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The impact of human capital migration on Aruba’s economy

Updated: Sep 16, 2018

Every year a significant number of students leave the country in pursuit of their professional aspirations. This is because the choice for higher education in Aruba is very limited, the number of colleges and universities and their degree offerings are not extensive, and as such students are likely to move abroad to countries such as: the Netherlands or the United States to pursue a degree.

According to data from the Central Bureau of Statistics (original source: Department of Education), 5.1 percent of students who were granted a student loan to study in Aruba pursued a Masters degree, 41.9 percent a Bachelors degree and 53.0 percent an Associate degree (2008). Those who studied abroad, 2.1 percent received a loan for an Associate degree, 80.6 percent for a Bachelors degree and 17.3 percent for a Master's degree. However, it is unknown how many actually attained the degree and returned to Aruba.

The outflow of students equals an outflow of human capital, which has its effect on the production factors that drives growth in an economy, particularly if such human capital never returns. Human capital is defined as a set of skills and competences possessed by the labor force and which have a direct positive effect on the level of economic development.

Therefore, understanding this migration phenomenon should be given the proper attention, especially in small-island economies where economic diversification has been challenging. The Government of Aruba (GOA) offers students financial support (loans) to enable them to pursue their degree (either local or abroad). This naturally has its implications on public finances.

There is no clear understanding of the direct and indirect impact of “brain drain” for the economy of Aruba, as quantitative studies in this area has not been conducted over time.

We can try to understand and shed some light on the potential economic impact that the outflow of human capital can have on Aruba by considering the current key tendencies that makes the local economy vulnerable to this occurrence. One study found that a one-year increase in the average education of a nation's workforce increases the output per worker by between 5 and 15 percent (Barro and Sala-I-Martin 1995).

Low levels of education, slow economic growth, the studies argue, damage the earnings of low-skilled workers, and increase poverty. There are also, however, positive indirect impacts (Lowell and Findlay 2002). "Optimal brain drain" theory finds some support for the notion that the possibility of emigration for higher wages induces more students in the sending country to pursue higher education.We will focus on highlighting some of the current local economic trends and conditions that are important in light of this subject.

1. Ageing population

Aruba is challenged with a growing ageing population; latest statistics show that the ageing index has doubled in 10 years from 2000 to 2010 (Central Bureau of Statistics Aruba). The old age dependency ratio has been increasing as well with a growth from 24.1 in the year 2000 to 29.1 in 2010 (old age dependency ratio is the number of 60+ per 100 employees). As the population is getting older, the health care system and its pension system are under pressure. It is therefore crucial to upturn the number of contributors to the system. As the population gets older and the demand for health care increases, health care costs will be under pressure, which is crucial for the sustainability of government finances and its revenue. This ageing trend has further a ripple effect on different economic factors, such as tax revenue.

Source: Central Bureau of Statistics

2. Labor productivity

Available statistics show that from 2000 to 2010 labor productivity has been on a decline. Real GDP per capita as the measure of the standard of living has been dropping as well. The future growth of labor productivity and our standard of living will depend on labor input; professionals and or graduate students play an important role as the engine for productivity growth. The decline in labor productivity has its implication for the future income of our elderly, but also for the current younger working population who are likely to carry the burden of higher costs of retirees and health care in the future.

Source: ‘Economic consequences of ageing’, Martijn B., 2011

Data source: Central Bank of Aruba

3. Tourism sole economic pillar

The economy of Aruba is dependent on one main source of income, which is the tourist industry. This has created a demand for low skilled workers (mainly from abroad), as such this sole economic driver has not been fully successful in creating employment for the higher skilled entry levels. The latter has its implication for the attractiveness of Aruba for the graduate students and their career development. Furthermore, it has its implication to incentivize labor productivity.

Furthermore, the IMF has attributed the slowdown in economic growth in Aruba since the 1990s largely to falling total factor productivity (TFP). The report notes that the economy’s reliance on the labor-intensive tourism industry could lead to lower growth in the future on the assumption that other sectors are more prone to stimulate productivity growth.

The return of graduate students could contribute to the economic diversification and reduce the reliance on tourism exports and reduce therefore the risk for external shocks that comes with the industry. Furthermore, returnees can play an important role in the modernization of some enterprises, introducing new technologies and adopting new tools and skills acquired abroad.

Meanwhile, there is little evidence that work experience from employment abroad is actually applied in small businesses owned or organizations employed. Furthermore, if returning students do not work in the profession they were trained for, they could lose their skills in a certified profession as a consequence.

A study further shows that the top 3 most important reasons for professional engagement are (1) professional development in the workplace (77.2 percent), (2) organizational atmosphere (72.5 percent) and (3) stimulating work environment (69.6 percent) ( Peterson, 2015). Hence, the attractiveness and career advancement possibilities are important factors to attract future or current young professionals.

Another study shows that there are several reasons students are not coming back to Aruba: (1) Future labor market prospects, (2) sensation seeking (adventure), (3) gain of human capital abroad (skills such as: language), while earnings are not as important as the perceived opportunity for personal growth. Positive determinants to return are security, safety, comfort and the sense of contributing to the island (Upegui, 2010).

4. Growing government debt

Aruba is encountering unsustainable levels of debt. This growing debt is asking for a systematic adjustment in Aruba’s fiscal balance in important (policy) items such as: health care, the pension system and (tax) revenues. The provision of student loan opportunities granted by the government is also a concern for the government budget and not having a proper pay-back system to ensure that student loans are paid back can cause a disruption in formulating realistic government budget, this has also been indicated by the supervisory board CAFT.

Furthermore, the loss of human capital caused by non-returning graduate students to Aruba result in a negative return on investment for the country.

Data Source: Central Bank of Aruba

To conclude

In 2009, the government introduced a new (policy) incentive, which entailed a 30% discount on student’s loans to students who return – however: according to a study the debt discount will not have a clear effect on the Aruban’s students intention to return, considering what drives the student to come back (Upegui, 2010). Furthermore, little is known on how this policy will function in practice and how Aruba will accommodate potential job seekers.

While definite conclusions are still waiting on more solid data, concerned observers are still discussing this important subject of “brain drain”. The challenge is to implement immigration policies and multilateral agreements that optimize the flow of skilled migrants. Research must be ongoing, but it must also entertain a variety of outcomes and be willing to delve into sub-sectors of the political economy.

This article was written by Lay Hing Yee, MSc. in Finance, prepared for the organization Mind Your Choice Netherlands.


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