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THE IMPACT OF BRAIN DRAIN ON THE COMPETITIVENESS OF THE CROATIAN ECONOMY Prof. dr. sc. Dragomir Sundać University of Rijeka, Faculty of Economics, Croatia [email protected] Gorana Stumpf, mag. oec. University of Rijeka, Faculty of Maritime Studies, Croatia [email protected] ABSTRACT Brain drain is a global problem that involves the migration of highly educated people who are looking for better living conditions abroad due to dissatisfaction with the situation in their home country. The Republic of Croatia was increasingly confronted with the above phenomenon primarily because of high unemployment rate and other unsatisfactory living conditions. The economic development of a country depends largely on its competitiveness; moreover, a key factor to maintain and increase the competitiveness is the human capital. Long-term development of the economy of the Republic of Croatia depended largely on the quality and expertise of human resources, which entailed the fact that the investment in human resources, their professional development and encouragement of the implementation of measures for their stay in home country should have been highly positioned on the priority list of the Republic of Croatia. This scientific paper conducted an analysis and determined the relationship between competitiveness and brain drain, as well as stated measures and proposals for reducing the brain drain, which should consequently affect the increasing competitiveness of the Republic of Croatia. The research results suggested that the brain drain caused by dissatisfaction in the home country greatly affected the competitiveness of the Republic of Croatia diminishing its importance on global competitiveness ranking. These findings were confirmed by international experiences which indicated that it was necessary to continuously work to prevent emigration of highly educated professionals by giving them satisfactorily working conditions, opportunities for constant development and life in general in their home country. Keywords: Brain Drain, Competitiveness, Republic of Croatia 1 INTRODUCTION Brain drain is a term which has been used more frequently in recent times, and is becoming a significant problem for the Republic of Croatia. It involves the migration of highly educated people who, dissatisfied with the situation in their country of origin, seek better living conditions abroad. The inability to find employment in profession, lack of advancement and career development, as well as getting to know the world appear as the main drivers of potential brain drain. Unemployment is at a very high level in Croatia at the moment; therefore, highly educated people are prompted to consider leaving the country in search of better living conditions. Highly educated people are the main drivers of the overall development of an economy and thus increase of country’s competitiveness; therefore, the migration of professionals necessarily means a loss to the country they leave behind and gain for the country to which those professionals arrive. Brain drain should be reduced if the competitiveness of the Republic of Croatia is sought to be improved. The portion of highly educated people in the total workforce of Croatia is increasing through years; however, not sufficiently, while on the other side the brain drain is high, which consequentially causes a deficit of intellectual capital in Croatia. It is necessary to work on motivating and developing human potentials, as well as introducing new ways and techniques to reduce the brain drain. The purpose of this scientific paper is to determine the connection between competitiveness and brain drain, and to specify measures and proposals for the reduction of brain drain which will consequentially influence the increase of competitiveness of the Republic of Croatia. The aims of the research are to explain the state of brain drain in Croatia, what are the main reasons highly educated people are leaving their countries, in what way and to what extent are the brain drain and competitiveness connected, and to specify the measures for reduction of this phenomenon. The method of linear regression is used to determine the connection between brain drain and competitiveness of economies of certain countries. 2 ECONOMIC IMPACTS OF BRAIN DRAIN Migration is any form of temporary or permanent resettlement and is a population phenomenon that is most difficult to predict. The simplest economic models related to migration explain how the motivation for migration stems from the real differences between wages among countries. There are models which explain migration motivation more precisely, showing that migration is driven by expected differences in wages rather than real differences in wages. However, there are authors who believe that these simple economic models do not comprise all motivational factors of migration and therefore have limited success in explanation. Numerous studies show that wages and differences in employment are only partly statistically significant indicators of migration (Andrijević Matovac et al., 2010, p. 365). The causes of emigration can be summarized in the following two reasons: push factors, due to which the individual leaves the country, and pull factors, due to which the individual chooses another country (Šverko, 2005, p. 1150). The push factors are mostly connected to dissatisfaction with economic circumstances in the country of origin, unemployment, low wages, inability to advance in career, job instability, housing, corruption etc., while the pull factors are connected to better economic circumstances in other countries, such as better living conditions, higher wages, better employment possibilities etc. Migration is most commonly driven by demographic changes and developed countries’ labor market needs, differences in wages and pressure of crises in developing counties, inter-state networks and other factors (Skupnjak-Kapić, 2008, p. 4). All these factors combined support and will continue to support international migrations in the future. When analyzing the impact of migration, it is necessary to differentiate between the impact on countries which accept the migrants and impact on countries from which the migrants leave. The initial impacts on the host country are rather mixed and varied. The immigration increases the relevant supply of workforce; however, it depends what qualifications the migrants have and whether the host country has the demand for those qualifications. If there is an imbalance between supply and demand of certain skills in the host country, and if the migration impacts precisely on that imbalance, it is likely that the migration will be useful for both sides. Furthermore, migration can influence the fiscal balance of the host country depending on whether the migrants pay taxes and similar levies. The effect of migration is also the acceleration of technological progress of the economy in terms of migration of highly qualified persons (Andrijević Matovac, et al., 2010, p. 366). Host countries have benefits from highly qualified workers because they increase the potential for innovations in strategic sectors and bring diversity into work teams. There are many negative impacts on the countries which the migrants leave; the most obvious one is the loss of highly educated workers i.e. human capital decrease, which can negatively influence the economic growth of the country. More so, the loss of highly educated workers can deem the country as less attractive to local or foreign investors. Emigration can cause a lack of workforce, innovativity and creativity; therefore, all that can make the country less competitive on the world market. Furthermore, the brain drain theories were often connected to theories of human capital. According to the theory of human capital, it is best to invest in education which will create and develop new experts, so every person in whose education the country invests is the human capital of that country. Therefore, if highly educated people opt to leave their home country, it causes invaluable damage and loss of the most valuable segment of the working population, on whom the future economic growth depends (Horvat, 2004, p. 3). This is the case of most transition countries, including Croatia, where the brain drain slows down the economic growth, development and coming out of transition. The brain drain problem has represented and still represents a global problem. Each day more countries become a part of the “global war for talent”; immigration laws are in many countries adjusted to favor highly qualified workers, while the unqualified are forbidden from entering (Andrijević Matovac et al., 2010, p. 367). As a result, the rates of migration of highly qualified workers have increased. Economic consequences of brain drain have recently shown certain positive aspects, such as remittances; however, to countries with prominent emigration of qualified workers, brain drain is a very negative occurrence. The decrease of human capital in whose education a country invested can deem the country less attractive to investors, which negatively impacts economic growth, making the country less competitive on the world market. 3 RELATIONSHIPS BETWEEN BRAIN DRAIN AND COMPETITIVENESS Competitiveness is one of the most important prerequisites for a country’s economic development, and human capital i.e. the level of knowledge and skills is a crucial factor of maintenance and growth of competitiveness. The quality of workforce creates an ability of a country to develop, expand and utilize knowledge and information in a way to make the country more competitive and increase the quality of life (Kersan-Škabić, 2007, p. 43). According to the most widely accepted definition, competitiveness is an ability to achieve market success, which leads to a highly productive economy and improved living standard of the whole population. The acceptance of the concept of competitiveness is a crucial question of the future development of Croatia, as numerous studies have demonstrated a strong connection between the indicators of competitiveness and dynamic of economic growth, which has a return impact on the dynamic of foreign investments, abatement of poverty and inequality, political stability etc. The importance of workforce competitiveness is particularly significant for the competitiveness of the whole economy. The most important factors of workforce competitiveness are educational structure, compatibility of supply and demand in terms of knowledge, expertise and ability, and costs of labor (Bejaković, Lowther, 2004, p. 1). The long-term development of the Croatian economy, as well as any other economies in the world, mostly depends on the quality and expertise of human resources, which means that an investment in human potential, professional development and measures for keeping potential emigrants in the home country should be highly positioned on the priority list. Since knowledge is a generator of wealth from both, the aspect of a company and aspect of the national economy, it makes the intellectual capital the most valuable asset. Therefore, financial markets are being replaced with the knowledge market, where the global “battle for the brains” started, and which will intensify in the future (Sundać, Škalamera-Alilović, Babić, 2016, pp. 105-106). Education and knowledge have always had a great significance for the development of an economy, but in recent times that significance has increased. Economies are more than ever dependent on the creation, distribution and use of knowledge. In times of fast changes and uncertainties, the economies which continuously create and distribute new knowledge will be successful (Mrnjavac, 2002, p. 209). However, if highly educated people want to make a contribution and work for the economic progress, they must be an active part of that economy. If an economy does not resort a certain profile of highly educated people, their competencies, knowledge and experience will not be utilized. Precisely in such cases brain drain often occurs. The Croatian economy still doesn’t recognize the importance of education and competencies, while the economies of other countries understand the importance of highly educated people and try to utilize their knowledge in the best possible way. Long-lasting and continuous investments in people and their potentials, as well as material assets, bring positive effects on the economic and social development of a country, along with the rates of return on investment into human capital which are higher than the rates of return on investment into physical capital. This was confirmed by many economists, such as Ante Lauc from the Faculty of Economics in Osijek, who claims that the rate of return on investment into human capital is significantly higher than the rate of return on funds invested into physical capital. In his research on the impact of education on GDP per capita, Barro proved that an increase of the rate of enrolled into primary education of 1% brings a 2.5% increase of the GDP growth rate, while an increase of the rate of enrolled into secondary education of 1% brings a 3% increase of the GDP growth rate. Levine and Renelt determined that primary education brings a 3.17%, secondary 2.5%, and tertiary 3.71% increase of the GDP growth rate, Hanushek and Kim for secondary education a 3.6% increase of the GDP growth rate, Gemmel for primary education a 2.68%, secondary education 1.09%, and tertiary education 5.89% increase of the GDP growth rate. Furthermore, Benhabib and Spiegel got the result that for tertiary education, the GDP growth rate increased by 12 to 17% (Mujić, Legčević, 2008, p. 200). The macroeconomic policy of any country should be focused on raising the level of human development, which will, with the indispensable development of infrastructure, lead to a greater and faster economic development (Požega, Crnković, 2008, p. 67). 3.1. Connection between brain drain and global competitiveness According to the data from the Global Competitiveness Report 2015-2016, the most competitive countries are mostly ranked low in terms of brain drain. For example, Switzerland, which was the most competitive country in the world in 2015 (i.e. which had the highest competitiveness index of 5.76), was ranked last in terms of brain drain. This leads to the conclusion that brain drain and competitiveness are connected; the higher the competitiveness of a certain country, the lower the brain drain, which is the primary hypothesis of this scientific paper. To prove this hypothesis, the method of linear regression was used, with competitiveness being the dependant variable, and brain drain the independent variable. The data from the Global Competitiveness Report 2015-2016 were used on a sample of 100 countries. The obtained equation is: “Copetitiveness = 6,4556 – 0,6138 Brain Drain“ which points to the fact that, if brain drain increases by 1, competitiveness will decrease by 0,6138, which confirms the hypothesis that competitiveness and brain drain are connected and that reduction of brain drain can influence the increase of competitiveness. The suitability for linear regression is shown in the following chart. 7 Competitiveness 6 5 4 3 2 1 0 0 1 2 Brain Drain 3 4 5 y = -0,6138x + 6,4556 R² = 0,7498 6 Chart 1: The Connection of Brain Drain and Competitiveness (author’s analysis of data from Schwab, 2015-2016, p. 7, pp. 93-371) The coefficient of determination (R2) in the given calculation is 75%, which means that the method explained 75% of dependent variable variations. Furthermore, from the coefficient of determination it is possible to calculate the correlation coefficient which illustrates how the value of one variable can with a certain level of probability be predicted on the basis of the value of the other variable. The correlation coefficient (r) is 0.8659, which points to a high connection between competitiveness and brain drain. The Durbin-Watson statistic determined that there is no autocorrelation in the model, whereas the Durbin-Watson indicator was 1.762, which is within the critical values which are 1.742 and 2.258. The absence of autocorrelation in the model is a very good indicator, because autocorrelation oftentimes has negative effects on the model, making it unsuitable for prognosis. 3.2. Connection of brain drain and competitiveness of the Republic of Croatia The Republic of Croatia is ranked relatively low on the scale of global competitiveness, while in relation to brain drain it is ranked high, which is demonstrated by the following table. Table1: Global Competitiveness and Brain Drain of Croatia in the Period 2008 - 2015 (author’s analysis of data from Schwab, 2015-2016, p. 7, pp. 93-371; Schwab, 2014-2015, p.13, pp. 105-391; Schwab, 2013-2014, p. 15, pp. 101-395; Schwab, 2012-2013., p. 13, p. 474; Schwab, 2011-2012, p. 15, p. 477; Schwab, 2010-2011, p. 15, p. 451; Schwab, 20092010, p. 13, p. 427; Schwab, 2008-2009, p. 10, p. 446) Year 2008 2009 2010 2011 2012 2013 2014 2015 Ranking on the scale of global competitiveness 61st 72nd 77th 76.th 81st 75th 77th 77th Brain drain ranking 60th 36th 18th 15th 19th 15th 8th 8th The results of the Global Competitiveness Report in 2015 rank Croatia 77th out of 140 countries, which is a decline of 16 places compared to 2008. In terms of brain drain, in 2015 Croatia was ranked eighth, which demonstrates a distinct dissatisfaction of highly educated people with the circumstances in Croatia, and a decline of 52 places in only eight years. Brain drain is a powerful factor which has an influence on the decrease of Croatia’s competitiveness and which slows the country’s economic growth and development. For these reasons, it is necessary to implement measures and activities which will reduce this phenomenon. 4 PROPOSED MEASURES FOR PREVENTION OF BRAIN DRAIN If Croatia wants to become a knowledge-based society, it must work on the measures for preventing brain drain, in order to completely utilize the knowledge and skills of highly educated people. Apart from the state and the private sector, non-governmental organizations must as well work on fighting the brain drain by inclusion into the process of connecting Croatian science with the global science, precisely through young and educated people (Horvat, 2004, p. 6). Young people should be encouraged and stimulated to emigrate professionally on short-term basis and at the same time conditioned to return in their home country (Horvat, 2004, p. 4). If they were to return to Croatia after spending a certain amount of time abroad acquiring new skills and knowledge, they would represent an advantage for the growth and development of the Croatian economy, and in that case the term would be “circulation of brains” which should be encouraged in the future. Croatia should endeavor to improve the position of science by increasing investments into research and development which currently amount approximately 2,6 billion kunas (Croatian Bureau of Statistics, 2015, p. 535), encourage international scientific cooperation, creation and marinating contacts with scientists in the world for the purpose of creating active cooperation and attracting talents from the neighboring countries (Horvat, 2004, p. 6). Croatia should work on developing a special programme for discovering young talents whose capabilities would be further developed and whose employment would be ensured. The gap between life expectations, demographic and economic structure, social conditions and political stability between less developed countries will still exist and stimulate the process of brain drain. However, it is to be expected that additional investments in science will manage to retain the most of young scientist population (Adamović, Mežnarić, 2003, p. 158). A reform of the education system would help in reduction of the brain drain; a reform which would enable the utilisation of acquired skills and knowledge, improve the conditions for research, improve working conditions, ensure wages in the level of professional qualification and provide many other conditions which would have a positive impact on brain drain. Establishment of public–private partnerships and a flexible visa regime could have a positive impact on the stimulation of brain circulation rather than brain drain (Šćukanec, 2013). An increase of wages would surely be a great motive to stay for the potential candidates for brain drain. Furthermore, different incentives such as mortgage loans, improved job stability (stability of living conditions in general), assured kindergarten places and good quality education for children would have a positive impact on the reduction of migration of highly educated people. Croatia should work on the reform of the pension system and change its labor laws. Industrialization in Croatia is at a very low level at the moment, and if it is successfully revived, Croatia will create more jobs and thusly reduce unemployment. Unemployment can also be reduced by generally increasing the GDP, which is something that should be worked on in the years to come. 5 CONCLUSION The scientific paper was written with the intention to explain the term brain drain, to determine whether there is a connection between competitiveness and brain drain, to explore what are the main reasons why highly educated people move abroad and to see what measures could be implemented in the future to reduce this phenomenon. If there is a need to get to the bottom of the brain drain problem, it is necessary to view all causes which drive the emigration of highly educated people, and they are usually connected to economic issues such as low wages, unemployment and job instability. However, possible causes of emigration of highly educated people are the inability to advance, job instability, corruption etc. Highly educated professionals see the developed countries as an attractive destination which will give them better working and living conditions. Competitiveness is a very important prerequisite for the economic development of every country, and the level of people’s knowledge and skills is a crucial factor in sustaining the growth of competitiveness. Investment in human capital, professional development and measures for keeping potential emigrants in the home country should be high on the list of priorities of every country. The method of linear regression was used on the data connected to the world competitiveness and brain drain to determine the connection between competitiveness and brain drain. It was proved the connection between these two phenomena exists, and that if competitiveness increases, the brain drain will decrease, and highly educated workforce will stay in the home country. If Croatia wants to become a knowledgebased society, it must work on the measures for preventing the brain drain, because this phenomenon has in recent years seized worrying proportions. The position of science in Croatia should be improved to keep the professionals in the home country and motivate them to achieve new scientific breakthroughs. Investments in research and development should be increased, international scientific cooperation should be encouraged, and contacts with scientists from all over the world should be maintained in order to create active cooperation and attract talents from the neighboring countries. The Republic of Croatia needs a reform of science which will enable the utilization of acquired knowledge and skills, improve the conditions for research work, improve working conditions, ensure wages in the level of professional qualification and provide many other conditions which would have a positive impact on brain drain. Higher wages, mortgage loans, job stability, increased industrialization which would open new jobs; those are all the factors which would motivate highly educated people to stay in Croatia. 6 BIBLIOGRAPHY 1. Adamović, M.; Mežnarić, S. (2003): Researching Potential Migrants: "Brain Drain" of Young Scientist from Croatia, Sociological Review, Vol.34, No.3-4 2. Andrijević Matovac, V.; Bilas, V.; Franc, S. (2010): Understanding the importance of human capital and labor market, Competitiveness in the EU candidate countries and selected EU members, Economic Thought And Practice: Periodical Of The University of Dubrovnik Vol.19, No.2 3. Bejaković, P.; Lowther, J. 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