The mixed benefits of remittances

Recent years have seen international agencies like the World Bank and IMF extol the econmic benefits of remittances. Sending money to the folks back home boosts the incomes of developing countries and helps to offset losses fom the 'brain drain'. What's not to like?

Well, we wouldn't be economists if we weren't looking for unintended consequences. And sure enough, David Grigorian and Tigran Melkonyan have found some. Their recent IMF working paper Microeconomic Implications of Remittances in an Overlapping Generations Model with Altruism and Self-Interest studies the impact of remittances on Armenian households:

We demonstrate that when the migrant and the relative(s) cooperate to maximize the joint utility of the household, this leads to higher level of remittances as well as investment and hours worked by the relative(s). We use data from Armenia to test our predictions regarding implications of remittances flows on behavior of receiving households.

Consistent with our predictions, remittance-receiving households work fewer hours and spend less on the education of their children. While saving more, these households are not leveraging their savings to borrow from the banking system to expand their business activities. This evidence suggests that the benefits of remittances might be overstated and emphasizes the importance of measuring their impact in a general- rather than a partial-equilibrium context.

So remittances lead to households working fewer hours: "The coefficient is negative and significant and its magnitude is rather large." More surprising is the apparent negative effect on education. The authors conjecture:

The impact of remittances on education spending (column 3, Table 3) is perhaps the most controversial of our findings. The negative (and significant) coefficient here could be indicative of two things. First, it is possible that members of remittance-receiving households are likely to later migrate themselves and, therefore, not value the local education as much. Second, because their consumption patterns might be under scrutiny by the remitter, the receiving households may adjust their consumption pattern to look more conservative and be
centered around necessities (such as food and public services/utilities, and presumably not education and other types of spending that could be considered unnecessary from theremitter’s point of view). To the extent that remittances represent a large share of the receiving family’s income, for the same level of disposable income, this tendency to “simplify” the spending pattern could in fact lead to lower spending on education (in nominal terms) out of total income.

Families with remittances do accumulate more savings. While the costs of migration on households have a negative effect, it is "not large enough ..to offset the accumulation of savings due to remittances."

I would be interested to see if similar remittance effects are to found in other countries with high levels of emigration.

Comments

[notsneaky]

Thanks for the great pointer! I've got a student who'll be writing his senior thesis on a related topic next term - the impact of remittances on incidence of child labor. So far he's only gathered the data but one of his hypothesis is that in some instances remittances can actually increase the incidence of child labor. If households use the remittance money to finance start up of family businesses then they might pull kids out of school and have them be employed in the family business - if true, this would fit the finding with respect to education above.

But I'm not sure these are really "negative" consequences of remittances. The fact that people work less when receiving remittances seems like a straight forward income effect, and as long as leisure is a "good", there's nothing wrong with that. Likewise, the decision to lower investment in education in favor of investment in job-specific skills through employment in family business might, from the point of view of the household, be an improvement.

[François Godard]

Another negative aspect of remittances that has not been studied thoroughly as far as I know is social status real estate investment. I think of immigrants in France from northern Portugal and Kabylia (in Algeria) who invest considerable amounts in building villas and mansions back home publicising their economic success. These are usually not used more than a few weeks per year, built without proper building permit and, by any account, very destructive of the local landscape and undermining these poor areas future tourism potential. Moreover we are talking about poor rural areas where population is stagnating or declining (migrating to cities)and housing demand is weak and should remain so. Therefore the value of the houses is unlikely to rise, and the children of the immigrants, who will attain higher social status and will not put too much value on the image they project on their village of origin, are unlikely to want to use them for their holiday in the future.

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Having peopke working abroad is both a class statement as well as a sense of relief for many families in the third world countries. In countries like India and Philippines, the families of the overseas workers enjoy a far better lifestyle than those who don't have any relative living in the US or the UAE. But the socio economic effects of such a trend has been both negative as well as positive. On the positive side, the economies of these countries (India, Philippines, etc) have received a lot of money that has helped them to nmake their economies stronger, while on the flip side most overseas workers have been overburdened by the fact that they have to support their families back home while managing a difficult life in a foreign land. Also reports of harassment, torture and assaults have been rampant. With the US recession looming large, the going has certainly got difficult.

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But I'm not sure these are really "negative" consequences of remittances. The fact that people work less when receiving remittances seems like a straight forward income effect, and as long as leisure is a "good", there's nothing wrong with that. Likewise, the decision to lower investment in education in favor of investment in job-specific skills through employment in family business might, from the point of view of the household, be an improvement..

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Remittance can also refer to the accounting concept of a monetary payment transferred by a customer to a business. Remittances also foster, in the receiving countries, a further economic dependence on the global economy instead of building sustainable, local economies.

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But I'm not sure these are really "negative" consequences of remittances. The fact that people work less when receiving remittances seems like a straight forward income effect, and as long as leisure is a "good", there's nothing wrong with that. Likewise, the decision to lower investment in education in favor of investment in job-specific skills through employment in family business might, from the point of view of the household, be an improvement.

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Thanks for sharing such a nice stuff.International remittances are transfers of funds by foreign workers—"remitters"—who are living and working in developed countries typically to their families who are still living in their home countries. Examples include Middle Easterners living in Europe, Latin Americans in the United States, and Koreans or Filipinos in Japan. Although the use of remittance funds varies from country to country, the recipients of remittances commonly rely on them for living costs, education, and investments.

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I think of immigrants in France from northern Portugal and Kabylia (in Algeria) who invest considerable amounts in building villas and mansions back home publicising their economic success. These are usually not used more than a few weeks per year, built without proper building permit and, by any account, very destructive of the local landscape and undermining these poor areas future tourism potential.

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Economists and policymakers have studied remittance trends between Latin America and the United States extensively. Since this relationship has developed into one of the largest volume remittance markets in the world, it offers important illustrations of international remittances at work and how remittances create a vital tie between developed and developing countries.

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Most times remittnces are used to cover basic needs in those receiver's homes. It is because the the cost of living is high for them.

I see these exact behavior in Costa Rica and Nicaragua (Both Central American countries) Nicaraguan immigrants in Costa Rica explain that, they send money to their families to cover basic needs (Food, clothing, medicine come first need) and provide a better life style (some times a home and savings, then if it's possible, education)

I don't know much about Armenian situation but a generally need of human beings are to cover essential needs over others, in with education is place as an extra, not as an essential one

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Remittances, support families, but it indicates the country's situation is not good, also that is an important labor force that is leaving the country to be able to take care of family... the problem with it... Stadistics say that.. those families use the money for basic needs.. and have to possibilities to improve situation with education and other possible options

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