Topic 12

Remittances and Multiplier Effects

While international remittances are primarily private transfers from a migrant working abroad to his/her household back home, the way in which these remittances are spent by the migrant household may have important second- and third-round effects on the broader economy.  For example, migrant expenditures on housing may create new income and employment opportunities for low-income people working in construction as well as open new business opportunities for merchants selling building supplies.  Identifying the scope and magnitude of these remittance-multiplier effects is thus an important topic in the literature.

In one of the more ambitious studies, Glytsos (1993) examines the direct and indirect effects of international remittances on production, imports and employment on the Greek economy in 1971.  The author finds that remittances generate a multiplier effect of 1.7 on total gross output, with the highest multiplier effects being in the apparel, machinery and construction industries.  In other words, a remittance of $1 million dollars would increase Greece’s gross output by $1.7 million dollars.  Remittances also lead to a rise in imported goods, but these imports represent only 5 percent of total Greek imports.  On this basis, Glytsos (1993) emphasizes that remittances leakages to imports do not have a major impact on the trade deficit.

In a micro-based study based on one rural area, Taylor (1995) examines the direct and indirect effects of international remittances on one Mexican village.  He finds that international remittances generate a multiplier effect of 1.6; that is, a remittance of $1 million dollars would raise the village’s value-added output by $1.6 million dollars.  When disaggregated by income group, the author finds that most of the first- and second-round effects of remittances go to large- and small-landholding households; landless households gain relatively little from the multiplier effects of remittances.

In another Mexican-based study, Taylor and Dyer (forthcoming 2008) use a general equilibrium model to examine the direct and indirect impacts of international migration on prices, wages and investment in rural Mexico.  They find that the direct effects of migration are smaller than the indirect effects. In the short-term, a 10 percent increase in returns from international migration lead to a 5 percent increase in rural wages and a 52 percent marginal increase in investment in education.  In the long-term, a similar 10 percent increase in the returns from international migration lead to only a slight, 1 percent increase in rural wages and large marginal increases in investment in education (52 percent) and housing (15 percent).

Using household survey data from China, Taylor et al (2003) examine the impact of internal migration and remittances on crop and household income.  The authors find that migration and remittances have multiple and contradictory effects on rural household income.  On the one hand, when a migrant leaves a household, crop yields fall and crop income declines by about 33 percent.  However, the remittances sent home by the migrant have a positive, countervailing effect on household income.  For example, with the receipt of remittances, rural households tend to purchase more inputs and to substitute capital for labor.  Taking into account all of these various effects, the authors find that participating in migration increases per capita household income in rural China, for those left behind, by between 16 and 43 percent.

 

Topic 12 – Articles

Glytsos, Nicholas. 1993. Measuring the Income Effects of Migrant Remittances: A Methodological Approach Applied to Greece. Economic Development and Cultural Change 42: 131–160. (Publisher Link)

This paper uses an input-output model to examine the direct and indirect effects of remittances on production, consumption, imports and employment in Greece in 1971.  It finds that remittances generate a multiplier effect of 1.7 on total gross output, with the highest multiplier effects being in the apparel, machinery and construction industries.  With respect to employment, remittances generate about 74,000 new jobs in the nonagricultural sector.   Remittances also lead to a rise in imported goods, but these imports represent only 5 percent of total Greek imports.  On this basis, the paper emphasizes that remittances leakages to imports do not have a major impact on the trade deficit.

Taylor, J. Edward. 1995. Micro Economy-Wide Models for Migration and Policy Analysis:  An Application to Rural Mexico, Development Center of Organization for Economic Cooperation and Development (Oecd). Paris: Development Center of Organization for Economic Cooperation and Development (OECD).

This study is concerned with the impact of international migration on the places of migrant origin in developing countries. The author “uses data from rural household and farm surveys to estimate a micro economy-wide model of a typical migrant-sending village and then uses the model to examine the economic impacts of migration. The surveys were undertaken in Mexico….The micro-model used in the estimations is a form of aggregate computable general equilibrium (CGE) model, a modelling structure which is able to capture complex linkages and feedbacks of village production and expenditure. Simulations based on such models are likely to offer a more realistic view of the impacts of policy and market-induced change on village economies.”

Taylor, J. Edward, and George Dyer. 2009. Migration and the Sending Economy:  A Disaggregated Rural Economy-Wide Analysis. Journal of Development Studies 45 (6): 966-989 (Publisher Link)

This paper uses a small rural household survey in Mexico (2003) to examine the direct and indirect impacts of migration on the rural economy.  For example, while the direct effects of migration include upward pressure on rural prices and wages, the indirect effects include general equilibrium wage and price effects and dynamic investment effects.  Results suggest that the direct effects of migration are smaller than the indirect effects. In the short-term, a 10 percent increase in returns from international migration lead to a 5 percent increase in rural wages and a 52 percent marginal increase in investment in education.  In the long-term, a similar 10 percent increase in the returns from international migration lead to only a slight, 1 percent increase in rural wages and large marginal increases in investment in education (52 percent) and housing (15 percent).

Taylor, J. Edward, Scott Rozelle, and Alan de Brauw. 2003. Migration and Incomes in Source Communities:  A New Economics of Migration Perspective from China. Economic Development and Cultural Change 52:75–101. (Publisher Link)

This paper uses a small, non-representative sample of rural households from China (1991) to examine the impact of internal migration and remittances on crop and household income.  Controlling for endogeneity and selection, the authors find that migration and remittances have multiple and contradictory effects on household income.  On the one hand, when a migrant leaves a household, crop yields fall and crop income declines by about 33 percent.  However, the remittances sent home by the migrant have a positive, countervailing effect on household income.  The authors find that each yuan in remittances is associated with 1.36 yuan of additional crop income.  In other words, with the receipt of remittances, farm households tend to purchase additional inputs and to substitute capital for labor.  On the whole, the authors find that participating in migration increases per capita household income in rural China, for those left behind, by between 16 and 43 percent.