Brain drain – the Romanian example

Daria writes*

“Brain drain” is defined as the emigration of highly skilled workers from developing economies to more developed ones. Globalisation and  membership in the European Union have had positive and negative impacts on Eastern European countries, which in the context of liberalisation have become known as human-capital-exporting countries. Unfortunately, the surge in medical personnel, engineers and entrepreneurs working abroad has caused serious damage to the countries of origin that now struggle with dormant economies.

Romania ranks first in emigration among European countries. The 1989 fall of the Communist regime was the first opportunity for Romanians to look for new prospects abroad. However, only following Romania’s EU joining, the brain drain effect started to impede development in specific sectors. The healthcare sector is one in which innovation seems impossible.  More than half of its workers have migrated to Western countries, meaning that those left behind are struggling to meet day-to-day health care demands.

Reports have shown that four out of five Romanian doctors consider working abroad and over 20,000 have left to practice in countries such as the UK or France since 2007. This problem disrupts the country’s development. There is often concern regarding the financial losses, since Romanian taxpayers pay for the education of doctors and nurses. The training of one doctor in Romania costs approximately 100,000 €. These costs deepen the economic disparities between Western and Eastern Europe, but education costs are overlooked during EU budgeting meetings. That oversight may not be accidental when destination countries gain knowledge and economic benefits from such workers.

While long-term economic consequences involve a more elaborate analysis, short-term repercussions are more visible. The brain drain has depleted the healthcare system, with a 20% personnel shortage in Northern Romania The recent outbreak of COVID-19 has exposed the workforce to risk and the weaknesses of the sector. The lack of qualified personnel and scarcity of hospital funding (Romania allocates only 5% of GDP to healthcare) led to unprecedented measures such as closing hospitals in major cities.

Brain drain is often irreversible, so Romania should soon focus on a “brain gain” approach. Various studies have shown that such a strategy might foster and encourage growth . “Brain gain” generates economic gains and knowledge capital. Policies promoting  return-migration would bring experience and skills to the healthcare sector.

Although remittances from the diaspora of 1.9 billion dollars in 2014 helped the economy, monetary gains cannot entirely offset the negative effects of brain drain. As an increasing number of highly skilled Romanians work abroad because of exacerbated income inequalities and corruption in their home country, radical institutional change to encourage “brain gain” is needed.

Bottom Line: Brain drain has little to no positive effects for Romania, especially in the healthcare sector losing trained specialists. Reversing the drain is needed to foster progress and development.


* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Little tax, lots of pressure

Manon writes*

Global issues like climate change require governments to invest in ways that will cost them in the present to hopefully provide a better future. But, investing in the future is a lot harder when you are already struggling with investing in the present. The wealthiest of countries are having a hard time making such a change. For low-income countries, it seems near impossible due to a lack of government capacity.

The original Kuznets curve illustrates that as a country goes through economic development, inequality will first increase. When, due to economic growth, the government has a high enough revenue through taxes, it can set up a welfare system and inequality will go down again. The environmental Kuznets curve is based on the original curve and argues that as a country develops, pollution will first go up. However, when the country reaches a certain level of economic growth, pollution will go down again through technical innovation and switching from fossil fuels to green energy.

However, climate change is knocking on everyone’s door, albeit often a bit more urgently on those of poorer countries. Countries that have not reached the level of economic development that the environmental Kuznets curve talks about are being forced to deal with climate change before they are, in a sense, ready. This force is coming from either them being directly affected by climate change or through international pressures, such as the UN’s Sustainable Development Goals.

Low-income countries often do not have the capacity to invest in the future as their tax revenue is still low. They have not reached the point of economic development in the original Kuznets curve where they have enough tax revenue to set up a welfare system, let alone to invest in the future. A big struggle in raising the needed tax revenue to finance public spending in low-income countries is that the economy is largely informal. Many people have a varying income and are often paid in cash, making income tax hard to implement. Consumer taxes are equally hard because many people shop at smaller stores that might not keep an accurate account of sales and inventories. In such a situation, one would ideally tax the rich more heavily than the poor as they often have a more formal and constant income or assets to tax. However, these figures often have considerable political sway to prevent them from being taxed more. Furthermore, creating an administrative body that is well-educated, well-trained and well-paid has proven difficult as there is a lack of funding, coming from a lack of tax revenue. As you can see, a rather vicious cycle occurs.

Low-income countries that are still very much to the left of the turning point in any Kuznets curve are thus being pressured to make changes surrounding climate change that they cannot afford due to low tax revenue. Furthermore, these changes will most likely hurt current economic activity in the country, leading to an even larger need for public spending and simultaneously even less tax income.

Bottom line: Countries all over the world will have to work together to combat climate change by making some necessary adjustments to the way we live. Countries that do not have the capacity, due to a lack of tax revenue, to provide welfare will also be the countries that will struggle most with these adjustments.


* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

e-Estonia: The Paperless Government

Anzelika writes*

Estonia has become a global model for e-government, having created a secure, transparent and efficient digital platform, where both businesses and citizens can access necessary governmental services online.

Estonia is a small Baltic country located in Northern Europe. Gaining independence from the Soviet Union just under 30 years ago, Estonia has emerged to be one of the wealthiest countries in the world. Between the years 2001 and 2007, Estonia showed one of the highest GDP growth rates in Europe [pdf], currently is number 30 out of 189 countries in Human Development Index and (ranks higher in Economic Freedom than the United States or the Netherlands.

Estonia’s economic success can, in part, be attributed to its innovative way of governing society. Estonia has been able to build the world’s first paperless government – e-Estonia.  Today 99 percent of all Estonian state services can be accessed online, 98 percent of Estonian citizens have an electronic ID card, and more than 45 percent of the population use internet voting. Estonia has further introduced what has been termed as e-Residency. It is a transnational digital identity that can be used by anyone in the world to get access to Estonia’s digital technologies, including legal or accounting services, and the entrance to the EU business environment. This makes Estonia one of the most advanced digital societies in the world, and it comes with its benefits.

For example, moving government services online has dramatically reduced corruption. The problem of corruption was of particular concern back in 1994, when e-Estonia was first introduced. By moving essential state services online, it has meant that interaction between government officials and citizens has dramatically reduced, eliminating most bribery. This issue still plagues many of the post-Soviet countries.

Further, the ease of starting a business online together with the e-Residency program has allowed Estonia to become Europe’s leading startup hub. Estonia currently has 31 startups per 100,000, which ranks 6 times higher than the EU average. Companies such as Skype and TransferWise have emerged in the tiny Baltic State. Not only do these startups contribute to Estonia’s economic growth, the favourable economic climate for businesses has also attracted significant levels of FDI to the country.

As governments around the world seek to improve their economies, they should look towards the small Baltic state that can serve as a blueprint for the effectiveness of a digital society. As the Estonian MEP Marina Kaljurand has stressed: “if used properly, digital solutions can be essential drivers for economic growth and equity.”

Bottom line: Estonia has been able to successfully create e-government, which in part has helped the country emerge as one of the most advanced economies of the world.


* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Book 3, chapter 6: Value and Utility

§1. This chapter explores an important idea in economics that’s often confused in everyday life, i.e., the consumer surplus (CS) equal to the difference between a good’s price and someone’s value of that good. The greater the difference — which varies with individual values — the greater their satisfaction. CS is also captured in “value for money” or “it’s a steal,” but some people make the mistake of assigning CS (or value) to the price when the gap is what matters.

§2. Marshall gives a verbal description of how CS rises with quantity voluntarily purchased at the same price, i.e., CS(2 units) is greater than CS(1 unit) as well as how CS rises if the price per unit falls. Through a slightly exhausting example, he explains how one’s “demand schedule” (the units of quantity demanded at different prices) results from decisions based on marginal rather than average values. If you buy one pound of tea for 20 shillings (s.) but add another (buying two pounds) when the price is 14s. each, then we know you value the first at 20s. (or more) and the second at 14s. (or more), for a total of 34s. When comparing value (34s.) to price (28s.), the key is not to compare average value (17s.) but the marginal values of 20s and 14s implied by prices paid.

These ideas are much easier to convey with a picture…

§3. So it’s nice that Marshall draws that picture in a footnote:This demand curve is familiar to anyone who has taken Economics 1, but let me reinforce the lesson: The area DOHA represents value, COHA equals cost, and DCA represents consumer surplus.

Marshall then explains the difference between marginal and total utility, i.e., that the marginal utility of a pound of tea is greater than that of a pound of salt but the total utility of consuming many pounds of salt is greater than that of consuming a few pounds of [way more expensive] tea, adding that — given a choice between two gifts — the consumer would choose more tea over more salt.

In a footnote to this example, Marshall quotes Harris (1757):

“Water is of great use, and yet ordinarily of little or no value; because in most places, water flows spontaneously in such great plenty, as not to be withheld within the limits of private property; but all may have enough, without other expense than that of bringing or conducting it, when the case so requires. On the other hand, diamonds being very scarce, have upon that account a great value, though they are but little use.” [pp 107-8]

Although he’s not as direct as I’d like, it seems he quotes this example to show how marginal and total values differ, thereby showing how the Diamond-Water paradox offered by Adam Smith in his 1776 Wealth of Nations resulted from misunderstanding marginal values. This oversight  won Smith few admirers, and it was (again) corrected by the “Marginalists” upon whose late-19th-century shoulders Marshall stood.

Marshall cautions against comparing the utilities of individuals (especially from different classes) and explaining how the loss of utility from losing access to tea would be much greater if coffee were not available as a substitute. Put differently, “let them eat cake” works only if you have cake to replace lost bread!

§4. Marshall’s assumption that changes in price can be analyzed ceteris paribus (all things equal) will break down if that change in price has an appreciable impact on buying power for other items, by depleting limited income, a problem of those particular inferior goods known as Giffen goods. He also notes that a complete demand schedule is more assumed than real, since it’s hard to know how demand responds to big price changes. Bravo!

§5. Well being depends on personal income but also “external considerations,” i.e., non-excludable (public and common pooled) goods:

Some are free gifts of nature; and these might indeed be neglected without great harm if they were always the same for everybody; but in fact they vary much from place to place. More of them however are elements of collective wealth which are often omitted from the reckoning of individual wealth; but which become important when we compare different parts of the modern civilized world, and even more important when we compare our own age with earlier times. [p 111]

His note here pushes back my mental model for economists’ awareness of non-excludable goods from Ostrom and Ostrom (1977) and Samuelson (1954).

§6. Marshall defines happiness as beginning once one has “enough to support life,” and that happiness rises more quickly for the poor than the rich. He then explains how this [decreasing marginal utility of income] justifies lower (higher) taxes on the poor (rich), as well as how a gambling loss of £100 is more painful than a win of £100, since the value of £1 is greater to a poorer person. These ideas were made famous by Kahneman and Tversky (1979) [cf. my review of Thinking Fast and Slow], but it’s quite interesting to see Marshall citing Bernoulli (1738)!

The chapter ends with some comments on work, wealth, consumption and quality over quantity, to whose eloquence I defer:

In every civilized country there have been some followers of the Buddhist doctrine that a placid serenity is the highest ideal of life; that it is the part of the wise man to root out of his nature as many wants and desires as he can; that real riches consist not in the abundance of goods but in the paucity of wants. At the other extreme are those who maintain that the growth of new wants and desires is always beneficial because it stimulates people to increased exertions. They seem to have made the mistake, as Herbert Spencer says, of supposing that life is for working, instead of working for life.

The truth seems to be that as human nature is constituted, man rapidly degenerates unless he has some hard work to do, some difficulties to overcome; and that some strenuous exertion is necessary for physical and moral health. The fulness of life lies in the development and activity of as many and as high faculties as possible. There is intense pleasure in the ardent pursuit of any aim, whether it be success in business, the advancement of art and science, or the improvement of the condition of one’s fellow-beings. The highest constructive work of all kinds must often alternate between periods of over-strain and periods of lassitude and stagnation; but for ordinary people, for those who have no strong ambitions, whether of a lower or a higher kind, a moderate income earned by moderate and fairly steady work offers the best opportunity for the growth of those habits of body, mind, and spirit in which alone there is true happiness.

There is some misuse of wealth in all ranks of society. And though, speaking generally, we may say that every increase in the wealth of the working classes adds to the fulness and nobility of human life, because it is used chiefly in the satisfaction of real wants; yet even among the artisans in England, and perhaps still more in new countries, there are signs of the growth of that unwholesome desire for wealth as a means of display which has been the chief bane of the well-to-do classes in every civilized country. Laws against luxury have been futile; but it would be a gain if the moral sentiment of the community could induce people to avoid all sorts of display of individual wealth. There are indeed true and worthy pleasures to be got from wisely ordered magnificence: but they are at their best when free from any taint of personal vanity on the one side and envy on the other; as they are when they centre round public buildings, public parks, public collections of the fine arts, and public games and amusements. So long as wealth is applied to provide for every family the necessaries of life and culture, and an abundance of the higher forms of enjoyment for collective use, so long the pursuit of wealth is a noble aim; and the pleasures which it brings are likely to increase with the growth of those higher activities which it is used to promote.

When the necessaries of life are once provided, everyone should seek to increase the beauty of things in his possession rather than their number or their magnificence. An improvement in the artistic character of furniture and clothing trains the higher faculties of those who make them, and is a source of growing happiness to those who use them. But if instead of seeking for a higher standard of beauty, we spend our growing resources on increasing the complexity and intricacy of our domestic goods, we gain thereby no true benefit, no lasting happiness. The world would go much better if everyone would buy fewer and simpler things, and would take trouble in selecting them for their real beauty; being careful of course to get good value in return for his outlay, but preferring to buy a few things made well by highly paid labour rather than many made badly by low paid labour.

…and thus, Marshall channels Thoreau (1854) (“my needs are few, therefore I am rich”), extolls the value of work while denouncing vanity, calls for the rich to provide public goods to all, and suggests that a few beautiful things are worth more than many things of poor quality.

Those who engage in “retail therapy” need to read Marshall!

Interesting stuff

Covid-related

  1. Every Covid commercial is the same (OMG!)
  2. Good advice for coping with quarantine… 
  3. The Dutch government seems to be confused over the purpose of — and decision rule for exit from — lockdown
  4. The technology of tracking you via your phone
  5. The Coronavirus reveals: The US is a failed state
  6. How will colleges cope with C19? 
  7. “Amsterdam’s old centre had been largely abandoned to mass tourism and the sex industry until coronavirus hit, and is now an oasis of peace and quiet.”

Non-covid

  1. Want change? Pay attention to the hierarchy of leverage points
  2. Why sharp knives cut better
  3. When the world was innocent: Setting international standards

H/Ts to JS and VZ