Chapter 17 The Economics of Migrants' Remittances

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Abstract

This chapter reviews the recent theoretical and empirical economic literature on migrants' remittances. It is divided between a microeconomic section on the determinants of remittances and a macroeconomic section on their growth effects.

At the micro level we first present in a fully harmonized framework the various motivations to remit described so far in the literature. We show that models based on different motives share many common predictions, making it difficult to implement truly discriminative tests in the absence of sufficiently detailed data on migrants and receiving households' characteristics and on the timing of remittances. The results from selected empirical studies show that a mixture of individualistic (e.g., altruism, exchange) and familial (e.g., investment, insurance) motives explain the likelihood and size of remittances; some studies also find evidence of moral hazard on the recipients' side and of the use of inheritance prospects to monitor the migrants' behavior.

At the macro level we first briefly review the standard (Keynesian) and the trade-theoretic literature on the short-run impact of remittances. We then use an endogenous growth framework to describe the growth potential of remittances and present the evidence for different growth channels. There is considerable evidence that remittances (in the form of savings repatriated by return migrants) promote access to self-employment and raise investment in small businesses, and there is also evidence that remittances contribute to raise educational attainments of children in households with migrant members. Investigation of the effects of remittances on outcomes such as children's education and health raise identification issues, however, as we explain below. Finally, the relationship between remittances and inequality appears to be non-monotonic: remittances seem to decrease economic inequality in communities with a long migration tradition but to increase inequality within communities at the beginning of the migration process. This is consistent with different theoretical arguments regarding the role of migration networks and/or the dynamics of wealth transmission between successive generations.

Introduction

During the last two decades, the economic analysis of remittances has experienced a dramatic renewal, applying and sometimes initiating the development of new economic tools and approaches. First of all, the microeconomics of remittances has focused since the early 1980s on the role of information and social interactions in explaining transfer behavior. This resulted in a deep change in the way economists look at the determinants of remittances, with familial and strategic motives being increasingly acknowledged for alongside more traditional motivations. From a macroeconomic perspective, new growth theories have also profoundly altered the directions for research on the impact of migration and remittances. While previous research in the 1970s and 1980s was centered on the short-run effects of international transfers, mainly within the framework of static trade models, the focus gradually shifted to long-run considerations, notably the role of remittances in the dynamics of inequality and development.

To the best of our knowledge, there is no comprehensive survey on the economic analysis of remittances, at least no recent survey that would cover the new theoretical and empirical findings mentioned above.1 These findings provide answers to questions such as: Who transfers? Why? How much? And, most importantly, what are the economic consequences of remittances for developing countries? The answers to the first three questions do not necessarily differ from those exposed elsewhere in this handbook for other types of private transfers. However, the context in which remittances take place, that of developing countries, makes them unique in many respects. First, developing countries are characterized not only by high levels of poverty, but also high levels of inequality and income volatility (which, in turn, make access to credit and insurance so crucial); since remittances have an effect on each of these dimensions, their overall economic impact—and, hence, the marginal value of a dollar of remittances—is likely to be quite large. Second, developing countries are also characterized by pervasive capital markets imperfections, offering no market response to the needs for credit and insurance of the majority of the population; therefore, despite being voluntary and altruistic to a large extent, remittances differ from most private transfers observed in Western countries in that additional motives (insurance, investment, and exchanges of various types of services) are central to explaining transfer behavior. Third, with few exceptions, private transfers in the Western countries either take place “anonymously”—in the sense that donors do not necessarily know the identity of the beneficiaries (e.g., charity, philanthropy)—or within a very restricted familial group; by contrast, remittances are increasingly recognized as informal social arrangements within extended families and communities. Finally, while most public and private transfers tend to reduce economic inequality, this needs not be the case for remittances: the presence of liquidity constraints that impinge investment in migration and education, combined with the use of inheritance procedures to monitor the migrants' behavior, sometimes generate patterns of remittances that tend to increase inter-household inequality.

Another challenging aspect of the study of remittances is related to data collection and analysis. At a macro level, it is not always possible to test appropriately for the macroeconomic impact of remittances because of poor data quality; at a micro level, it is extremely difficult to discriminate between competing theories of remittances, which often share similar predictions as to the impact of the main right-hand-side variables, implying that truly discriminative tests have to rely on additional variables for which details are not always available. In spite of these limitations, there is a lot to learn from existing data on remittances. For example, international data reveal that workers' remittances often make a significant contribution to GNP and are a major source of foreign exchange in many developing countries. For some countries, it is not uncommon to observe flows of remittances that equal about half the value of their exports or 10% of their GDP (see Table 1). This is or was the case for relatively small Caribbean and Pacific countries, but also for traditional labor-exporting countries such as Egypt, Turkey, or Pakistan.2 In the case of Mexico, it has been estimated that remittances received in 1989 amounted to 10% of merchandise exports, 65% of earnings from tourism, were equivalent to agricultural exports, and sufficient to cover three times the balance of payments deficits (Durand et al., 1996); more recently, the Bank of Mexico estimated that Mexican migrants remitted in 1998 about 1.5% of Mexico's GDP, with remittances reaching as much as 10% of GDP in one Mexican State (Michoacan). These figures exclude internal (mainly urban-rural) remittances and informal international remittances and are therefore probably well below the actual figures.3

A maybe more meaningful way to assess the economic role of remittances is to rely on household surveys and estimate the proportion of households for which remittances are an important source of income. Such surveys tend to show that remittances are often a crucial element of survival and livelihood strategies for many (typically rural) poor households. For example, Rodriguez (1996) reports that 17% of Philippines' households receive income transfers from abroad, representing 8% of national income. Similarly, Cox et al. (1998) found that 25% of Peruvian households receive private transfers (mainly remittances), representing 22% of their incomes. On a more reduced scale, de la Brière et al. (2002) show that approximately 40% of the households in the Dominican Sierra, a poor rural region of the Dominican Republic, have migrant members, 52% of whom are sending remittances. For El Salvador, Cox-Edwards and Ureta (2003) find that 14% of rural and 15% of urban households received remittances from friends and relatives abroad in 1997. These studies, as well as many others detailed below, show that remittances are instrumental to achieving mutual insurance, consumption smoothing, and alleviation of liquidity constraints.

As to their economy-wide consequences, it is clear that remittances may have a short-run macroeconomic impact through their effects on price or exchange rate levels. The long run implications of remittances, however, would seem to be more significant. First, remittances impinge on households' decisions in terms of labor supply, investment, education, migration, occupational choice, fertility, etc., with potentially important aggregated effects. Secondly, another channel through which remittances may affect a country's long-run economic performance is through their distributional effects and impact on economic inequality, a key issue from an endogenous growth perspective. Once we know that the amounts at stake are important and their potential economic impact is significant, it is worth trying to understand the determinants of remittances. This is the purpose of section 2 on the size and motives of remittances. Section 3 details the macroeconomic consequences of remittances, and distinguishes between short-run and long-run effects. Section 4 offers concluding remarks.

Section snippets

The microeconomics of remittances

Is the study of remittances in essence distinct from that of migration? To answer this question, we refer to Edward Funkhouser's (Funkhouser, 1995) comparative study on remittances to the capital cities of El Salvador and Nicaragua. In this study, Funkhouser noted that while the number of migrants and the general economic conditions prevailing in the two countries during the 1980s were quite similar, twice as many households received remittances from relatives abroad in San Salvador than in

The macroeconomics of remittances

Before we begin the analysis of the macroeconomic impact of migrants' remittances, a terminological disclaimer may be required. In the microeconomic section, remittances were defined as an interpersonal transfer between the migrant and his or her relatives in the home country. Accordingly, we did not include temporary migration—understood as a strategy aimed at accumulating enough savings abroad to start an investment project upon return at home—among the different motivations to remit reviewed

Conclusion

This chapter shows that in general migration and associated remittances tend to have an overall positive effect on origin countries' long-run economic performance. It is beyond the scope of this survey to evaluate whether emigration is a sustainable development strategy or to ask whether governments should try to impact on the migrants' skill composition or immigration status (e.g., temporary or permanent visas). However, two relatively modest policy issues can be briefly discussed further: (i)

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