Review of Global Evidence John Page and Sonia Plaza The World Bank

The Impact of Remittances on Growth, Poverty and Inequality

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The Impact of Remittances on Growth, Poverty and Inequality

Many studies agree that remittances are primarily used for household expenditures, such as the construction of homes and consumption. (Black, 2003; Martinez Pizarro and Villa 2005). These transfers have consequences at both the household level and at the level of the economy as a whole, affecting macroeconomic management, labor force participation, education and health outcomes, income distribution and patterns of household expenditure.

Remittances, economic growth and macroeconomic management

Large and sustained remittance inflows – like other sources of exogenous foreign exchange, such as development assistance -- can cause an appreciation of the real exchange rate, making tradable goods production less competitive overall, and perhaps making low cost manufacturing unprofitable. Empirical evidence on the adverse effect of large inflows of foreign exchange is scarce. It is even more scarce with reference to remittances. Amuedo-Dorantes, Bansank, and Pozo (2004) find that a doubling of worker’s remittances results in real exchange rate appreciation of about 22 percent in a panel of 13 Latin American countries.

Whether exchange rate appreciation has a longer term impact on growth, however depends on the consequences of the shift in the structure of the economy for savings, investment and productivity change. Much of the theoretical and empirical literature concerning the impact of the so-called “Dutch disease” on growth rests on a loss of externalities associated with technological mastery in manufacturing, particularly in nontraditional exports. This is an area of research that remains largely unexplored.
Several studies have been undertaken to test the impact of remittances on GDP growth. Their results have been mixed. Faini (2002, 2003) finds a positive relationship between growth and remittances using cross-country data. Although his results are not robust to alternative specifications (IMF 2005). Bougha-Hagbe (2004) finds that increased construction activity is correlated with remittances. Adelman and Taylor (1990) find that “every dollar Mexican migrants send back home or bring back with them increases Mexico’s GNP from anywhere between US$ 2.69 and US$ 3.17, depending on which household income group received the remittances”, and Durand, Parrado and Massey (1996) suggest that for every US$ 2 billion in remittances that entered Mexico, there was over a US$6.5 billion dollar production increase in agriculture, manufacturing and services. Spatafora (2005) in contrast finds that there is no direct link between real per capita output growth and remittances. Chami et al (2005), using a panel of data for 113 developing countries find that remittances have a negative effect on economic growth. They argue that receiving remittances might lower recipient households’ labor force participation or savings rates and limit their job search efforts.
Microeconomic analyses of the growth potential of remittances have tended to focus on their impact on investment and productivity in the senders’ countries of origin. Early discussions of the effects of migration on development concentrated on the uses of remittances. The effect was judged negative or positive, depending on whether remittances were used for consumption or investment. Bohning (1975) and Rempel and Lodbell (1978) for example, argued that remittances reduced investments by promoting greater finance consumption or housing expenditures. Stark (1991) in contrast argued that remittances are fungible and investment may increase, even if the cash received is not invested immediately. Since the 1980s the debate has shifted to underscore the importance of remittances in alleviating liquidity constraints in low income households, promoting investment in new agricultural techniques, education and further migration. (Stark, Taylor and Yitzhaki, 1986 1988, Taylor and Wyatt, 1996). Another strand of this literature suggests that at the household level remittances can spur entrepreneurial activity (Funkhouser 1992, Yang 2004, Woodruff and Zenteno 2001).

Remittances offer some important advantages from the point of macroeconomic management in poorer countries. Remittances tend to be relatively stable, so that the resulting real exchange rate level may be sustainable (IMF 2005). Sometimes, remittances may also behave counter-cyclically with respect to the economic cycle of the recipient country. Surveys indicate that relatives and friends often send more remittances in response to negative shocks or a general downturn, and more affluent migrants portfolio choices are affected by exchange rate movements. Yang (2004) for example shows that remittances respond positively to falls in the real exchange rate.

Thus, the greater stability of remittance flows and their anti-cyclicality may contribute to the stability of recipient economies by compensating for foreign exchange losses due to macroeconomic shocks. Remittances can also serve as an important support for a country’s creditworthiness and improve access to international capital markets (World Bank 2003). One question that still remains is the sustainability of remittances over time. Recent studies have indicated that the long term flow of remittances depends on various factors such as the anticipated flow of migration, whether the migrants come alone or with their family, and how this changes over time (Solimano 2004).

Migration, remittances, poverty: evidence from cross country studies.
Adams and Page (2005, forthcoming) use a large data set that includes information on international migration, remittances, income inequality and poverty for 74 developing countries to estimate the relationship between migration, remittances, and the extent, depth and severity of poverty. The authors find that remittances have a strong impact on reducing poverty, controlling for income (or its growth) and inequality. For example, a 10 percent increase in the share of international migrants in the population or of remittances received in GDP reduces the fraction of people living on less than one dollar per day by 1.9 and 1.6 percent, respectively. Their results also indicate that the depth and severity of poverty were even more strongly reduced by increases in migration and remittances.20 They speculate, that the reason for the impact of remittances on poverty, independent of changes in mean survey income, may reflect a positive distributional bias in the targeting of remittances that is not captured in changes in the gini coefficient, their measure of income inequality, due to the lack of frequency of household surveys on which the distributional data are based.21
Recent cross country studies broadly confirm the Adams-Page results. Spatafora (2005) reports similar results using data from a sample of 101 countries for the period 1970 – 2003. Her results show there is a link between poverty reduction, whether measured using the poverty headcount or the poverty gap, and remittances. Munzele (2005) uses a cross-country data set composed of 71 developing countries to estimate a growth-poverty model. His results show that “official international remittances reduce poverty in the developing world”, but he finds that “in South Asia, official remittances have no statistical impact on the level and depth of poverty.” When he adds estimated values for unofficial remittances to official remittances figures, however he finds that total remittances reduce the level of poverty in South Asia.
Remittances and poverty at the household level
Sthal (1982), Stark (1991), and Adams (1991) pioneered the effort to assemble household data that could shed light on the impact of remittances on welfare. The generality of their findings was limited by small sample sizes. In the past five years, data have become more complete and analysts are using national census and household surveys to study the relationship between remittances and some aspects of household welfare. Quartey and Blanson (2004) increase use the most recent waves of the Ghana Living Standards Survey to estimate the impact of remittances on the household. Using a random effects model, they find that: 1) the flow of migrant remittances to Ghana increases in times of economic shocks; 2) the impact of economic shocks in reducing household welfare is reduced by migrant remittances; and 3) the proportion of males receiving migrant remittances exceeds that of females. Adams (2004) has found that remittances reduce the severity of poverty in Guatemala. According to the author, “when the poorest of the poor households receive remittances, their income status changes dramatically.”

Migration and health and education outcomes
A few empirical studies have found positive linkages between migration, and remittances and education or health outcomes. Rapoport and Docquier (2005) report that remittances can have positive effects on the educational attainment of children from households with migrant members. Hanson and Woodruff (2002) writing on Mexico find that children in households with a migrant family member completed more years of schooling. Cox Edwards and Ureta (2003), find that in households with at least one family member living abroad in El Salvador, remittances significantly contributed to a reduction in the probability of children leaving school. When Dean Yang (2003) analyzed the impact of remittances on Filipino households he found that “a rise in remittances of 10 percent of initial income will increase the fraction of children, aged 17 to 21, attending school, by more than 10 percentage points.”
Frank and Hummer (2002) report a positive correlation between remittances and health profiles for Mexican households receiving remittances. They conclude that children born in remittance receiving migrant households are less likely to be exposed to health risks at birth. Hildebrant and McKenzie (2005) found that migration from Mexico to the United States improved child health outcomes in Mexico, resulting in lower rates of infant mortality and higher birth weights. An interesting finding of the authors’ research is that mothers in migrant households have more health knowledge than their counterparts in non-migrant households, importantly, they also find significantly higher levels of health knowledge among non-migrant households in high migration communities, supporting the hypothesis that knowledge spillovers exist within these communities.
Lopez Cordova (2004) uses a cross-section of all Mexican municipalities (over 2400) in the year 2000 to look at the impact of migration on education and health outcomes. He finds that as the proportion of households receiving remittances rises in a community, developmental outcomes improve. “If the fraction of remittance-receiving households increased by five-percentage points, starting from zero, infant mortality falls by almost five percent, children’s school attendance rises by more than 3 percent, while illiteracy drops by 34 percent.”

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