Brain drain is a sadly well-known phenomenon in many countries and it usually refers to an international flow of high-skilled workers from some countries to countries that for some reason are more attractive. The mechanism behind it is simple: People observe an unfavorable job market situation, do not foresee any improvement in the short-run and emigrate to countries that offer better opportunities. This in turn generates even worse job market outcomes in their countries of origin making their prediction correct. But what if the brain drain is at work within the national borders and talents are displaced from productive activities in their own countries?
Misallocation of talents in high income countries usually comes in the form of workers allocated to sectors different from those that would maximize social welfare. This misallocation can be caused by wrong incentives given by policy makers (e.g., wrongly placed subsidies) or, more in general, by sectors that for some reasons (e.g., market failures) become too big compared to their social optimum. A (somewhat controversial) example of this is well described in a famous quote from Tobin (1984):
“… We are throwing more and more of our resources, including the cream of our youth, into financial activities remote from the production of goods and services, into activities that generate high private rewards disproportionate to their social productivity.”
The misallocation of talents in low income countries might come from another source and potentially be much more costly in terms of economic development. In the past decades, the trend for international and non-governmental organizations has been to hire more and more local employees. It seems to make perfect sense, right? Who better than people who grew up in a certain environment knows what people need and expect? And who could better communicate with the people targeted by developmental programs if not their peers? Moreover, since local employees will tend to spend (a bigger share of) their salaries locally, it might be another way to indirectly help the local economy. One thing that is less discussed is what is the counter factual. That is, what would have these people done in the absence of IOs and NGOs? International organizations tend to hire all sort of worker. From low-skilled workers to monitor the activities on the ground to highly educated (often in Western universities) workers to manage the activities. And it is this last group that concerns me the most: Is it possible that IOs and NGOs are taking away potential entrepreneurs from the local economies with the promise of an international low-risk career and high salaries?
I have discussed the topic at length in the past months and some people have argued that maybe there is not such a big room for entrepreneurial activities in low income countries and that maybe these people would have not returned to (or stayed in) their home countries after getting their degrees without the possibility to work for an IO. Also, employees of international organizations might be able to acquire skills and connections that might help them later in life if they want to start an activity on their own.
I have doubts that the first argument is sound: During my (admittedly limited) experience in Africa, my feeling was that there was room for entrepreneurial activities. Factories run by Chinese or Indian nationals were quite common and the main problem seemed to be one of credit and infrastructure (or trade networks) more than one of entrepreneurial opportunities. However, being an entrepreneur is certainly riskier than a career in an IO/NGO, in particular in a context of chronic political instability. The second argument is without doubt a valid one, although as speculative as mine.
I think that ultimately the answer to this question is an empirical one and I would like to see some good empirical work on the topic, because I think it is central for building development programs in an efficient way. In particular, it would be interesting to calculate the salary that employees of IOs and NGOs should receive (taking into consideration the trips and all the goodies that come with an international career) not to unfairly compete with local labor markets and what are the costs and benefits to the local economy. The answer is probably not an easy one (it sounds a bit like the old question: Are development programs useful?), but I think that this topic deserves some serious studies and a careful discussion within international organizations.
Disconnected Thoughts 
One more thing to consider in defense of IOs/NGOs hiring locally. In formerly colonized countries, the economic elite is mostly composed of foreigners (traditionally from the former colonial power and more recently from emerging Asian countries) while the political elite is formed of corrupt and very often incompetent local people backed by and protecting the interests of the economic elite. In those countries, labor markets are largely inefficient because of widespread practices of nepotism, cooptation, and corruption (which in some part explains why businesses in Africa are commonly run by Chinese or Indian nationals). In that context, IOs/NGOs can constitute an important countervailing force by offering an elite training to talented local people who would have never had any real economic opportunities due to lack of connections. Those people can in turn use their experience profitably in the private sector, in politics, or give to their peers the chance to benefit from their international connections. So rather than contributing to the misallocation of talents in the economy, I see IOs/NGOs as channels through which the elite in developing countries can become more diverse and more competent. Obviously this point is valid only if IOs/NGOs do a good job at selecting local candidates and do not themselves adopt incestuous/dubious hiring practices.