Discover more from The Global Prosperity Institute
Grey Matter Migration: The Cerebral Strategy for Development
How the movement of skilled labour can drive economic development in low-income countries
Thomas Kehler's entrepreneurial journey kicked off unexpectedly while he was teaching in Uganda, where his fishing hobby turned into an export-oriented commercial fishing venture. After finishing business school in the 1960s, he moved to Colombia in search of business opportunities involving high-value export crops.1 He landed on flowers.
To assess the feasibility of a flower export business, Kehler recruited collaborators with complementary skills, including: Harmon Brown, a flower grower in California facing rising land and energy prices; Bill Mott, an economist; and David Cheever, an agronomist who had identified certain regions of Colombia as ideal for growing flowers through a prior university project. After the feasibility study yielded promising findings, each of them pitched in $25,000 to establish Floramerica in 1969. Within 6 months, the company was exporting flowers to the U.S.; within 3 years, they employed 400 workers; and by 1986, their initial investment of $100,000 had translated to $50 million in annual sales.
While Floramerica’s success was dramatic, its impact on Colombia’s cut flowers industry was even more profound. For instance, David Cheever left the company after 2 years to consult for new Colombian flower companies. In addition, two salesmen from Floramerica’s Miami sales office left after a few years to set up a brokerage firm, the Colombian Flower Exchange, that supported Colombian growers with marketing in the U.S. The movement of these people out of Floramerica was critical in transmitting knowhow to Colombia more broadly, and was instrumental in the establishment of 250 flower exporters in the country.
By 1986, cut flowers became Colombia’s 5th-largest export, generating $155 million in annual exports and employing 70,000 people–including 50,000 women. In 2021, Colombia was the world’s second largest exporter of cut flowers (behind the Netherlands), accounting for $1.73 billion–equivalent to 16.5% of global cut flowers exports.
Think of an economy like the game of Scrabble. In Scrabble, you have to construct words out of a set of letters that you are given. The more letters you have, the more words you can make. The more words you can make, the better you’ll do in the game.
Likewise, for an economy to grow, it needs to produce more and more sophisticated goods and services–like words in Scrabble. To do so, the economy needs to develop and combine an increasing number of productive capabilities–like letters in Scrabble. Acquiring these capabilities lies at the heart of development. As Ricardo Hausmann points out, “To make stuff, you need to know how to make it.”
It may sound simple, but it’s hard to achieve. Experts like Hausmann, W. Brian Arthur, and César Hidalgo argue that this kind of “tacit” knowledge is mostly acquired through learning by doing. It’s not easy to transfer through written word. Try mastering the violin by reading books about violins to find out why.
Luckily, there is an easier alternative. His work on productive capabilities led Hausmann to conclude that “it is easier to move brains than it is to move tacit knowledge into brains”. As demonstrated by the example of skilled Americans catalysing Colombian cut flower exports, bringing in knowhow from the outside is quicker, cheaper, and easier than developing it on your own.
History supports this idea: labour mobility (“the movement of brains”) has been critical for development and innovation in high-income countries. For example, industrial development in East Germany post-reunification relied heavily on the movement of skilled workers from the west of the country. In the U.S., the success of industry clusters in Silicon Valley (semiconductors/IT) and, before it, Detroit (automobiles) can be traced to workers who initially joined existing firms in these places, then left to form new firms in the same locations–taking their tacit knowledge with them.
Understanding the role skilled labour mobility can play in spurring the growth of key industries is critical for low-income countries. Yet their industrial strategies rarely reflect this. Countries often limit labour mobility for fear that migrants take jobs that would otherwise be occupied by natives. While we understand the political rationale for this–bringing in foreigners to spur economic growth isn’t exactly an expedient rallying cry–it’s bad economics.
The “moving brains” approach can be delivered through many channels. One is returning diaspora. For example, returning migrants–mostly from Silicon Valley–were instrumental in catalysing the growth of high-tech sectors, including semiconductors and telecommunications, in Taiwan. Returnees had established 118 of the 378 companies at the Hsinchu Science-based Industrial Park by 2007, according to researchers from the Chung-Hua Institution for Economic Research. At the start of the new millennium, around half of the leading software firms in India had been founded by return migrants from the US. One advantage of focusing on diaspora labour mobility is that it may alleviate concerns about “outsider” influence in a country.
A second channel through which brains can be moved is foreign direct investment (FDI). In the 1970s, a raft of Korean and Taiwanese manufacturers invested in Indonesia’s forestry sector, and soon saw the opportunity to move up the value chain into plywood exports. Key to cracking the export market was the fact that they brought with them more than a thousand skilled workers from their home countries to lead production and train Indonesians. From the initial success of over $6 million in plywood exports in 1987, Indonesia became the world’s second leading exporter of plywood by 2021, accounting for $2.5 billion. FDI in Costa Rica–in the form of an investment by Intel in 1996–had similar effects. Besides directly generating thousands of jobs and billions of dollars’ worth of exports, Intel leveraged foreign managers to help local suppliers to upgrade their quality and cost competitiveness. Furthermore, they invested heavily in continual training for Costa Rican employees, sending them to operations abroad for lengthy skill-building periods. Within 10 years of Intel’s initial investment, Costa Rica’s electronics sector was the country’s largest exporting sector, with 55 companies employing 12,000 workers and exporting more than $1.65 billion annually.
Joint ventures and acquisition of foreign firms is a third pathway for moving brains. The success of Bangladesh’s garments industry was kickstarted by a joint venture between Korean firm Daewoo and Desh Garments. Another example comes from Ethiopia–namely, the partnership between Ethiopian Airlines and Trans World Airlines (TWA) that began in 1945. Though more of a subcontracting relationship than a joint venture or acquisition per se, TWA was responsible for procuring aircraft and equipment, getting access to credit, and critically, providing all personnel from abroad, including the CEO, management team, pilots and technicians, and other staff. In return, the Ethiopian government paid TWA a management fee, while maintaining full ownership of the airline. Throughout the partnership, the Ethiopian government emphasized that TWA would transfer knowhow such that Ethiopians could gradually take over positions held by foreign staff. By 2019, Ethiopian Airlines was Africa’s strongest airline, serving more than 120 international destinations and generating more than $3 billion in annual revenues.
These and many other cases illustrate the importance of skilled labour mobility for economic development, yet the development community isn’t putting nearly enough effort into facilitating this at greater scale. Placements of professionals from developing countries in developed country firms, or the reverse approach of placing skilled professionals with developing country firms to facilitate better management and productivity, may be promising ways to cost effectively promote knowhow transfer. Meanwhile, developing country governments should separate the knowhow acquisition challenge from the question of immigration–by, for example, fast tracking time-bound work permits for skilled workers in high-potential industries (which is already being done in some places but could be strengthened further). Doubling down on existing measures to encourage diaspora return would also be fruitful.
Implicit in the anecdotes above is that knowhow transfer from foreigners to locals doesn’t happen automatically–it needs to be actively facilitated so that domestic firms and workers benefit without stunting sectoral take-off. Nonetheless, to improve their Scrabble-playing abilities now and in the coming decades, developing countries need to do whatever possible to get more letters.
Thanks for reading The Global Prosperity Institute! Subscribe for free to receive new posts and support our work.
This anecdote has been adapted from here: https://documents1.worldbank.org/curated/en/474231468740371757/pdf/multi-page.pdf.