Demographic Divide and Labour Migration in the Euro-Mediterranean Region * Working paper 111

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1 Demographic Divide and Labour Migraion in he Euro-Medierranean Region * Working paper 111 Mehme Serkan Tosun Deparmen of Economics Universiy of Nevada, Reno and Insiue for he Sudy of Labor (IZA) Bonn, Germany Augus 2011 Oxford Insiue of PopulaionAgeing Working Papers Series edior: Kae Hamblin * This paper is based parly on he work done by he auhor during his visis o he European Universiy Insiue (EUI), Florence, Ialy, and he Oxford Insiue of Populaion Ageing a Oxford Universiy, Oxford, England. The auhor wishes o hank Philipp Fargues, Eore Recchi, Jaco Hoffman, Kenneh Howse, George Leeson, Maria Porer, and conference paricipans a he CREMed workshops on he Economics of he Medierranean and he Euromedierranean Process, and he seminar paricipans a he Oxford Insiue of Populaion Ageing for helpful commens on earlier drafs.

2 Absrac This paper provides a demographic oulook of he Euro-Medierranean region and hen shows he economic and fiscal consequences of such demographic differences wihin a wo-region model wih inernaional labour mobiliy. Inernaional labour mobiliy is also examined hrough an exernaliies framework where brain drain from migraion could be axed by he home counries. Taxing he brain drain has a subsanial limiing effec on labour migraion and a small negaive effec on per worker growh. On he oher hand, i could be a soluion o he negaive exernaliy problem associaed wih brain drain. I is also found ha such ax can raise subsanial ax revenue for he SMCs which could be used o enhance human capial in he region. JEL Classificaion: E62, F22, H23, H24, H41 Keywords: Demographic divide, demographic defici, populaion aging, youh bulge, labour mobiliy, brain drain, overlapping generaions, endogenous ax policy, Medierranean region. 1. Inroducion There is a significan demographic divide in he Euro-Medierranean Region beween European counries in he Norh and he Souhern Medierranean Counries (SMCs) in he Souh. The SMCs have higher feriliy and populaion growh raes and a significanly younger age srucure han he Norhern Medierranean counries and mos oher counries and regions. The 2002 Arab Human Developmen Repor noes ha his can presen a demographic gif or a demographic curse depending on wheher he high populaion growh and feriliy can be ransformed ino human wealh hrough capial invesmens and echnological progress. Similarly, Dhone, Bhaacharya and Yousef (2000) and Dhillon and Yousef (2009) argued ha he explosion in he working-age populaion in he Middle Eas presens challenges as well as opporuniies for hose counries. The similarly unique demographic characerisics of he SMCs show a sark 1

3 conras o heir European counerpars, where counries are experiencing a serious demographic defici hrough populaion aging. 1 An imporan oucome of he demographic differences menioned above has been subsanial labour migraion from he Souhern Medierranean o he European counries in he Norh. 2 According o he Unied Naions 2005 revision of inernaional migraion rends, Europe has been hos o abou 34 per cen of all migrans in Fargues (2006) showed ha Europe is he single larges desinaion of firs-generaion Arab emigrans, and hoss 59% of all such emigrans worldwide (Fargues, 2006: 8, 25). While such labour migraion has been driven mainly by economic and demographic differences beween hese wo regions, i has creaed imporan exernaliies. These exernaliies ook he form of negaive exernaliies hrough brain drain in he SMCs, and boh posiive exernaliies hrough brain gain and negaive exernaliies hrough congesion and social problems for he European counries. 3 Bhagwai (1972, 1976a, 1976b) argued ha axing his brain drain could be a soluion o he negaive exernaliy problem. He also argued ha he curren sysem of income axaion based on residence insead of ciizenship leads o represenaion of immigran workers in home counries wihou axaion. This braindrain ax idea is resurfacing again in he recen lieraure where several papers have argued he virues of such a ax for developing counries (Desai, Kapur and McHale, 2004; Sraubhaar, 2000). 1 In an enry in he forhcoming Encyclopedia of Global Human Migraion, Tosun (forhcoming) defines demographic defici as an imbalance or shorage in he human populaion of a counry, province or any oher regional or local jurisdicion ha arises mainly from differences in age, sexes, and geographic concenraion of ha populaion, such as rural-urban or suburban populaion differences. 2 These demographic differences can also lead o capial flows beween regions. See Börsch-Supan, Ludwig and Winer (2005), Tosun (2003) and Tosun (2007) for sudies on examining he link beween populaion aging and capial flows. 3 One may argue ha workers remiances o he SMCs are posiive exernaliies from labour migraion o Europe. However, hese are pecuniary exernaliies and hence do no fall under he caegory of echnological exernaliies examined by he public finance lieraure. 2

4 This paper describes he demographic and migraion rends in he Euro- Medierranean region and hen shows he economic and fiscal consequences of such demographic differences wihin a wo-region model wih inernaional labour mobiliy. Inernaional labour migraion is examined also hrough an inernaional exernaliies framework ha has recenly been popularized by Kaul e al. (1999, 2006). A he same ime, he paper conribues o he lieraure on brain drain and axaion ha daes back o Bhagwai s original proposal in mid-1970s. The paper uses a wo-region, wo-period overlapping generaions model wih inernaional labour mobiliy o examine he efficacy of using ax policy o inernalize he exernaliies creaed by inernaional labour migraion. The goal is o examine he human capial, growh and welfare consequences of labour movemens and a brain-drain ax similar o wha was originally proposed by Bhagwai (1972). The paper is srucured as follows. The nex secion provides a demographic oulook of he region. This is followed by a descripion of a sylized wo-region, woperiod overlapping generaions model wih inernaional labour mobiliy in Secion 3. A dynamic ransiion analysis in Secion 4 shows resuls from a numerical simulaion exercise. Secion 5 shows budgeary implicaions of a brain drain ax and discusses issues relaed o he adminisraion of such a ax. The las secion presens summary and concluding remarks. 2. Demographic Oulook of he Medierranean Region The Medierranean region has undergone a significan demographic change in he pas fify years and is also expeced o go hrough more changes in forhcoming decades. 3

5 Table 1 shows he basic demographic saisics for he Medierranean region for he years 1960, 2010 and This shows he magniude of he aging of he populaions in he region. While he populaion is expeced o reach abou 590 million by 2050, populaion growh rae decreases almos o zero for he region. This is explained by he decrease in he oal feriliy rae o well below replacemen rae of 2.1. Subsanial increases in he median age, share of populaion 65 and older, and he old-age dependency raio are clear evidence on he demographic defici hrough populaion aging. The demographic change in he region is also shown in he populaion pyramids in Figure 1. Table 1. Demographic Oulook of he Medierranean Region Toal Populaion 239 million 471 million 590 million Populaion Growh 1.88% 1.01% 0.07% Toal Feriliy Rae Deah Rae Median Age Populaion 65 and older 5.80% 10.67% 22.87% Old Age Dependency Raio 10% 15.90% 38.60% Share of Urban Populaion 41.31% 67.55% 81.44% Source: Unied Naions World Populaion Prospecs (2010 Revision). 4 This able shows daa for counries ha have Medierranean Sea coas. Figures shown for 2050 are UN projecions based on medium-feriliy scenario. 4

6 Figure 1. Populaion Pyramid of he Medierranean Region (2010 and 2050) Source: Unied Naions World Populaion Prospecs (2010 Revision). Populaion share calculaions were compued by he auhor. As shown in Figures 2 and 3, Souhern Medierranean Counries (SMCs), however, have and will coninue o have significanly younger populaions han he European counries, hough his gap is expeced o close o some exen by For hose counries he key age group in erms of size is he age group, indicaing he youh bulge. For he European counerpars, he populaion pyramid in Figure 3 already looks differen in 2010 wih as he larges age group. By 2050 we expec he and age groups o be he bigges groups, ogeher wih he age group. This variaion beween regions can also be illusraed in Figures 4 and 5 where he wo opposie exreme cases are shown for Palesinian Terriories and Spain respecively. I is ineresing ha he region will coninue o have hese vas demographic differences as Wes Bank Gaza will coninue o have a populaion pyramid ha is ypical for a developing counry and Spain will have a populaion ha looks almos nohing like an acual pyramid. For Spain, he projecions in Figure 5 show ha he age group will become he larges populaion age group. 5

7 Figure 2. Populaion Pyramid of he Souhern Medierranean Sub-Region (2010 and 2050) Source: Unied Naions World Populaion Prospecs (2010 Revision). Populaion share calculaions were compued by he auhor. Figure 3. Populaion Pyramid of he Norhern Medierranean Sub-Region (2010 and 2050) Source: Unied Naions World Populaion Prospecs (2010 Revision). Populaion share calculaions were compued by he auhor. 6

8 Figure 4. Populaion Pyramid of he Palesinian Terriories (2010 and 2050) Source: Unied Naions World Populaion Prospecs (2010 Revision). Populaion share calculaions were compued by he auhor. Figure 5. Populaion Pyramid of Spain (2010 and 2050) Source: Unied Naions World Populaion Prospecs (2010 Revision). Populaion share calculaions were compued by he auhor. The demographic divide beween he wo sub-regions can also be seen in he maps in Figures 6 and 7. Figure 6 shows ha he feriliy rae is higher in he SMCs wih an average oal feriliy rae of 2.1 for he Medierranean region, which also happens o 7

9 be he replacemen rae of a populaion. Among he Medierranean counries, Turkey has a oal feriliy rae ha is roughly equal o he region average. We also see ha while he average oal feriliy rae in he region is significanly smaller han he one for he Middle Eas and Norh Africa (MENA) region or he Arab world, i is sill higher han he one for he OECD or European Union (EU) counries. When we look a he old-age dependency raio, i is now he European counries in he Norh of he Medierranean ha have significanly higher old-age dependency raio. Mos of he SMCs have a raio of less han 10%. Medierranean counries on average have a higher old-age dependency raio han he Arab world and he MENA region bu sill a lower raio han he OECD counries and he EU counries. Figure 6. Toal Feriliy Rae in he Medierranean (2009) Source: 2010 World Developmen Indicaors, The World Bank. 8

10 Figure 7. Old-Age Dependency Raio in he Medierranean (2009) Source: 2010 World Developmen Indicaors, The World Bank. The flow and sock of migrans in he region are shown in Figures 8 and 9, respecively. While he Souhern European (or he Norhern Medierranean) counries were home counries during he gues worker migraion in he 1950s and 1970s, hey became mainly hos counries for migraion saring 1980s. Among he original gues worker home counries, Greece, Ialy, Porugal and Spain now have posiive ne migraion raes and Turkey s ne migraion rae is very close o zero. On he oher hand, mos of he SMCs have negaive ne migraion raes, which indicaes ha hey are ne senders of migrans. Counries like Jordan, Libya, Syria and Palesinian Terriories are excepions due o large Palesinian refugee populaions in hose counries. Figure 9 shows ha Souhern European (or Norhern Medierranean) counries now have a large sock of 9

11 migrans compared o mos of he SMCs. The Medierranean region as a whole is a ne recipien of migrans, wih an average rae less han he averages for he OECD counries and he EU counries, bu he region has a higher sock of migran populaion as a share of oal counry populaion han all oher regions compared in Figure 9. Figure 8. Ne Migraion Rae in he Medierranean (2009) Source: 2010 World Developmen Indicaors, The World Bank. 10

12 Figure 9. Inernaional Migran Sock in he Medierranean (2009) Source: 2010 World Developmen Indicaors, The World Bank. In he nex secion, he economic and fiscal consequences of such demographic differences are presened wihin a wo-region model wih inernaional labour mobiliy. 3. The Two-Region Model of Labour Mobiliy, Brain Drain and Taxaion The model builds on a wo-period overlapping generaions model firs developed by Diamond (1965). 5 To examine open economy issues, he sandard framework is exended o a wo-region model wih inernaional labour mobiliy similar o Galor (1986, 1992) and Creez e al. (1996, 1998) 6. Labour mobiliy has a dual effec in he sense ha 5 However, he earlies overlapping generaions models are described by Allais (1947) and Samuelson (1958). Children are no modelled in a wo-period model. 6 A wo-counry model wih inernaional capial mobiliy is shown by Buier (1981). 11

13 i exhibis he characerisics of capial as well. Young migran workers conribue o he economy boh as labourers hrough heir human capial, and as savers hrough heir supply of capial. Anoher major exension is modelling he link beween human capial accumulaion and ax policy o address he brain drain and axaion issues. Brain-drain ax is assumed o be jus he home counry s income ax rae imposed on he migran workers. Hence, i is really no a separae ax. For clariy, he model is presened for one region only. This is followed by a descripion of he wo-region world equilibrium Households Individuals live for wo periods and seek o maximize a uiliy funcion based on discreionary consumpion in he firs and second period of heir lives, 1 U ln C ln C, j j 1 1 (1) here j indexes individuals, C is consumpion when young, j j 1 C is consumpion when old, and is he pure rae of ime preference. The period-specific budge consrains in he firs and he second periods are: Firs period: C a S a 1 j j j j w l a j Second Period: C a r j 1 j 1 1 S j a j where j j S a is firs period saving, 1 1, (2) w is he wage rae individual j faces, j l a is effecive labour, 7 where a is he abiliy level of individual j, j 1 r is he rae of reurn o capial, is he rae of income axaion ha is applied o boh capial and labour income. This ax is used enirely o finance a produciviy enhancing public programme. For 7 Here, young supplies one uni of ime o he economy. Noe ha, making he allocaion of ime beween schooling and supplying labor endogenous does no change his analysis. 12

14 simpliciy, his public programme will be referred o as educaion hroughou he ex. 8 The goal is o highligh he srong link beween his ype of governmen spending and human capial accumulaion, which is considered o be one of he mos imporan avenues for economic growh. 9 I is assumed ha here is a coninuous disribuion of abiliies ha is replicaed in each new generaion. The abiliy level of individual j is indexed by a j, which ranges from 0 o 1. The densiy funcion of abiliies is denoed by f(a) where by definiion: 1 f a d a 1. (3) 0 Human capial is accumulaed from he ineracion of abiliy level ( and governmen spending per young ( g e ) on educaion: a j ) of he individual e 1, l a a g j j (4) where, denoes an index on human capial efficiency and is a parameer indicaing he reurn o human capial from he inpus ( a and j g e ). 10 The form of he human capial funcion is chosen so ha even individuals wih he lowes abiliy ( a 0 ) will conribue j o he economy in erms of human capial (see Holz-Eakin, Lovely, and Tosun 2004). From he maximizaion of (1) subjec o (2) and (4); we ge he familiar firs order condiion: 1 C a C a 1 r 1 j j j 1 j 1 1. (5) 8 I should be noed ha any oher governmen program ha is direced owards increasing he labor produciviy of young could easily be used. 9 Tosun (2009) inroduced a social securiy programme in he model by having an exogenously fixed level of social securiy spending. An income ax ha is earmarked for social securiy adjuss hrough he periods o balance he social securiy budge. Thus, here are separae axes for educaion and social securiy spending wih voers deciding only on he educaion ax rae. The resuls from ha paper showed ha modelling social securiy in his way only affeced he magniude of he effecs, no he qualiaive resuls. 10 should be less han or equal o uniy o preven increasing reurns from governmen spending. 13

15 Using (5) and (2), we derive he opimal saving of an individual j: S a 1 w l a 2 1 j j j. (6) Saving of an individual depends on ne labour earnings bu i is independen of he ineres rae. This is due o he Cobb-Douglas form of he uiliy funcion. Given (5) and (6), i is sraighforward o derive consumpion funcions in each period: C a 1 w l a 2 C 1 j j j j 1 a j 1 r w l a j 2. (7) 3.2. Poliical Process of Tax Policy and Brain Drain To make he process of ax policy deerminaion for educaion rich, ineresing, ye racable, a median-voer framework wih voer heerogeneiy is used. 11 This framework suggess ha public secor responds o voer preferences over he long period (hiry years) assumed in he wo-period overlapping generaions model. Voer heerogeneiy is inroduced by assuming a disribuion of geneic abiliy levels for he working generaion. 12 The abiliy level of he individual will, in urn, deermine he value she receives from educaion. The consumpion and saving decisions, as seen secion 2.1, depend on human capial, which is in urn deermined by governmen spending (see equaion 4). By 11 The poliical process is modelled hrough a median voer framework because he condiions for he median voer heorem are saisfied. The choice of voers is over a single dimension since he preferred educaion ax rae is he only choice variable, and he voer preferences are single peaked. The propery of single-peakedness has been demonsraed o ensure exisence of a voing equilibrium (Black 1948). 12 While no very realisic, uniform disribuion is used for is simpliciy in deriving analyical resuls. 14

16 plugging hese ino (1), we ge he indirec uiliy funcion, which each voer maximizes, in deermining his or her preferred ax rae, subjec o he governmen budge consrain e for his ype of governmen spending ( y g ). 13 The preferred ax rae of individual j when young is: j a j a j y 1 1 a y j. (8) Equaion (8) is he ax rae each individual prefers based on her abiliy level. This preferred ax rae is increasing in boh abiliy level a and in income per young. In j addiion, because he old do no derive any benefi from publicly provided educaion and here are no bequess in he model, hey incur a cos wihou enjoying any benefis. Therefore, heir preferred educaion ax rae will always be zero, regardless of heir abiliy. Toal populaion in each period is N N where N 1 is composed of boh newly born naionals and migran workers. Given his, he median voer is defined by 1 a m 1, (9) N N f a d a 0 N N where a m is he abiliy level of he median voer. 2 Wih lower populaion growh (due o lower feriliy or labour ouflow), he median voer becomes a person wih lower abiliy, and he preferred ax rae of he median voer is lower. This, in urn, leads o lower governmen spending on public educaion which has a negaive impac on human capial accumulaion. Hence, for 13 I is assumed in each period ha governmen uses he enire revenue from his ax o finance he public good for all young equally, regardless of heir abiliy level (Bearse, Glomm, and Ravikumar, 2000). 15

17 example, he impac of labour ouflows on human capial in he SMCs would be wofold: firs hrough loss of oal human capial due o he emigraion of workers and second hrough reduced average human capial for each remaining worker. While he former effec is he ypical brain drain argumen, he laer is an addiional brain drain effec from loss of producive poliical paricipaion of young workers in home counry. This laer effec is a novel aspec of he model which has no been widely addressed in he previous lieraure. A brain drain ax enables represenaion wih axaion. By paying he home counry s income ax, migran workers are allowed o voe for he ax rae and hereby help improve he provision of educaion in he home counry Producers echnology. Each counry produces a single good using a Cobb-Douglas producion 1, (10) Y K H here is he produciviy index, K is capial sock and H is aggregae supply of human capial. The aggregae supply of human capial is: 1. (11) H N l a f a d a 0 Human capial per worker, using (4) and (11), is 1 1. (12) h a g f a d a 0 Compeiive facor markes require ha real wage and ineres raes are equal o he marginal producs of labour and capial respecively. Therefore, facor demand equaions are: 16

18 w k 1 h (13) r k h 1. (14) Here, k K / N a n d h H / N are capial sock per worker and human capial per worker, respecively. Using (6) and (12), saving per worker can be expressed as 1 s w a g f a d a (15) Inernaional Equilibrium wih and wihou a ax on Brain Drain In he absence of inernaional capial mobiliy, capial marke equilibrium requires ha saving in each period equals o accumulaed capial in he following period. Capial marke equilibrium condiions for each region can be depiced as k 1 A A 1 A N s (16) A N k 1 B B N s, (17) B N B 1 where superscrips A and B denoe regions. To close he dynamic model, inernaional labour marke equilibrium mus be specified. In he case of perfec inernaional labour mobiliy, inernaional labour marke equilibrium requires A B A A B B N N 1 N 1 N. (18)

19 A B where, and are he populaion growh raes in region A and region B, 1 1 respecively. In he perfec labour mobiliy model, labour income is axed where income is earned. Thus, source based income axaion is used for boh regions. 14 This implies ha ne-of-ax wage raes are equalized in equilibrium. Therefore, he inernaional labour flow consrain is: A B B w w A (19) I is assumed ha only he members of he young generaion move beween regions. Boh regions are assumed o have uniform abiliy disribuions, which mean ha migraion does no have any effec on he abiliy disribuion in hese regions. 15 When a brain drain ax is imposed, he inernaional labour flow condiion above changes. To see his change, assume ha region A is Europe and region B is he Souhern Medierranean. In ha case, he income ax rae of region B will be imposed as a brain drain ax on he workers ha migrae o region A. 16 Hence, labour from region B will flow o region A according o he following condiion: A B B B w w A (20) The model incorporaes he ineracion of household behaviour, firm behaviour, poliical process, and inernaional labour flows. The model explained above will be used o examine he labour flows beween wo regions ha have srong populaion differences 14 Under a source sysem, labour income is axed where income is earned. The model ax reaies of he OECD and he Unied Naions boh give source counries he firs righs o ax income accrued wihin heir borders. 15 A more realisic case is allowing for migraion of workers ha have cerain abiliies (unskilled vs. skilled). However, his would conflic wih he uniform abiliy disribuion which assumes ha abiliy levels in he disribuion are chosen a random. 16 I s assumed here ha brain drain ax is a ax ha is only imposed by he SMCs (region B). This is in line wih he main negaive exernaliies argumen based on brain drain from he SMCs. 18

20 such as Europe and Souhern Medierranean and he impac of hese flows on he human capial accumulaion in boh regions. 4. Aging Europe and Brain Drain from SMCs 4.1. Closed Economy and Labour Mobiliy Simulaion Resuls Simulaions in his secion are based on he populaion projecions for European counries and he SMCs derived from he 2002 revision of he World Populaion Prospecs published by he Unied Naions (Unied Naions, 2002a). The simulaions will be shown for wo 30-year periods, and and for he enire period The average populaion growh raes for he period are used as a saring poin. A criical parameer in he model is he elasiciy of human capial wih respec o governmen spending on educaion and abiliy level ( ). Lainer (2000b) used a human capial funcion ha is similar o (4) and se his human capial elasiciy wih respec o educaion equal o Based on an iniial value of he abiliy of he median voer, Lainer s esimae corresponds approximaely o 0.4 in our model. However, series of sudies (and updaes) by Psacharopoulos (1985, 1994 and 2004) esimaed a significanly higher rae of reurn o educaion for low income and developing counries compared o developed counries. Hence, = 0.5 is chosen as a compromise given Lainer s esimae and he SMCs used in populaion projecions. We sar wih he perfec labour mobiliy model where here is perfec inernaional labour mobiliy wih migran labour paricipaing in he poliical sysem of 19

21 % change beween period years he hos counry bu no he home counry. Based on he populaion projecions for he wo regions, labour migraes from he SMCs o he European counries. Figure 10 shows his in reference o he change in he number of workers in boh regions. European counries experience a major boom in foreign workers, paricularly beween 2000 and This boom is almos abou six imes greaer han he growh aribued o he naive worker populaion. Figure 11, on he oher hand, shows ha he SMCs send labour o Europe and hus experience significanly lower domesic labour growh despie a high populaion growh. Figure 10. Composiion of he Change in Number of Workers in Europe (Perfec Labour Mobiliy) % Change Due o Immigraion % Change Due o Own Growh Periods 20

22 % change beween period years Figure 11. Composiion of he Change in Number of Workers in SMCs (Perfec Labour Mobiliy) % Change Los Due o Ou-Migraion % Change Afer Ou-Migraion Periods We now compare his o our alernaive labour mobiliy model wih brain drain ax, where migran workers paricipae in he poliical sysem of boh hos and home counries bu a he same ime remi he addiional income ax (brain drain ax) o he home counry. Figure 12 shows ha his leads o a significan decrease in he number of workers migraing o Europe in boh periods. Figure 13 mainly confirms his by showing ha he growh in he number of workers los o ou-migraion is very small compared o he overall growh in number of workers. Apparenly, brain drain ax acs as a very srong migraion conrol mechanism. 21

23 % change beween period years % change beween period years 60.0 Figure 12. Composiion of he Change in Number of Workers in Europe (Labour Mobiliy w/brain Drain Tax) % Change Due o Immigraion % Change Due o Own Growh Periods Figure 13. Composiion of he Change in Number of Workers in SMCs (Labor Mobiliy w/brain Drain Tax) % Change Los Due o Ou-Migraion % Change Afer Ou- Migraion Periods 22

24 4.2. Model Comparisons To undersand he economic and fiscal impac of brain drain hrough labour flows, we firs compare he perfec labour mobiliy model o a closed economy model. These simulaion resuls are shown in columns (1)-(4) of Tables 2 and 3. Table 2 shows he per worker values of seleced economic variables. European counries benefi from labour migraion from he SMCs paricularly in erms of educaion spending per worker and human capial per worker. However, hey are adversely impaced by he large influx of foreign workers in he period. The benefis of he labour migraion o Europe are even clearer when we look a he aggregae economic values shown in Table 3. Ageing Europe clearly benefis from he economic expansion made possible by he conribuions of migran workers as labourers, savers and paricipans in he policymaking process ha deermines he provision of produciviy-enhancing public good (educaion). SMCs, on he oher hand, suffer economically (lower capial, human capial and income growh) mainly due o loss of workers o he European counries. As aforemenioned, he impac of he loss of workers on human capial in he SMCs is wofold: firs hrough loss of oal human capial from ouflow of workers, and second hrough reduced average human capial for each remaining worker due o he loss of producive poliical paricipaion of young workers in heir home counry. We see he clear evidence of his in he sharp decreases in he income ax rae in he SMCs in boh periods. The nex comparison is wih he labour mobiliy model wih brain drain ax. Simulaion resuls for his model are shown in columns (5) and (6) of Tables 2 and 3. 23

25 European counries seem o benefi from such a ax hrough smaller labour flows ha lead o more sable changes in he per worker values of heir economic variables, paricularly in capial per worker and income per worker. On he oher hand, heir aggregae economic expansion is also less pronounced. Hence, while he brain drain ax has a negaive impac on he overall economic aciviy in European counries, i also riggers a relaively more sable economic growh by limiing large influx of workers. For he SMCs, he brain drain ax improves on boh he human capial per worker and oal human capial accumulaion. While i seems o limi economic growh slighly in per worker erms, i conribues significanly o aggregae economic expansion as seen in Table 3. By limiing harmful ou-migraion of workers, he brain drain ax funcions like a Pigouvian ax which is considered a firs-bes soluion o he negaive exernaliy problem. 24

26 Table 2. Model Comparisons 1/ (per worker values) Closed Economy Model (No Labour Mobiliy) Perfec Labour Mobiliy Model wih Migrans Voing Only in Hos Counry Labour Mobiliy Model wih Migrans Voing in Boh Counries and Income Tax on Brain Drain Time Periods European Counries (1) SMCs (2) European Counries (3) SMCs (4) European Counries (5) SMCs (6) Number of workers Capial sock per worker Human capial per worker Income per worker Income ax rae Educaion spending per worker Source: Compued by auhor. 1/ All numbers refer o percenage changes beween he years indicaed in he ime period. 25

27 Table 3. Model Comparisons 1/ (aggregae values) Closed Economy Model (No Labour Mobiliy) Perfec Labour Mobiliy Model wih Migrans Voing Only in Hos Counry Labour Mobiliy Model wih Migrans Voing in Boh Counries and Income Tax on Brain Drain Time Periods European Counries (1) SMCs (2) European Counries (3) SMCs (4) European Counries (5) SMCs (6) Number of workers Toal capial sock Toal human capial Toal income Income ax rae Toal educaion spending Source: Compued by auhor. 1/ All numbers refer o percenage changes beween he years indicaed in he ime period. 5. Budgeary Implicaions of he Brain Drain Tax and Some Adminisraion Issues Simulaions in he previous secion give us an idea abou he budgeary implicaions of such a ax for he SMCs. Considering he resuls for number of migrans, he income ax rae in he SMCs and he income per worker in he European counries, he share of he brain drain ax in oal income ax revenues in he SMCs is calculaed as 2% for he period and 3% for he period. Using acual ax revenue figures from he Inernaional Moneary Fund s Governmen Finance Saisics (GFS), 26

28 hese shares ranslae o abou $1.3 billion in average annual income ax revenue for oal of SMCs unil 2030 and abou $2.8 billion beween 2030 and These are sizeable revenues ha SMCs can poenially use o provide enhanced educaion o he exising workforce and in urn help improve human capial accumulaion in he SMCs. A recen sudy by Desai, Kapur and McHale (2004) shows a similarly subsanial poenial revenue gain o India from such axaion. However, here can be significan issues relaed o he adminisraion and use of such a brain drain ax. Firs, his ax requires a ax sysem based on ciizenship (he American model) raher han residence in he SMCs. Currenly hese counries use a residence-based income ax sysem and swiching o a ciizenship-based sysem would bring significan adminisraive coss. Involvemen of inernaional insiuions and creaion of new inernaional migraion regimes have also been discussed (Sraubhaar, 2000; Pasore, 2005). Addiionally, governmen secor inefficiencies due o corrupion in he SMCs could also become a hindrance o he producive use of his new revenue sream. 6. Conclusions This paper describes he demographic and migraion rends in he Euro- Medierranean region and hen shows he economic and fiscal consequences of such demographic differences wihin a wo-region model wih inernaional labour mobiliy. Inernaional labour mobiliy is also examined hrough an exernaliies framework where brain drain from migraion could be axed by he home counries. The paper used a woregion, wo-period overlapping generaions model wih inernaional labour mobiliy o examine he efficacy of using such ax policy. 17 GFS revenue figures come from IMF (2003) and are for eigh of he nine SMCs. Libya is excluded due o lack of daa. Tax revenues are averaged for he las hree available years ( ) and hen convered o consan 1995 dollars. 27

29 Demographic oulook of he region shows subsanial expeced increases in he median age, share of populaion 65 and older, and he old-age dependency raio which are clear evidence of demographic defici hrough aging of he populaion in he region. There is however a significan demographic divide in he region largely beween Norh and Souh where he SMCs have and will coninue o have significanly younger populaions han he European counries while he gap beween he wo sub-regions is expeced o close o some exen by A ax on he brain drain has a subsanial limiing effec on labour migraion and a small negaive effec on per worker growh. I can, however, also raise subsanial ax revenue for he SMCs which could be used o enhance human capial in he region. Adminisraive coss involved wih he ax sysem required o implemen a brain-drain ax consiue he bigges obsacle o he use of such a ax. 28

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