Cyclopedia Of Economics 3rd edition

Technologies that appear at first blush and in the lab to be both benign and efficacious often turn out, upon widespread implementation, to be counter-productive or even detrimental. We have yet to accurately capture and model the complexity of reality. Emergent phenomena, unintended consequences, unexpected and undesirable by-products, ungovernable economic and other processes all conspire to adversely affect the trajectories of even the most thoroughly studied inventions.

Biofuels are the poster children of such good intentions gone terribly awry. Rather than retard global warming, scientists (such as Holly Gibbs, a postdoctoral researcher at Stanford's Woods Institute for the Environment, Matt Struebig from Queen Mary, University of London, and Emily Fitzherbert from the Zoological Society of London and University of East Anglia) are now warning that they may enhance and accelerate it by encouraging deforestation in the tropics. Indeed, the higher the prices fetched by biofuels, the more rainforests are being ferociously decimated in the quest for arable land.

Moreover, biofuels are energy-inefficient: their production consumes more energy than they yield in burning. The disastrous effect they have on food prices is amply documented. Another study demonstrates that their consumption releases more carbon dioxide into the atmosphere than the quantity of fossil fuels that they replace.

This "carbon debt" is especially true if we take into account the gases released by the incineration of trees mowed down to make place for the (often state subsidized) cultivation of biofuels. There is also a "biodiversity debt": up to five-sixths of indigenous species are extinguished once a forest is cleared to make way for oil palm plantations, for instance.

Though much hyped, biofuels should not serve as part and parcel of the energy policy mix. Some wonks suggest that biofuels should be allowed to be grown only on marginal or degraded land. But, this would require enormous investments in fertilizers and other technologies intended to halt soil erosion and nutrient leeching. From the point of view of environmental accounting, such tracts better be re-forested. Forests recycle rainwater, act as carbon skins, prevent floods, and serve as habitats to species, some of them endangered.

Bosnia-Herzegovina (heretofore "Bosnia") is an artificial polity with four, tangentially interacting, economies. Serbs, Croats and their nominal allies, the Bosniaks each maintain their own economy. The bloated, fractured, turf conscious, inefficient, and often corrupt presence of the international community, in the form of the Office of the High Representative, among others, constitutes the fourth - and most dominant - parallel economy.

The divergence of the economies of these components of Bosnia is so high that the inflation differential between them amounts to 13%. The Bosniak-Croat Federation experienced deflation in 1999 - while the Republika Srpska (RS) was in the throes of 14% inflation. The real effective exchange rate in RS appreciated by 13% and depreciated by 6% in the Federation between 1998-2000. Wages in the Federation are higher by 30% compared to the RS.

The International Crisis Group in its October 8, 2001 report about the Republika Srpska estimated that "the RS economy stands on the verge of collapse. Were it not for a continuing flow of direct international budget supports and soft loans, the RS government would be bankrupt." And the RS actually enjoyed a disproportionate part of the more than $5 billion in aid that flooded Bosnia since 1996. The world Bank has disbursed c. $690 million of the $860 million it committed to Bosnia as a whole - twice its disbursements in Slovenia and Macedonia combined.

These jeremiahs may be overkill. Bosnia, its flourishing informal economy and all-pervasive smuggling notwithstanding, has come a long way since the Dayton accords. It has a functioning central bank with growing foreign exchange reserves and a stable and widely accepted currency-board backed currency, the marka. Its payment and banking systems are surprisingly modern.

Bosnia's anti money laundering and anti corruption legislation is up to scratch and even enforced (especially in the Croat part of the Bosniak-Croat Federation). It is more advanced than all other successor republics to former Yugoslavia in pension, treasury system, and labour market reforms. Its inflation rate is moderate (c. 6% annually) - though reliable consolidated national figures are hard to come by.

Bosnia gained tariff-free access to the EU, enhanced by a Stabilisation and Association Agreement. It also signed a free trade agreement with Croatia which effectively abolished all tariffs by 2004. Similar agreements have either been signed or are being negotiated with Macedonia, Slovenia, and Yugoslavia. WTO accession was slated for 2002. For all these good news, Bosnia has been rewarded with a steady trickle of foreign investors.

Still, Bosnia is quintessentially "Balkan" - stifled by red tape, capricious laws, rampant corruption, venality, nepotism, and cronyism run amok. Its state enterprises are patronage machines and its banks coerced into political and unwise lending, propping up zombie enterprises. Credit to the private sector grows at less than nominal GDP which indicates a failure of financial intermediation by the banking system.

Trade among the ethnically cleansed parts of this country is minimal, privatization non existent, corporate governance a distant dream, as are the rule of law and property rights. Bosnia's impressive average growth figures (5-8% annually since 2000, depending on the source) were skewed by the spurt of reconstruction (especially of the electricity and water supply infrastructure), which followed the devastation of its protracted and savage civil war. This phase over, and the victim of a severe drought, the economy is faltering now, stagnant at less than half the prewar output levels (though more than double the 1995 level, at the end of civil war).

Bosnia faces growing unemployment (officially at close to 40%) and social disintegration provoked by excruciating poverty. Poor tax collection, a minimal tax base, and the transition to a new payment and bank supervision systems - all led to diminishing tax and customs revenues (which created an addiction to the kindness of strangers in donor conferences). Bosnians flee their impromptu country and it suffers a massive brain drain.

Industrial actions are a daily matter - for instance, by disgruntled teachers in in the canton of Central Bosnia in late 2001. The government hasn't paid their salaries since August 2001. Bosnia's trade (and budget) figures are notoriously irrelevant (defense spending is still off budget, for instance) but it trades mainly with Germany, Switzerland, and Croatia. It has gaping fiscal (6% of GDP, including arrears) and current account (22% of GDP excluding transfers!) deficits and heavy external debt (close to 80% of GDP) - though a lot of it is long term and concessionary.

Had it not been for unilateral transfers of aid (c. $1 billion a year), remittances from Bosnians abroad to their families, and the exploding drug trade (Bosnia is an important thoroughfare of illicit goods, including cigarettes and smuggled cars) - Bosnia would have been in dire straits.

It could have been different. Bosnia has rich agricultural endowments: soil and climate. Yet, its myriad tiny, family owned, farms are non-competitive and it is, thus, a net food importer. Its (mostly military, vehicular, heavy, and obsolete) industry is labour-intensive and ridden with obstructive hidden unemployment. It parasitically thrives on services (close to 60% of its economy) - mainly to expatriates and peacekeepers. And wages (especially in the Federation) are set at Hungarian levels, making both the public and private sectors woefully uncompetitive.

Bosnia's economy teaches us two diametrically opposed lessons: that Man can put aside a brutal past and work towards a better future and that such an effort is doomed if it is the result of external pressure to sustain a political fiction.

The internecine war lasted three years, from 1992 to 1995. It displaced more than one quarter of the population. Of 4.4 million people, at least 250,000 are missing and at least 40 percent of these, most of them men, are presumed dead. Education was disrupted, disability benefits soared, destitute, single parent families are the norm.

The damages are unimaginable. The costs of ruined infrastructure, devastated crops, demolished real estate - amount to tens of billions of dollars in a country whose GDP, at $4 billion, or $1000 per capita, is one half of its pre-war level. Industrial production ceased altogether during the years of fighting.

The international community has poured well over $5 billion into Bosnia-Herzegovina since the Dayton Accords were signed on November 21, 1995. The World Bank accounts for one fifth of this inordinate amount. This is more than $1000 per every citizen. What do donors and creditors have to show for it?

Not much. To start with, most of the money went to support the peacekeeping force and UN administration in BiH and to repay its bilateral and multilateral public debt.  An international force of 21,000 soldiers - known as SFOR - succeeded a 60,000 strong IFOR in 1996. Additionally, the two mutually-hostile entities which comprise the unprecedented entity that is BiH spend between one quarter and one third of their meager budgets on defense.

It seems that most of the cash flows - domestic and foreign - of this turbulent "republic" go towards keeping its constituents from each other's throats. The rest is brazenly stolen by vast networks of patronage, crime, and money laundering.

In the meantime, the rate of unemployment has leveled off at 40 percent. In the Republika Srpska, a family of four typically consumes one and a half times the average salary. The Sarajevo-based UN Independent Bureau for Human Issues found that 60 percent of BiH's population lives below the poverty line. Imports exceed exports by a margin of 4 to 1. Corruption scandals erupt daily.

But there are signs of renewal. Refugees are returning, albeit hesitatingly. One hundreds thousand of them came back last year, double the number in 2000. Volkswagen decided to reinstate the assembly of its popular "Golf IV" model in Sarajevo - subject to customs privileges and an effective, republic-wide, customs system. Production of the "Beatle" in the much-tortured city was halted during the war.

BiH completed free trade agreements with all the republics of former Yugoslavia. Yet, vast swathes of the economy subsist on international aid and consist of catering to expats and peacekeepers. Like Kosovo, Afghanistan, the Palestinian Authority, and others charmed spots, BiH is addicted to other people's money.

The new International High representative, BiH's procurator, is Paddy Ashdown, a British Liberal-Democrat, an erstwhile commando, a member of the House of Lords. He might need all these trades in his new post.

Quoted by the International War and Peace Report, he says:

"The truth is that Bosnia and Herzegovina spends far too much money on its politicians and far too little on its people. The same is true for defense. Proportionately, Bosnia spends twice as much on defense as the United States and four times more than the European average. Bosnia has twice as many judges per head of population as Germany, yet each German judge deals with four times as many cases per year as his Bosnian counterpart."

The outgoing High Representative, Petritsch, was much less diplomatic in an interview he gave to Associated Press upon his return from Brussels on May 24:

"(Bosnians must) understand that many people in other countries that are financing this have their own problems and they don't want to be bothered with (Bosnia's) problems."

Still, why is Bosnia so economically backward?

The politicians of BiH have perfected their mendicity - as well as their venality - into art forms. A former president, Izetbegovic, and his cronies, were alleged by Western media to have absconded with more than $1 billion in aid money in less than 4 years.

Moreover, Bosnians of all ethnic groups are powered by an overwhelming sense of entitlement. They sincerely feel that the world owes them - either because it stood by as a genocide unfolded (the way the Moslems see it), or because it spitefully deprived them of an imminent victory (as the Serbs perceive it).

Bosnia's beggars are assertive choosers. Beriz Belkic, the Chairman of the make-belief presidency of BiH, had the temerity to say this, in connection with a forthcoming Srebrenica donors conference:

"The programme is planned to last until 2004, and in my opinion it should be a symbolic start of the international community's care for this region against which serious mistakes were committed during the war by the very same international community."

Content to maintain the precarious house of cards that passes for a polity, IFI's have rarely applied pressure to implement in BiH the prescriptions of the "Washington Consensus" over-zealously and indiscriminately applied elsewhere.

When the World Bank submitted recently a report about the privatization of Aluminji Mostar, an aluminum plant in Croat territory, the BiH Federation government thumbed its nose at it and issued this statement:

"(The Federation Government) confirmed its commitment to protecting the state capital in all companies which are strategically vital to the Bosnia-Herzegovina Federation economy."

This timidity of the gatekeepers of the international community was exploited to the hilt by intertwined networks of politicians, bureaucrats, militias, businessmen, managers, and criminals in Bosnia. Economic enterprises were transformed into cash cows and money laundering fronts. The payment system - a relic of socialist times - served as a mammoth "off-shore", Hawala-like, cash conveyance web until it was dismantled.

BiH has no checks and balances. Its institutions are utterly compromised and distrusted. Its police and judiciary are little more than private enforcers at the employ of the criminalized wealthy and mighty. Its Potemkin banks are dysfunctional and arthritic. Its triple and multilayered bureaucracies refuse to collaborate. Red tape suffocates entrepreneurships and barriers to entry often culminate at the point of a gun.

While International Financial Institutions and donors - such as the IMF, the World Bank, the European Development Bank, the EU, and the UNDP - stressed foreign investment, no one paid attention to inward flows.

The EBRD has floated a few sporadic initiatives to encourage small and medium sized enterprises and the World Bank provides microfinance through the Local Initiatives Project (LIP). But the emphasis was overwhelmingly on trying to secure headline-grabbing, big-ticket, FDI.

Yet, foreign investors - deterred by political instability, pernicious graft, crime, and economic stagnation - are unlikely to pitch their tent in Bosnia any time soon - unless they are provided with economically counterproductive tax and customs benefits, passim Volkswagen. Even the resilient and persevering McDonald's failed to penetrate the thicket of Bosnian demands for backhanders coupled with self-serving and contradictory regulations.

BiH had a surprisingly large, entrepreneurial, and cosmopolitan middle-class before the war. Its assets (mainly real estate) and savings (largely foreign exchange deposits) were expropriated and squandered by the warring parties and other, post-war, scoundrels.

The revival of this middle class, the institution of incentives to save and to form capital, the introduction of competing financial intermediaries into the moribund banking system, the encouragement of domestic investment, the enhancement of business-related services, the establishment of new institutions (such as business courts) to circumvent the hopelessly corrupt ones Bosnia sports - should have been the top priorities of the successive High Representatives of this makeshift country.

Yet, they were not. The multilaterals appeared to have been concerned chiefly with tax collection - but not with engendering a taxable economy. Until the latter part of 2000, they did not even bother to significantly reform the intractable, business-repelling, and corruption-inducing tax code. Nor was the legal environment made more business-friendly. Numerous and tedious inspections, regulations, controls, and conflicting permits afflict every shop, plant, and service establishment in the land.

Incredibly, it was as late as last week that the World Bank approved a $44 million "Business Environment Adjustment Credit". At one third the size of the government's annual budget, it is supposed to support these long-overdue reforms:

"Facilitating business entry through the creation of a simplified and transparent countrywide approach to business registration, and licensing and a strengthened legal framework and capacity for attracting foreign investment; Streamlining business operations by reducing administrative and regulatory compliance costs through the rationalization of inspections and regulations; building judicial and extra-judicial capacity to resolve commercial disputes; improving enforcement of secured transactions, and ensuring equal access to public procurement; and, easing business exit through strengthened bankruptcy and liquidation systems."

Yet, this program is bound to fail. IFI's, governments, and development banks - hypnotized by the mantra of "country ownership" - keep pretending that Bosnia meets the definition of a state, with functioning institutions, and patriotic politicians. They keep conveniently ignoring the fact that Bosnia has no banks, no courts, no police and that its customs service is a primitive extortion racket.

The international community should have founded parallel financial, tax, customs, bureaucratic, and judicial systems to cater to the needs of the emerging private sector, now less than 40 percent of Bosnia's moribund economy.

The likes of the EBRD and the World Bank should have sapped the stifling might of the putrid elites of Bosnia by fearlessly providing functional and, where necessary, foreign-managed, alternatives. This is not without precedent. Bosnia's Central Bank is successfully governed by an IMF-appointed New Zealander. The EBRD runs much of business-related regulatory organs.

Instead, the multilaterals keep enriching and empowering the mortal foes of private enterprise: criminalized monopolists, power-inebriated virulent nationalists, corrupt officials, and their penumbral sidekicks, the Bosnian "bankers".

Every soft loan, every grant, every subsidized credit, and every round of "negotiations" with the criminals that pass for politicians and government officials in BiH and its constituents - demonstrates to potential investors - Bosnians and foreigners alike - that the international community is unwilling, or, worse, unable, to take on the entrenched anti-business kleptocracies of BiH.

There is an enormous pent-up demand for small business finance. The World Bank summarizes the astounding success of its - single - microcredit facility in Bosnia thus:

"Five years after the start of the LIP, the overall evaluation of the project is highly satisfactory. As of March 31, 2001, some 80,000 loans have been disbursed to microentrepreneurs throughout the country helping to create or sustain over 100,000 jobs. Monthly disbursements support more than 3,000 new loans. Levels of repayment are very high at 98.5%, with only 1.21% of outstanding repayments (30 days past due).

On the ground, these numbers translate in improved living conditions and a renewed sense of hope and confidence for many of the poor. An independent Client Survey commissioned by the Local Initiative Departments (the monitoring agencies of the project) in 1999 found that 79% of borrowers considered that the loan had significantly improved their economic situation. Furthermore, some microfinance institutions have used microcredit as a tool to bring together people previously divided by the war.

On the operational and financial side, the LIP has been equally successful. Just three years after the project was initiated, seven microfinance institutions became operationally sustainable, meaning that they are able to cover their operating expenses from their operating income. Four of these institutions were financially sustainable, i.e., they can cover all expenses, including the cost of maintaining the value of their capital, as well as adjustments that fully account for subsidies and write-offs for non-recoverable loans. These results make microfinance institutions in Bosnia and Herzegovina high performers among such initiatives worldwide."

This is not counting the prospering informal ("grey") economy - equal in size to the formal bit - and the massive remittances of hundreds of thousands of Bosnians abroad. The drain of brains and entrepreneurship is inexorable. A United Nations survey conducted earlier this year found that 62 percent of the youth dream of leaving BiH, six years into the Dayton peace process.

The World Bank approved a second, $20 million, LIP last July. Yet, it is telling - and outrageous - that credits for SME (small and medium enterprises) and microcredits amount to less than 1 percent of the funds expended in Bosnia hitherto.

Bosnia fosters in IFI's a keen and sudden adherence to their charters and mandates. The IMF, which would have encroached gleefully on the World Bank's turf in almost any other country, confines itself in Bosnia to taxation.

While not averse, in dozens of countries, from Macedonia to Indonesia, to sonorously conditioning its programs upon painful structural reforms and development priorities  - in the minefield that is Bosnia, the IMF is content to tiptoe and procrastinate apologetically.

Public posturing - together with the US, EU, the World Bank, and others - over the botched privatization process at the end of 1999 notwithstanding, the IMF's subservience to its American paymasters is nowhere more transparent than in BiH.

Despite having consistently reneged on all its obligations, Bosnia's 1998 standby agreement with the Fund has - most unusually - been extended three times over. A new agreement was finally negotiated late last year.

As global interest wanes, BiH is likely to face a precipitous decline in international aid. This will result in an economic crash akin to the one experienced by Cambodia when the UN withdrew in 1993. A Lebanon-like country, governed by Russian-style oligarchs, with African-level poverty and Serb-reminiscent nationalism - Bosnia's future is unlikely to improve on its sorry past.

Bra

Mary Phelps Jacob - a rich socialite - received the first patent for a bra in 1914. Her corset - replete with whaleback bones was visible under a brand new evening gown she purchased. She used handkerchiefs and ribbon to replace the bones. The bra was born. she sold the patent to  Warner Brothers Corset Company in Bridgeport, Connecticut, for $1,500. They made $15 million over the next 30 years. Bras were one size fits all until 1928.

An interesting coincidence: one of the forerunners of the bra was patented by a George Phelps in 1875. Other bra-like devices were patented in 1893 and 1889.

During the first world war, in 1917, the US War Industries Board called on women to stop buying metal-rich corsets. Some 28,000 tons of metals were thus made available to the war effort.  

Human trafficking and people smuggling are multi-billion dollar industries. At least 50% of the 150 million immigrants the world over are illegal aliens. There are 80 million migrant workers found in virtually every country. They flee war, urban terrorism, crippling poverty, corruption, authoritarianism, nepotism, cronyism, and unemployment. Their main destinations are the EU and the USA - but many end up in lesser countries in Asia or Africa.

The International Labour Organization (ILO) published the following figures in 1997:

Africa had 20 Million migrant workers, North America - 17 million, Central and South America - 12 million, Asia - 7 million, the Middle East -  9 million, and Europe - 30 million.

Immigrants make up 15% of staid Switzerland's population, 9% of Germany's and Austria's, 7.5% of France's (though less than 4% of multi-cultural Blairite Britain). There are more than 15 million people born in Latin America living in the States. According to the American Census Bureau, foreign workers comprise 13% of the workforce (up from 9% in 1990). A million have left Russia for Israel. In this past century, the world has experienced its most sweeping wave of both voluntary and forced immigration - and it does not seem to have abated.

According to the United Nations Population Division, the EU would need to import 1.6 million migrant workers annually to maintain its current level of working age population. But it would need almost 9 times as many to preserve a stable workers to pensioners ratio.

The EU may cope with this shortage by simply increasing labour force participation (74% in labour-short Netherlands, for instance). Or it may coerce its unemployed (and women) into low-paid and 3-d (dirty, dangerous, and difficult) jobs. Or it may prolong working life by postponing retirement.

These are not politically palatable decisions. Yet, a wave of xenophobia that hurtled lately across a startled Europe - from Austria to Denmark - won't allow the EU to adopt the only other solution: mass (though controlled and skill-selective) migration.

As a result, Europe has recently tightened its admission (and asylum) policies even more than it has in the 1970's. It bolted and shut its gates to primary (economic) migration. Only family reunifications are permitted. Well over 80% of all immigrants to Britain are women joining their husbands, or children joining their father. Migrant workers are often discriminated against and abused and many are expelled intermittently.

Still, economic migrants - lured by European riches - keep pouring in illegally (about half a million every year -to believe The Centre for Migration Policy Development in Vienna). Europe is the target of twice as many illegal migrants as the USA. Many of them (known as "labour tourists") shuttle across borders seasonally, or commute between home and work - sometimes daily. Hence the EU's apprehension at allowing free movement of labour from the candidate countries and the "transition periods" (really moratoria) it wishes to impose on them following their long postponed accession.

According to the American Census Bureau's March 2002 "Current Population Survey", 20% of all US residents are of "foreign stock" (one quarter of them Mexican). They earn less than native-born Americans and are less likely to have health insurance. They are (on average) less educated (only 67% of immigrants age 25 and older completed high school compared to 87% of native-born Americans). Their median income, at $36,000 is 10% lower and only 49% of them own a home (compared to 67% of households headed by native-born Americans). The averages mask huge disparities between Asians and Hispanics, though. Still, these ostensibly dismal figures constitute a vast improvement over comparable data in the country of origin.

But these are the distant echoes of past patterns of migration. Traditional immigration is becoming gradually less attractive. Immigrants who came to Canada between 1985-1998 earn only 66% of the wages of their predecessors. Labour force participation of immigrants fell to 68% (1996) from 86% (1981).

While most immigrants until the 1980's were poor, uneducated, and unskilled - the current lot is middle-class, reasonably affluent, well educated, and highly skilled. This phenomenon - the exodus of elites from all the developing and less developed countries - is called "brain drain", or "brain hemorrhage" by its detractors (and "brain exchange" or "brain mobility" by its proponents). These metaphors conjure up images of the inevitable outcomes of some mysterious processes, the market's invisible hand plucking the choicest and teleporting them to more abundant grounds.

Yet, this is far from being true. The developed countries, once a source of such emigration themselves (more than 100,000 European scientists left for the USA in the wake of the Second World War) - actively seek to become its destination by selectively attracting only the skilled and educated citizens of developing countries. They offer them higher salaries, a legal status (however contingent), and tempting attendant perks. The countries of origin cannot compete, able to offer only $50 a month salaries, crumbling universities, shortages of books and lab equipment, and an intellectual wasteland.

The European Commission had this to say last month:

"The Commission proposes, therefore, that the Union recognize the realities of the situation of today: that on the one hand migratory pressures will continue and that on the other hand in a context of economic growth and a declining and aging population, Europe needs immigrants. In this context our objective is not the quantitative increase in migratory flows but better management in qualitative terms so as to realize more fully the potential of immigrants' admitted."

And the EU's Social and Employment Commission added, as it forecast a deficit of 1.7 million workers in Information and Communications Technologies throughout the Union:

"A declining EU workforce due to demographic changes suggests that immigration of third country nationals would also help satisfy some of the skill needs [in the EU]. Reforms of tax benefit systems may be necessary to help people make up their minds to move to a location where they can get a job...while ensuring that the social objectives of welfare systems are not undermined."

In Hong Kong, the "Admission of Talents Scheme" (1999) and "The Admission of Mainland Professionals Scheme" (May 2001) allow mainlanders to enter it for 12 month periods, if they:

"Possess outstanding qualifications, expertise or skills which are needed but not readily available in Hong Kong. They must have good academic qualifications, normally a doctorate degree in the relevant field."

According the January 2002 issue of "Migration News", even now, with unemployment running at almost 6%, the US H1-B visa program allows 195,000 foreigners with academic degrees to enter the US for up to 6 years and "upgrade" to immigrant status while in residence. Many H1-B visas were cancelled due to the latest economic slowdown - but the US provides other kinds of visas (E type) to people who invest in its territory by, for instance, opening a consultancy.

Germany has absorbed 10,000 computer programmers (mainly from India and Eastern Europe) since July 2000. Ireland was planning to import twenty times as many over 7 years - before the dotcoms bombed. According to "The Economist", more than 10,000 teachers have left Ecuador since 1998. More than half of all Ghanaian medical doctors have emigrated (120 in 1998 alone). More than 60% of all Ethiopian students abroad never return. There are 64,000 university educated Nigerians in the USA alone. More than 43% of all Africans living in North America have acquired at least a bachelor's degree.

Barry Chiswick and Timothy Hatton demonstrated ("International Migration and the Integration of Labour Markets", published by the NBER in its "Globalisation in Historical Perspective") that, as the economies of poor countries improve, emigration increases because people become sufficiently wealthy to finance the trip.

Poorer countries invest an average of $50,000 of their painfully scarce resources in every university graduate - only to witness most of them emigrate to richer places. The haves-not thus end up subsidizing the haves by exporting their human capital, the prospective members of their dwindling elites, and the taxes they would have paid had they stayed put. The formation of a middle class is often irreversibly hindered by an all-pervasive brain drain.

Politicians in some countries decry this trend and deride those emigrating. In a famous interview on state TV, the late prime minister of Israel, Yitzhak Rabin, described them as "a fallout of the jaded". But in many impoverished countries, local kleptocracies welcome the brain drain as it also drains the country of potential political adversaries.

Emigration also tends to decrease competitiveness. It increase salaries at home by reducing supply in the labour market (and reduces salaries at the receiving end, especially for unskilled workers). Illegal migration has an even stronger downward effect on wages in the recipient country - illegal aliens tend to earn less than their legal compatriots. The countries of origin, whose intellectual elites are depleted by the brain drain, are often forced to resort to hiring (expensive) foreigners. African countries spend more than $4 billion annually on foreign experts, managers, scientists, programmers, and teachers.

Still, remittances by immigrants to their relatives back home constitute up to 10% of the GDP of certain countries - and up to 40% of national foreign exchange revenues. The World Bank estimates that Latin American and Caribbean nationals received $15 billion in remittances in 2000 - ten times the 1980 figure. This may well be a gross underestimate. Mexicans alone remitted $6.7 billion in the first 9 months of 2001 (though job losses and reduced hours may have since adversely affected remittances). The IADB thinks that remittances will total $300 billion in the next decade (Latin American immigrants send home c. 15% of their wages).

Official remittances (many go through unmonitored money transfer channels, such as the Asian Hawala network) are larger than all foreign aid combined. "The Economist" calculates that workers' remittances in Latin America and the Caribbean are three times as large as aggregate foreign aid and larger than export proceeds. Yet, this pecuniary flood is mostly used to finance the consumption of basics: staple foods, shelter, maintenance, clothing. It is non-productive capital.

Only a tiny part of the money ends up as investment. Countries - from Mexico to Israel, and from Macedonia to Guatemala - are trying to tap into the considerable wealth of their diasporas by issuing remittance-bonds, by offering tax holidays, one-stop-shop facilities, business incubators, and direct access to decision makers - as well as matching investment funds.

Migrant associations are sprouting all over the Western world, often at the behest of municipal authorities back home. The UNDP, the International Organization of Migration (IOM), as well as many governments (e.g., Israel, China, Venezuela, Uruguay, Ethiopia), encourage expatriates to share their skills with their counterparts in their country of origin. The thriving hi-tech industries in Israel, India, Ireland, Taiwan, and South Korea were founded by returning migrants who brought with them not only capital to invest and contacts - but also entrepreneurial skills and cutting edge technologies.

Thailand established in 1997, within the National Science and Technology Development Agency, a 2.2 billion baht project called "Reverse the Brain Drain". Its aim is to "use the 'brain' and 'connections' of Thai professionals living overseas to help in the Development of Thailand, particularly in science and technology."
 

The OECD ("International Mobility of the Highly Skilled") believes that:

"More and more highly skilled workers are moving abroad for jobs, encouraging innovation to circulate and helping to boost economic growth around the globe."

But it admits that a "greater co-operation between sending and receiving countries is needed to ensure a fair distribution of benefits".

The OECD noted, in its "Annual Trends in International Migration, 2001" that (to quote its press release):

"Migration involving qualified and highly qualified workers rose sharply between 1999 and 2000, helped by better employment prospects and the easing of entry conditions. Instead of granting initial temporary work permits only for one year, as in the past, some OECD countries, particularly in Europe, have been issuing them for up to five years and generally making them renewable. Countries such as Australia and Canada, where migration policies were mainly aimed at permanent settlers, are also now favoring temporary work permits valid for between three and six years ... In addition to a general increase in economic prosperity, one of the main factors behind the recent increase in worker migration has been the development of information technology, a sector where in 2000 there was a shortage of around 850,000 technicians in the US and nearly 2 million in Europe..."

But the OECD underplays the importance of brain drain:

"Fears of a "brain drain" from developing to technologically advanced countries may be exaggerated, given that many professionals do eventually return to their country of origin. To avoid the loss of highly qualified workers, however, developing countries need to build their own innovation and research facilities ... China, for example, has recently launched a program aimed at developing 100 selected universities into world-class research centers. Another way to ensure return ... could be to encourage students to study abroad while making study grants conditional on the student's return home."

The key to a pacific and prosperous future lies in a multilateral agreement between brain-exporting, brain-importing, and transit countries. Such an agreement should facilitate the sharing of the benefits accruing from migration and "brain exchange" among host countries, countries of origin, and transit countries. In the absence of such a legal instrument, resentment among poorer nations is likely to grow even as the mushrooming needs of richer nations lead them to snatch more and more brains from their already woefully depleted sources.