Globalisation and the brain drain

The ``brain drain'' has been on our consciousness for over 30 years. India has steadily exported some of its brightest youngsters. From the early 1960s onwards, a large fraction of the graduating class at the IITs has left India.

In earlier decades, the big decisions that individuals made were at age 20 and at age 25. At age 20, a young person decided whether he wanted to study abroad. At age 25, he decided whether he wanted to return to India. Once a person spent a few years in the Indian labour market, with or without a foreign education, it was highly likely that he would stay in it for life.

Why was the world open to Indian youngsters at age 20 but not at age 30? My sense is that Indian firms were inward looking, and not oriented towards global competition. This meant that when a youngster spent one decade working in an Indian firm, his skills were out of tune with the global marketplace. Hence, a person with a very good track record in India, at age 30, used to find it quite difficult to be productive in a workplace outside India.

Over the decade of the 1990s, this picture has changed substantially. Numerous Indian firms now have product development, technology and processes which are a lot like those seen globally. Hence, the skills of middle management in India are a lot like those of middle management anywhere else in the world. This has opened up a new phenomenon: brain drain in the form of middle aged workers leaving India.

This is one of the less noticed consequences of globalisation: the integration of the world market for high skill individuals. Globalisation has reduced the differences between countries, so that the skills of a good doctor or a good futures trader or a good economist are highly portable across the globe. The "transactions costs", or the fixed costs of moving across locations, are lower than ever before (though they remain large enough to block off mobility for low-skill labour). This gives us a fairly well-integrated global market for high-end human capital.

This is not to suggest that barriers to labour mobility do not exist. For example, the green card queue in the US contains above one million individuals. Industrial countries other than the US are much more restrictive in accepting immigrants. It is hard to envisage emigration by more than a few hundred thousand high-skill individuals from India each year. However, if such a phenomenon takes place across the entire labour market (as opposed to bright 20 year-olds), it has important consequences.

A shortage of skilled and competent people in India. In the case of every organisation that I know closely today, the shortage of competent people is the central hurdle in executing change. Services exports are widely seen as being the centrepiece for a new phase of export-oriented GDP growth in India. However, the shortage of decent skills in the labour force is a critical factor limiting the growth of firms involved in services exports.

A tremendous increase in wages of high-skill labour in India. This is the obvious outcome of a persistent shortage. We will see two labour markets in India: one market for high-skill labour that is globally mobile; this market will operate at international wages. The second labour market will be for low-skill labour where global mobility is absent. This market will clear domestically.

Problems for the public sector. With the exception of ICICI, none of the public sector finance companies have done a serious job of revamping their pay scales. They face two alternatives: a sharp increase in wages of high-skill labour, or bankruptcy.

Problems of governance. In government itself, low wages at senior levels are a serious problem. An economic advisor at the Finance Ministry earns less than Rs.20,000 a month. It is possible to have individuals take up these roles if they are independently wealthy; altruistic; power-hungry; corrupt or incompetent. This is not a happy state of affairs.

A jump in billing rates in India. A firm like Infosys derives 95% of its revenues from exports, at rates like $5,000 per man-month. Most Indian customers are averse to paying such high rates, which is probably why Infosys does only 5% of its work for Indian customers. This will have to change; in a global market, there is only a global price. For services (such as software development) which have a global market, the billing rates charged in India will become close to global rates.

What can we do? From a policy perspective, this argument has one major implication. We need to take higher education more seriously, and obtain a ten-fold or hundred-fold increase in the supply of high quality masters and Ph.Ds. The conventional wisdom states that India has an excellent system of higher education, and needs to do more on elementary education. The goal of getting up to 100% literacy within a year or two is a very important one and it should undoubtedly be a first priority. However, an army of literate individuals simply do not suffice in building a modern capitalism; much higher skills are essential in order to build firms and markets that can inhabit and compete in the global economy. For instance, India's IT boom is clearly a payoff to decades of investment in higher education at a few elite institutions.

We are used to feeling proud about five good IITs and the steady stream of newspaper articles about the international success of their students. But five good IITs do not addup to a system of higher education. The dropoff in quality in even the next ten universities is simply frightening. We should not pretend that we have a system of higher education which is even marginally credible. This is something that the State can, and should, do a lot about.

Ironically, one of the biggest hurdles in obtaining a sensible system of higher education is low wages in academics. This harks back to our main point: the globalisation of the market for high skills. A good fresh Ph.D. has a global market, and it is not possible to have sound universities in India without offering wages which are in the same order of magnitude as those available outside India. Today, the Indian labour market offers a strange spectacle: we commonly see individuals with a Masters degree earning in excess of $1000 a month, while the highest of human capital - a Ph.D. who knows how to do research - earns below $500 a month in academics.

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