.

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