The World Economy (2006) doi: 10.1111/j.1467-9701.2006.00856.x © 2006 The Authors Journal compilation © 2006 Blackwell Publishing Ltd, 9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA 1599 Blackwell Publishing Ltd Oxford, UK TWEC World Economy 0378-5920 © 2006 Blackwell Publishers Ltd (a Blackwell Publishing Company) November 2006 29 11 Original Article DIASPORA and DEVELOPMENT YINGQI WEI and V. N. BALASUBRAMANYAM Diaspora and Development Yingqi Wei and V. N. Balasubramanyam Lancaster University Jagdish Bhagwati’s proposal for a ‘brains tax’ to be levied on the incomes of the diaspora from developing countries residing in the developed countries and the proceeds to be remitted to the countries of origin of the diaspora is well known. In recent years the voluntary contributions or remittances from the diaspora to their countries of origin have often been higher than the aid monies given to these countries. It is now increasingly recognised that the diaspora may have an active role to play in the development process of their countries of origin. They are not only a source of funds; they are also a rich source of skills and know how. This paper analyses the potential of the diaspora as agents of change in their countries of origin and argues that the social rate of return to a unit of diaspora investments may be higher than that for a unit of foreign direct investment from non-diaspora sources. 1. INTRODUCTION A MONG Professor Bhagwati’s major scientific contributions is his work on international migration of labour, dating back to his influential theoretical analyses of skilled migration almost four decades ago and continuing with other recent ideas such as the need for a World Migration Organisation. Bhagwati was also stimulated by Johnson’s (1965) and Grubel and Scott’s (1966) early discus- sions of the ‘brain drain’ phenomenon. His pioneering contribution here is on the analysis of appropriate taxation in the presence of international mobility of skilled labour. 1 Bhagwati’s proposal for a tax on skilled migrants (Bhagwati and Partington, 1976; and Bhagwati and Wilson, 1989), now known as the ‘Bhagwati tax’, has led to extensive policy discussions, most recently by economists and political scientists such as Desai et al. (2001). The most notable aspect of Bhagwati’s work in this area is that it represents the earliest theoretical analysis of what we would call today, as he himself suggested early on, the ‘Diaspora model’. Whilst Bhagwati’s early work aimed at issues relating to taxation of the diaspora, today we would extend the model to encom- pass interactions such as remittances which have grown immensely beyond levels imagined by Bhagwati and others in the 1960s, and the diffusion of technology that seems to occur massively from Silicon Valley to IT centres in Taiwan and India (and indeed back to Silicon Valley also). While the remittance issue is equally important, and perhaps more so with unskilled migrants who are more likely to send moneys back to their poor parents and siblings and nuclear families than are the skilled migrants, the technology diffusion aspect cries out for analytical treatment. We propose to do this by drawing on a model developed by Findlay (1978). Whilst the beginnings of international flows of human capital are to be traced to the 1960s and 1970s, recent data suggests that emigration of skilled people from 1 His work in this area has resulted in two influential volumes on ‘taxing the brain drain’ (Bhagwati and Partington, 1976; and Bhagwati, 1976), and the volume edited with his student John Wilson (Bhagwati and Wilson, 1989).