TRADE IN HUMAN CAPITAL: A QUANTITATIVE THEORY OF ECONOMIC GROWTH AND THE IMPORT OF HIGHER EDUCATION

Abstract

For a developing economy transitioning into knowledge-intensive sectors, the lack of capacity for advanced education poses a natural challenge. Many successfully industrialized countries used high-skilled foreign teachers to overcome this challenge. I present a stylized quantitative model of trade in high-skilled human capital, in which colleges in a developing country can hire high quality teachers from a developed country. In the model, the use of foreign teachers is proposed as a possible mechanism to build domestic capacity for advanced education. Quantitative calibrations of the model show two main results. First, there are significant frictions in human capital trade, as measured by the wedge between the level of human capital observed in the data versus the level simulated under the assumption of no frictions. Removal of the wedge can narrow the average income gap between the USA and other countries by about 14–24%. Second, relative to countries with the lowest and highest incomes, middle-income countries appear to gain the most from removing the wedge.