In my first post in this newsletter, I shared my experience living abroad in search of better career opportunities and a brighter future. Since then, I've reconnected with old friends and made new connections with talented individuals who, like myself, left their home countries to try a better life in developed economies. We all have our unique reasons, but I realized that there are common factors that contribute to a much larger macroeconomic issue.
This phenomenon is known as Brain Drain, and it plays a significant role in why many countries struggle to transition from developing economies to advanced ones, falling into what is commonly referred to as the middle-income trap. The middle-income trap solidifies a country's position in the global economy and makes it exceedingly difficult for others to join the ranks of the approximately 30 existing advanced economies.
What Defines a Developed Economy?
While there is no consensus on the definition, developed economies are typically characterized by a GDP per capita greater than USD 20,000 per year, advanced and highly technical industries, a well-functioning and regulated market system, and high scores in the Human Development Index (HDI).
The Economist recently published an updated report by the World Bank comparing the situations of many countries in 2022 with those in 1960, shedding light on the middle-income trap phenomenon. The report revealed that most countries get trapped in middle-income status, notably Brazil, China, India, Mexico, Nigeria, Russia, and South Africa. Conversely, only a few countries as Singapore, Taiwan, South Korea, and Saudi Arabia, managed to break the barrier and transition to high-income status based on GDP per capita.
While various elements contribute to the middle-income trap, one crucial underlying factor is the phenomenon known as Brain Drain.
What is Brain Drain, and Why is it Getting Worse?
Imagine a scenario where a country invests heavily in its education system, nurturing talented individuals with boundless potential. These bright minds, however, find themselves lured away by opportunities abroad, enticed by higher wages, better working conditions, and better prospects for personal growth. This phenomenon, known as “Brain Drain,” can weaken a nation's progress and hinder its ability to cultivate sustainable development.
Reflecting on my personal experiences and conversations with friends, the motivation behind Brain Drain stems from various factors, including professional development opportunities, better-paying jobs, improved lifestyles, and a desire to escape violence, pollution, and corruption. Generally speaking, advanced economies tend to offer more desirable living conditions with lower rates of violence and higher-paying jobs.
💡 While the average salary for an engineer in Brazil is around $25,000 per year, a qualified engineer in the US can potentially earn 5x that amount. Moreover, countries like the US typically have lower crime rates and less corruption than Brazil, making them appealing destinations for skilled professionals.
How is Brain Drain Making Rich Countries Richer and Poor Countries Poorer?
On the one hand, Brain Drain has adverse effects on poor and developing countries, hindering their development and perpetuating poverty. The loss of skilled professionals deprives these countries of the human capital necessary to build and sustain vital sectors such as healthcare, education, infrastructure, and technology. It creates a significant knowledge and skills gap, impeding the nation's ability to advance economically and address pressing social challenges. Brain Drain also exacerbates demographic problems, such as an aging population and lower workforce participation. Skilled workers are the ones who generate more output, pay more taxes, and are most likely to drive innovation and contribute to a country's wealth. When a nation loses such talent, its economic productivity decreases, falling into the middle-income trap.
On the other hand, developed countries reap benefits from Brain Drain, as they can selectively attract skilled workers by adjusting the number of work visas they offer. A notable example is Canada, which plans to increase its immigration targets amid labor shortages. Skilled migrants help address the challenges of an aging population commonly faced by developed nations while stimulating economic growth. When individuals move to a new country, they often contribute to the local economy by purchasing goods (cars, houses, furniture, etc.) and services, thus acting as an economic stimulus.
Developed countries also benefit from the Brain Drain phenomenon through educational programs. Obtaining a degree from a university in a developed country increases the likelihood of converting a student visa into a working visa. International students, who often pay higher tuition fees, serve as a valuable source of revenue for these countries. For instance, Australia generates more revenue from international students than from petroleum or natural gas exports. In addition to funding research institutions through tuition fees, international students contribute to the local economy by spending on housing, food, and other goods and services. After graduation, they enter the job market at the beginning of their careers, maximizing their potential to add value to the economy and contribute through taxes.
Personal note: I was a financial burden for the Brazilian government for over two decades (tough to say, but as a child, I didn’t produce anything for the country). Instead, I consumed lots of public resources to fund my education at a public university, including a fully-funded exchange program sponsored by the federal government that went straight into college tuition and cost-of-living to the US, strengthening (even more) American institutions and stimulating the local economy there. After graduation, I contributed only a few years to the Brazilian economy when I decided to get my savings and pursue an MBA at a prestigious school in Italy. And guess what? Once again, funding education institutions and stimulating the local economy in a developed nation with money from a developing one.
Wait, it gets worse. Now that I graduated from business school and I’m statistically considered a skilled worker, I’m a high-productive taxpayer in one of the wealthiest countries in the world, ultimately contributing to sustaining Switzerland’s competitive advantages over developing nations.
You may think I’m an unthankful selfish person. But had my country possessed better conditions of social inequality, more security, and less corruption (or at least shown a strong signal of progress), would I and so many friends in similar situations have made the same decisions?
How Can Developing Countries Stop Brain Drain from Happening?
A prime example of a country ensnared by the middle-income trap is Brazil. Once touted as an emerging economic powerhouse, Brazil experienced an era of rapid growth but struggled to sustain it. Overreliance on commodity exports, insufficient investments in education and innovation, and a complex bureaucracy hindered the country's transition to a high-income economy.
Contrastingly, South Korea emerged as a resounding success story. Despite its war-ravaged past, the nation embarked on a transformative journey, focusing on developing its human capital and fostering technological advancements. Investments in education, R&D, and infrastructure propelled South Korea forward, transforming it into a global leader in industries as technology, automotive manufacturing, and shipbuilding.
While there is no silver bullet to address such a complex problem, success stories like South Korea should serve as inspiration for developing countries. By implementing similar strategies adapted to their realities, developing countries can create an environment that retains skilled professionals, mitigates Brain Drain, and paves the way for sustainable economic growth.
Hi Rodrigo, great post! Since I left Brazil, in 2018, I have been thinking about the reasons that made me me from a country that once welcomed my ancestors. I have also been thinking about how Brazil turned from a place of opportunity (even to many Europeans!) to a limited, struggling land with scarce resources whose society seems to have more diferences than similarities.
I moved to Denmark, an equalitarian wealthy country. Then, I moved to the United States, a country proud of itself who exported the idea that, in America, a self-made man can live the American dream just by working harder.
My conclusions about it are only mine. They reflect my interpretation of events and experiences in those countries. They are not necessarily based on research and thorough analysis. They are simply thoughts, premisses, and ideas.
Denmark has a homogenous society. They are united within a culture developed through the last 1,500 years (maybe more). Danes descend from ancient peoples who have been interconnecting and evolving over that period. Their rules, laws, social norms, and even genetics were also designed in through time. It is a well-established society, with almost none variance in their expected behaviors and genetic composition. Their institutions are old and strong. Danes feel represented by them and participate in their development. There is a general trust that things will be done according to the rule. Also, it is easier to trust your neighbors when they follow the same behaviors, share the same beliefs, and physically look like you.
The US, on the other hand, is a melting pot. Although it is founded over restrictive puritan norms and the constitutional idea of individual freedom. Individual rights were guaranteed even before the mechanism of government was defined. Punishment is severe for the ones who do not conform to the rules - it’s a puritan country after all. It still struggles with issues coming from the colonial era though (such as Brazil).
All of that to say that both countries reinforce (in their own way) The Rule of the Law, which is not a sufficient but a necessary condition for economies to grow and societies to prosper. It is interesting to talk about it because that rule is not physically measured (although you probably could use a parametric variable to asses it). It is a subjective idea, but that every individual has an opinion about. It could be summarized in one question: “when it comes to the law and the rules, do you think they will be applied in most of the cases or not?”. With the idea that the Rule of the Law is sovereign, individuals have more trust in each other, or at least, trust that they will find justice in case agreements are broken or they are victim of an illegal behavior.
Brazilian institutions are young. Even though, the country was founded within somewhat restrictive catholic norms, it was always a country that benefited social status over the application of law. There is a general distrust among citizens and, after, decades of frustration and economic struggle, most Brazilians reached a mental state of conformity (“things are like that and they will never change”).
What do you think about my observations? Why are English, Swiss, and Italians wealthier and more prosperous than Brazilians?
Hope I offered some food for thought.