Topic 23

Remittances, Environment and Natural Disasters

Recent studies have shown that remittances may be of considerable importance during crises and economic and political insecurity. During natural disasters, emergencies, conflict or war, remittances may provide a relatively stable source of income, and contribute significantly to household welfare.  Because formal market transactions tend to be disrupted and government capacity may be limited in times of insecurity, researchers and policymakers have shown a growing interest in understanding how remittances can help mitigate the economic shocks that impact crisis-affected populations.

One strand of the literature on this topic is largely descriptive.  For example, Ismail (2000) provides a descriptive overview of the role of remittances, provided by a large diaspora of migrant workers and refugees, in post-war Somaliland. Based on field-work conducted in Somalia, the paper discusses trends in the size, sources, means of transferring remittances, distribution and use of remittances, their role in livelihoods and in the country’s economic recovery and future prospects. The author suggests that remittances have contributed to the rapid growth of a vibrant private sector in the post-war period. However, the economic impact of remittance flows may also be limited by the lack of credit schemes and facilities for saving.

Another strand of literature aims to measure the degree to which remittance flows respond to natural disasters and shocks.  Yang (2006) examines the impact of hurricane exposure on international resource flows, including remittances to developing countries. The author finds that the impact of hurricane exposure on resource flows varies according to the receiving country’s income level. In the poorer half of the sample, hurricane exposure leads to a substantial increase in migrants’ remittances, such that total inflows from all sources in the three years following hurricane exposure amounts to roughly three-fourths of estimated damages. However, in the richer half of the sample, hurricane exposure stimulates inflows of new lending from multilateral institutions, but induces declines in private financial flows that are very large.

A central question then is whether remittances can provide insurances in the face of shocks induced by natural disasters and other emergencies.  Clarke and Wallsten (2003) examine whether remittances can insure households against income shocks, using a longitudinal household-level data set from Jamaica. The panel dataset includes remittance information as well as detailed self-reported information about damage incurred due to a major hurricane (Hurricane Gilbert in 1988). The authors conclude that remittances act as insurance, but only partially: parameter estimates suggest that remittances increased by only about 25 cents for every dollar of hurricane damage experienced by a given household.  The authors rely on household fixed effects to deal with unobserved heterogeneity and potential moral hazard problems.

Yang and Choi (2007) investigate whether remittances sent by overseas migrants serve as insurance for recipient households using a nationally representative household survey from the Philippines.  The authors find that remittances from international migration respond to income shocks experienced by Philippine households.  In particular, changes in income are found to lead to changes in remittances in the opposite direction, consistent with insurance motives. About 60 percent of declines in household income are replaced by remittance inflows from overseas. Because household income and remittances are jointly determined, rainfall shocks are used as an instrumental variable for income changes. The authors conclude that while consumption in households with migrant members is unchanged in response to income shocks, while consumption responds strongly to income shocks in households without migrants.

A final strand in the literature treats remittances as a monetary substitute for resources that have been exhausted by a combination of physical environmental change and human environmental degradation. An example is the study by Massey et al. (2010) that predicts out-migration from a valley in Nepal with instrumental variables reflecting environmental change, controlling for socio-economic factors. Beyond episodic environmental events are more insidious processes whose impacts are important over longer time periods. In the past, data availability, operationalization problems (the scale at which different environmental variables operate), and disciplinary myopia have presented obstacles for researchers. Now, as the literature begins to recognize that environmental forces are indisputable exogenous forces in migration and remittances, researchers will hopefully begin to tackle these problems.

 

Topic 23 – Articles

Ahmed, Ismail I. 2000. Remittances and Their Economic Impact in Post-War Somaliland. Disasters 24 (4):380–389. (Publisher Link)

This paper provides a descriptive overview of the role of remittances, provided by a large diaspora of migrant workers and refugees, in post-war Somaliland. Based on field-work conducted in Somalia, the paper discusses trends in the size, source, means of transfer, distribution and use of remittances, their role in livelihoods and in the country’s economic recovery and future prospects. The total value of remittances, originating mainly from migrant labor in the Middle East and more recently an exodus of refugees to the West, and greatly facilitated by the growth of telecommunications in Somaliland and of remittance agencies, is estimated at some US$500 million annually — around four times the value of livestock exports. Contrary to the prevailing view that remittances are mainly used for consumption and unproductive investments such as housing and land, the author suggests that in Somalia, the author suggests that remittances have contributed to the rapid growth of a vibrant private sector. However, remittance flows have also been associated with a number of negative side-effects such as the loss of the skilled labor, increased income inequality and booming sector effects, and their positive impact is limited by the present lack of credit schemes and facilities for saving.

Clarke, George R.G., and Scott Wallsten. 2003. Do Remittances Act Like Insurance? Evidence from a Natural Disaster in Jamaica (Working Paper).  Development Research Group:Unpublished Working Paper.

This paper examines whether remittances can insure households against income shocks, using a longitudinal household-level data set from Jamaica. The panel dataset includes remittance information as well as detailed self-reported information about damage incurred due to a major hurricane (Hurricane Gilbert in 1988). The authors conclude that remittances act as insurance, but only partially: parameter estimates suggest that remittances increased by only about 25 cents for every dollar of hurricane damage experienced by a given household.  The authors rely on household fixed effects to deal with unobserved heterogeneity and potential moral hazard problems.

Massey, Douglas S., William Axinn, and Dirgha Ghimire. 2010. Environmental Change and Out-migration: Evidence from Nepal. Population and Environment 32: 109–136.

This article re-conceptualizes remittances as a source of replacement for environmental resources that have been degraded, as when migrant families must purchase fossil fuels to replace ever scarcer firewood or fertilizers to stem declines in agricultural productivity due to deterioration of local soils. It draws upon a large multi-stage cluster sample (n=5,271) of adults living in the Chitwan Valley, Nepal, in 1996. The authors tap into the literature on environmental change and resource exhaustion in rural societies to develop indicators for environmental conditions in encompassing “neighborhoods” expected to influence out-migration (defined as leaving home for a non-education or marriage purpose for at least one month), along with controls for social and economic variables that are usually employed by social scientists to explain migration. Their logit-probit model uncovers a significant direct relationship between short-distance moves (within the Valley) and perceived decline in agricultural productivity, time needed to collect firewood and fodder, and absence of vegetational cover. Long-distance moves are predictable only from perceived productivity decline. They also show that effects of environmental change vary by gender and ethnicity, with women being more affected by changes in the time required to gather fodder and men by changes in the time to gather firewood, and high-caste Hindus generally being less affected than others by environmental change.

Yang, Dean. 2008. Coping with Disaster: The Impact of Hurricanes on International Financial Flows, 1970-2002. The B.E. Journal of Economic Analysis & Policy 8 (1) (Advances), Article 13.

This paper examines the impact of hurricane exposure on international resource flows, including remittances to developing countries. Using meteorological data, the author constructs a time-varying storm index that accounts for the fraction of a country’s population exposed to storms of varying intensities over time. The author finds that the impact of hurricane exposure on resource flows varies according to the receiving country’s income level. In the poorer half of the sample, hurricane exposure leads to a substantial increase in migrants’ remittances, such that total inflows from all sources in the three years following hurricane exposure amounts to roughly three-fourths of estimated damages. However, in the richer half of the sample, hurricane exposure stimulates inflows of new lending from multilateral institutions, but induces declines in private financial flows that are very large.

Yang, Dean, and HwaJung Choi. 2007. Are Remittances Insurance? Evidence from Rainfall Shocks in the Philippines. The World Bank Economic Review 21 (2):219–248. (Publisher Link)

This paper investigates whether remittances sent by overseas migrants serve as insurance for recipient households using a nationally representative household survey from the Philippines.  The authors find that remittances from international migration respond to income shocks experienced by Philippine households.  In particular, changes in income are found to lead to changes in remittances in the opposite direction, consistent with insurance motives. About 60 percent of declines in household income are replaced by remittance inflows from overseas. Because household income and remittances are jointly determined, rainfall shocks are used as an instrumental variable for income changes. The authors conclude that while consumption in households with migrant members is unchanged in response to income shocks, while consumption responds strongly to income shocks in households without migrants.