Download THE IMPACT OF BRAIN DRAIN ON THE COMPETITIVENESS OF

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.
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