Topic 10

Remittances, Consumption and Investment

Since international remittances are so large, many researchers feel that how migrants spend their remittance earnings will have an important development effect on local economies. But the question of how migrants spend their remittance earnings is a topic of much lively debate.  Some studies claim that migrants spend most of their remittances on consumption goods (such as food and consumer goods), and that such patterns of expenditure tend to have little positive development effect on local economies. However, other studies find that migrants spend their remittance earnings on investment goods (like education, housing and business), and that these patterns of expenditure help to build human and physical capital. For example, remittance-inspired expenditures on education can help create the type of human capital that is often seen as an important condition for accelerated economic growth. Similar patterns of remittance-inspired expenditure on housing can create both better living conditions for migrants and new income and new employment opportunities for local people working in construction.

In a recent (and rather) pessimistic review of how remittances are spent, Chami et al (2003) report three “stylized facts”: (a) a “significant proportion, and often the majority,” of remittances are spend on consumption that is “status-oriented”; (b) a smaller part of remittance funds goes into saving or investment; and (c) the way in which remittances are typically invested – in housing, land and jewelry – are “not necessarily productive” to the economy as a whole.

However, these pessimistic findings are challenged by Adams and Cuecuecha (forthcoming) using household data from Guatemala.   Focusing on how households spend at the margin, these authors find that households receiving remittances spend less on one key consumption good – food – and more on two investment goods – education and housing – compared to what they would have spent on these goods without remittances.  These findings suggest that remittances can help raise the level of investment in human and physical capital in remittance-receiving countries.

Using data from El Salvador, Edwards and Ureta (2003) also find that households receiving remittances spend more on education.. Comparing how income from remittances and income from other sources affect school attendance, the authors found that remittance income has a much larger positive impact on school retention rates than income from other sources.  In urban areas of El Salvador the average level of remittances lowers the hazard that a child will drop out of elementary school by 54 percent.

Working in the Philippines, Yang (2005) also found that remittances tend to be spent on education.  This author analyzes how exchange rate shocks during the 1997 Asian financial crisis affect the expenditure patterns of households receiving international remittances.  Since the author has panel data from before and after the 1997 crisis, he is able to analyze how different types of exchange rate shocks – positive and negative – affect changes in the expenditure patterns of households receiving remittances.  Focusing on changes in household spending on education, he finds that a one-standard deviation increase in the exchange rate leads to a 0.4 percent increase at the margin in household expenditure on education.  The author notes that these remittance-inspired increases in spending on education can help build human capital in the Philippines at large.

A number of studies have found that migrants tend to spend more on housing.  For example, in a study in Nigeria, Osili (2004) found that older migrants and those with higher incomes are more likely to invest in housing.  At the mean, a 10 percent increase in migrants’ income increases the probability of investing in housing by 3 percentage points.  From the standpoint of the migrant, these remittance expenditures on housing represent an important form of local investment.

On the issue of remittances and business investment, Woodruff and Zenteno (2007) found that international migration (Mexico-to-US) is associated with a large (35 to 40 percent) increase in the level of capital investment.  Specifically, these authors found that, through remittances, migrant households in Mexico were able to obtain the capital needed to grow and expand their micro-enterprises (those with fewer than 15 employees).

Finally, in a more theoretical study, Osili (2007) examined the extent to which remittances to Nigeria and savings in Nigeria are influenced by altruism vs. insurance motives.  The author found that remittances to Nigeria are motivated by altruism because remittances increase as the family’s asset holdings (landholdings) at home declines.  However, savings in Nigeria are dominated more by investment motives because savings at home are positively associated with family assets.

On the whole, it is possible that migrant households – just like non-migrant households – spend a large portion of their incomes on consumption (food and consumer goods).  However, identifying the conditions under which migrant households spend more at the margin on investment goods (like education, housing and business), and the impact of these investments on local economic development, remains an important topic of inquiry.  What economic and socio-cultural factors shape decisions to allocate remittances to investment are examined further under Topics 8 and 9, while the developmental effects of remittance spending are examined under Topics 10 through 17.

 

Topic 10 – Articles

Adams, Jr., Richard, and Alfredo Cuecuecha, 2010. Remittances, Household Expenditure and Investment in Guatemala. World Development 38 (11): 1626-1641. (Publisher Link)

This paper uses a nationally-representative household survey from Guatemala to analyze how the receipt of internal remittances (from Guatemala) and international remittances (from United States) affects the marginal spending behavior of households on various consumption and investment goods.  Controlling for endogeneity and selection, it finds that households receiving international remittances spend less at the margin on one key consumption good – food – compared to what they would have spent on this good without remittances.  The paper also finds that households receiving either internal or international remittances spend more at the margin on two investment goods – education and housing – compared to what they would have spent on these goods without remittances.

Edwards, Alejandra Cox, and Manuelita Ureta. 2003. International Migration, Remittances and Schooling:  Evidence from El Salvador. Journal of Development Economics 72 (2):429–461.

This paper uses a nationally-representative household survey from El Salvador (1997 EHPM) to analyze the impact of international remittances on school retention rates in El Salvador.  The authors use a Cox proportional hazard model to compare how two types of income, income from remittances and income from other sources, affect school attendance.  Results suggest that income from remittances has a much larger impact on school retention rates than income from other sources.  In urban areas, the average level of remittances lowers the hazard that a child will drop out of elementary school by 54 percent.

Osili, Una. 2007. Remittances and Savings from International Migration: Theory and Evidence Using a Matched Sample. Journal of Development Economics 83 (2):446–465. 

This paper uses a small, non-representative matched survey of Nigerian migrants in the US and their origin families in Nigeria (1997) to examine savings in the country of origin.  Since the study has information on both migrant- and origin-household characteristics, it is able to reduce concerns about omitted variable bias.  Results suggest that remittance transfers are motivated by altruism:  remittances sent home increase as the family’s asset holdings (landholdings) at home declines.  However, savings in the origin country are dominated by investment motives because savings at home are positively associated with the family’s asset holdings at home.   The author also finds that unskilled and less-educated migrants have higher savings rates at home.

Osili, Una. 2004. Migrants and Housing Investments:  Theory and Evidence from Nigeria. Economic Development and Cultural Change 52 (4):821–849. (Publisher Link)

This paper uses a small, non-representative household survey of Nigerian migrants in the US (1997) and migrant households in Nigeria to examine how migrants invest international remittances in housing in Nigeria.  It finds that older migrants and those with more income are more likely to invest in housing in Nigeria.  At the mean, a 10 percent increase in migrants’ income increases the probability of investing in housing by 3 percentage points.  Economic shocks in Nigeria, such as funerals, job loss and crop failure, also lead to an increase in the amount of remittances spent on housing.

Woodruff, Christopher, and Rene Zenteno. 2007. Migration Networks and Micro-Enterprises in Mexico. Journal of Development Economics 82 (2):509–528.

This paper uses a survey of micro-enterprises (fewer than 15 workers) in Mexico (1998 ENAMIN) to examine how migration networks affect the level of capital investment in micro-enterprises.  Most of the enterprises included in the study are very small:  60 percent of them hire no employees at all.  The authors find that international migration (to the US) is associated with a 35 to 40 percent increase in the level of capital invested in a micro-enterprise.  Examining the level of investment by type of asset, the authors find that investment in tools and vehicles are both associated with stronger links to migration networks and international migration.

Yang, Dean. 2005. International Migration, Human Capital and Entrepreneurship:  Evidence from Philippine Migrants’ Exchange Rate Shocks. In World Bank Policy Research Working Paper 3578. Washington, DC: World Bank.

This paper uses four linked nationally-representative household surveys from the Philippines to analyze how exchange rate shocks during the 1997 Asian financial crisis affect international remittances and household spending on education.  The author finds that positive exchange rate shocks lead to a significant increase in remittance expenditures on education.  A one-standard deviation increase in the size of the exchange rate shock lead to a 0.4 percent increase in household expenditure on education and a 1.6 percent increase in the likelihood of a child being a student.