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.

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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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