Financial & Economic Blog

An original data set on international migration by educational attainment for 1990 and 2000 is used to analyze the determinants of brain drain from developing countries. The analysis starts with a simple decomposition of the brain drain in two multiplicative components, the degree of openness of sending countries (measured by the average emigration rate) and the schooling gap (measured by the education level of emigrants compared with natives). Regression models are used to identify the determinants of these components and explain cross-country differences in the migration of skilled workers. Unsurprisingly, the brain drain is strong in small countries that are close to major Organisation for Economic Co-operation and Development (OECD) regions, that share colonial links with OECD countries, and that send most of their migrants to countries with quality-selective immigration programs. Interestingly, the brain drain increases with political instability and the degree of fractionalization at origin and decreases with natives' human capital.

Do remittances sent by overseas migrants serve as insurance for recipient households? In a study of how remittances from overseas respond to income shocks experienced by Philippine households, changes in income are found to lead to changes in remittances in the opposite direction, consistent with an insurance motivation. Roughly 60 percent of declines in household income are replaced by remittance inflows from overseas. Because household income and remittances are jointly determined, rainfall shocks are used as instrumental variables for income changes. The hypothesis cannot be rejected that consumption in households with migrant members is unchanged in response to income shocks, whereas consumption responds strongly to income shocks in households without migrants.

Recent data on international migration of skilled workers define skilled migrants by education level without distinguishing whether they acquired their education in the home or the host country. This article uses immigrants' age of entry as a proxy for where they acquired their education. Data on age of entry are available from a subset of receiving countries that together represent 77 percent of total skilled immigration to countries of the Organisation for Economic Co-operation and Development. Using these data and a simple gravity model to estimate the age-of-entry structure of the remaining 23 percent, alternative brain drain measures are proposed that exclude immigrants who arrived before ages 12, 18, and 22.

The recent literature contains many stories of how foreign aid affects economic growth. Aid raises growth in countries with good policies, or with difficult economic environments, or outside the tropics, or on average but with diminishing returns. The diversity of the results suggests that many are fragile. Seven important aid-growth papers are tested for robustness, using 14 minimally arbitrary tests deriving mainly from differences among the studies themselves. This approach investigates the importance of potentially arbitrary specification choices while minimizing the arbitrariness in testing choices. All of the results appear fragile, especially to sample expansion.

The purpose of economic reform is to reduce distortions and enhance efficiency. However, when reforms are partial and incremental, individuals and local governments are often able to capture the rent inherent in the gradual transition process. Young (2000) warned that such rent-seeking behavior might lead to increasing market fragmentation. Empirical studies have shown the opposite in the product market. This article argues that as the rent from China's product market has been squeezed out due to deepening reforms, rent-seeking behavior may have shifted to the capital market. Further reforms are needed in the capital market to squeeze out these rent-seeking opportunities, just as those from the product and labor markets were squeezed out earlier.

An extensive survey data set of Brazilian households is used to test whether intrahousehold gender bias affects the decisions of mothers and fathers to send their sons and daughters to work and to school. An intrahousehold allocation model is examined in which fathers and mothers may affect the education investment and the child labor participation of their sons and daughters differently because of differences in parental preferences or differences in how additional schooling affects sons' and daughters' acquisition of human capital. Brazilian household survey data for 1998 are used to estimate the impact of each parent's education on the labor market participation and school attendance of their sons and daughters. For labor market participation, the father's education has a greater negative impact than the mother's education on the labor status of sons. The father's education also has a greater impact on sons' labor status than on daughters'. For schooling decisions, the mother's education has a greater positive impact than the father's education on daughters' school attendance, but fathers have a greater positive impact on sons' school attendance than on daughters'.

Following the endorsement by the international community of the Millennium Development Goals, there has been an increasing demand for practical methods for steadily tracking poverty. An economically intuitive and inexpensive methodology is explored for doing so in the absence of regular, comparable data on household consumption. The minimum data requirements for this methodology are the availability of a household budget survey and a series of surveys with a comparable set of asset data also contained in the budget survey. This method is illustrated using a series of Demographic and Health Surveys for Kenya.

Macroeconomic volatility, both a source and a reflection of underdevelopment, is a fundamental concern for developing countries. Their high aggregate instability results from a combination of large external shocks, volatile macroeconomic policies, microeconomic rigidities, and weak institutions. Volatility entails a direct welfare cost for risk-averse individuals, as well as an indirect one through its adverse effect on income growth and development. This article provides a brief overview of the recent literature on macroeconomic volatility in developing countries, highlighting its causes, consequences, and possible remedies. It then introduces the contributions of a recent conference on the subject, sponsored by the World Bank and Pompeu Fabra University, Barcelona.

This article examines empirically how domestic structural characteristics related to openness and product- and factor-market flexibility influence the impact of terms of trade shocks on aggregate output. Applying semistructural vector autoregressions to a panel of 88 countries with annual observations for the period 1974–2000, the analysis isolates and standardizes the shocks, estimates their impact on GDP, and examines how this impact depends on the domestic conditions outlined above. The article finds that greater trade openness magnifies the output impact of terms of trade shocks, particularly negative ones, while financial openness reduces their impact. Flexibility of labor and firm-entry are beneficial, with labor flexibility dampening the impact of negative shocks and ease of firm-entry magnifying positive ones only. Domestic financial depth has a more nuanced role in stabilizing the economy. Analysis of interactions across structural determinants reveals complementarities among macroeconomic conditions (trade and financial openness and depth) and, separately, among microeconomic conditions (flexibility of labor markets and ease of firm-entry). Variables across these groups tend to behave as substitutes for each other.

There is a debate on whether some forms of financial flows offer better protection against crises than others. Using a large panel data set that includes advanced, emerging, and developing economies during 1970–2003, this article analyzes the behavior of several types of flows: foreign direct investment (FDI), portfolio equity investment, portfolio debt investment, other flows to the official sector, other flows to banks, and other flows to the nonbank private sector. Differences across types of flows are limited with respect to volatility, persistence, cross-country comovement, and correlation with growth at home or in the world economy. However, consistent with conventional wisdom, FDI is the least volatile form of financial flow, when the average size of net or gross flows is taken into account. The differences are striking during "sudden stops" in financial flows (defined as drops in total net financial inflows of more than percentage points of GDP compared with the previous year). In such episodes, FDI is remarkably stable, and portfolio equity seems to play a limited role. Portfolio debt experiences a reversal, though it recovers relatively quickly, and other flows (including bank loans and trade credit) experience severe drops and often remain depressed for a few years.