Sep 28, 2013

Remittances: Good or Bad?

Wikimedia Commons. Author: Tomas Castelazo
Migration is a hot topic. And if you are an economists and you do not support free migration, and even more, open borders, there is something wrong with you (the evidence is overwhelming). There are some contrarians out there, if we can call them that. 

In the past few decades some highly successful antipoverty programs have come out: China's reforms, India's reforms, and in a less comparable scale some cash transfers programs in Mexico. Immigration is another highly successful antipoverty program. And it is interesting how our perceptions of migration have changed, from the "brain-drain" - with a negative connotation - point-of-view in highly popular econ-development textbooks, to "brain-circulation," and finally the recognition that plain migration brings many benefits even for those left behind. 

I am puzzled however by some evidence of the effects of remittances on the labor market in remmittances-receiving countries. Simplifying, remittances can affect labor markets in two ways: (1) they provide capital for consumption and entrepreneurial ventures, and (2) they can discourage workers who substitute labor for leisure. The particular effects can be highly contextual and the issue is definitely empirical. I came across this paper by Pablo Acosta 
This paper uses a 4-year rural panel survey from El Salvador to analyze the effects of international migration and remittances on labor force participation. To account for the possible endogeneity of remittances, the author uses a fixed effects probit on the 4-year panel. Results suggest that with the receipt of international remittances, labor force participation falls more for women than for men. For instance, urban females in remittance-receiving households are 42.2 percent more likely to quit the labor market, while urban males in remittance-receiving households are only 9 percent more likely to quit. The authors also find both males and females reduce their total hours worked per week when they receive remittances. Urban males and females in remittance-receiving households reduce their hours worked per week by 24.4 and 20.8 percent, respectively.
I have posted other papers on that issue. How can we make sense of those apparently different results? The case of El Salvador in the paper above suggests a possible negative effect. But as we will see, that is not totally clear, and even incorrect. 

We would like to see more investment instead of more leisure as a consequence of remittances. But if we think carefully leisure is also an economic good, and more consumption of it can be also a good thing. Can we say that remittances are harming some societies because they reduce labor supply in formal (or even informal) markets? Probably not, because when people substitute work for leisure their preference reflect that they are choosing something that is "better" [some arguments from behavioral economics can complicate this]. 

In the conclusions of the paper cited above the author indicates that some people who leave the labor market might become self-employed, and even employers. That being said, the long term consequences are hard to predict. Some people might become dependent on remittances and their leaving of the labor market for a long time can handicap them if they don't do anything at all, and in that case they might not get the skills to compete if (when) remittances stop coming or are reduced. 

There is room for public policy, and even better, for private financial institutions in developing countries to provide services and products to inform migrants of the ways they could invest remittances. My colleague Diego Aycinena has an interesting co-authored paper on that
While remittance flows to developing countries are very large, it is unknown whether migrants desire more control over how remittances are used. This research uses a randomized field experiment to investigate the importance of migrant control over the use of remittances. In partnership with a Salvadoran bank, we offered US-based migrants from El Salvador bank accounts in their home country into which they could send remittances. We randomly varied migrant control over El Salvador-based savings by offering different types of accounts across treatment groups. Migrants offered the greatest degree of control over savings accumulated the most savings at the partner bank, compared to others offered less or no control over savings. Effects of this treatment on savings are concentrated among migrants who expressed demand for control over remittances in the baseline survey. We also find positive spillovers of our savings intervention in the form of increased savings at other banks (specifically, banks in the U.S.). We interpret the effects we find as arising from the joint effect of the bank account offers and the marketing pitch made to study participants by our project staff.

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