July 20, 2016/IMF

EXECUTIVE SUMMARY
Emigration from Central, Eastern, and Southeastern Europe (CESEE) has been unusually large, persistent, and dominated by educated and young people. After the fall of the Iron Curtain in the early 1990s, the next quarter century featured large and persistent east-west migration flows. The Southeastern European (SEE) economies typically saw appreciably larger labor outflows than the Baltic and Central European countries. Many emigrants were well-educated and young; their exodus has sharply accentuated already adverse demographic trends in CESEE. Moreover, emigration appears to be permanent, with indications of only limited return migration so far. Against that backdrop, this paper examines the effects of emigration on private sector activity, competitiveness, public finances, and ultimately, growth in CESEE economies as well as the pace of their income convergence to Western Europe.

Emigration has led to positive outcomes for CESEE migrants themselves, and for the European Union (EU) as a whole. Economic migration driven by individual choice is part of economic development. By moving abroad, migrants seek to improve their own well-being as well as that of their families back home. Furthermore, east-west migration, especially of highly educated and skilled people, has likely benefited the main receiving countries in the European Union (EU) and, therefore, the EU as a whole. Existing research points to sizable benefits from increased cross-border labor mobility within Europe and elsewhere. Thus, migration is an indicator of success of the EU project, which sees freedom of movement as necessary for achieving greater economic integration, and ultimately, higher incomes.

But large-scale emigration—through its externalities—may also have slowed growth and income convergence in CESEE economies. The significant outflow of skilled labor has reduced the size of the labor force and productivity, adversely affecting growth in sending countries and slowing per capita income convergence. With this trend, emigration appears to have reduced competitiveness and increased the size of government, by pushing up social spending in relation to GDP, and made the budget structure less growth-friendly. These effects are particularly strong in SEE and Baltic countries. With income and institutional quality differentials between CESEE and Western Europe still wide, the push and pull factors driving emigration are likely to persist for some time. In the absence of determined and coordinated policies, there is a risk that emigration and slower income convergence may become mutually reinforcing.

This paper proposes a multi-pronged policy approach to mitigate the adverse impact of emigration on CESEE. Policies in sending countries should focus on (1) strengthening institutions and economic policies to create an environment that encourages people to stay, promotes return migration, and attracts skilled workers from other countries; (2) better utilization of the remaining workforce by increasing labor force participation and productivity; (3) better leveraging of remittances to promote investment rather than consumption; and (4) mitigating adverse fiscal impacts of emigration. EU-wide policies should consider adjusting the allocation method for the EU structural and cohesion funds to explicitly account for the negative effects of emigration on growth and convergence. This approach would also be consistent with the stated objective of these funds, which is to reduce economic and social disparities in the EU and promote sustainable development.