Paper Review : Dean Yang's paper, "Migrant Remittances”
By: Praju Panta
Introduction 1.1.
Dean Yang's paper,
"Migrant Remittances," delves into the economic importance of
remittances in developing countries. As an Associate Professor of Public Policy
and Economics at the Gerald R. Ford School of Public Policy, University of
Michigan, and an affiliate of BREAD and NBER, Yang brings significant expertise
to this study.
The paper investigates
the dynamics of remittances sent by international migrants to their home
countries, starting with the scale of these financial flows and then examining
their economic impacts on recipient households and governments. Remittances,
which are household incomes received from abroad, primarily result from worker
migration. These transfers can be in the form of cash or goods and are sent
through formal or informal channels.
Formal channels include
money transfer services like Western Union and MoneyGram, which have extensive
agent networks for sending and receiving remittances. Banks and credit unions
in both the sending and receiving countries also facilitate these transfers,
often in partnership with money transfer operators. Informal systems, such as
hawala and hundi in South Asia or padala in the Philippines, operate through
brokers within migrant communities and recipient areas.
Remittances have become
a significant financial flow, surpassed official development aid and often
rivaling foreign direct investment (FDI) in size. Unlike FDI, remittances are
stable and resilient, even during global economic downturns, making them a
vital income source for developing economies. The paper aims to understand the
motivations behind remittances, their effects on households and national
economies, and the policy measures that could enhance their developmental
benefits.
The paper lists the 30
largest remittance-receiving countries, ranked by total remittance volume and
by their share of GDP. In 2010, India and China led in absolute terms,
receiving $55 billion and $51 billion, respectively. Mexico and the Philippines
followed with $22.6 billion and $21.3 billion, respectively.
However, when ranked by
remittances as a percentage of GDP (based on 2009 data), smaller countries with
high migration levels dominate. Tajikistan topped the list with remittances constituting
35% of GDP, followed by Tonga at 28%, Lesotho at 25%, and both Moldova and
Nepal at 23%. Seven countries appear on both lists due to their high remittance
inflows and the considerable proportion these inflows represent in their GDP.
These countries include the Philippines, Bangladesh, Lebanon, Serbia,
Guatemala, Jordan, and El Salvador.
Yang uses Macro-level data on remittance flows to developing
countries from the World Bank and other sources. Data are remittances vs. other
international financial flows to developing country from World bank, second Top
remittances recipient Countries. Third he uses remittance Activity in selected
Migrant origin -Destination countries Paris, Data sources from China– Australia
1997 Longitudinal Survey of Migrants to Australia.
The study employs a mixed-methods
approach. Experiments method Exchange rate shocks during the
1997 Asian financial crisis provided an opportunity to observe household
behavior changes. Second, Randomized Controlled Trials (Salvadoran migrants
were offered savings tools to analyze the effects of direct control over
remittances. Last Panel Data Analysis Micro-level household data was used to
differentiate between consumption and investment effects.
The
Core Research Problem is While remittances have become a major source of
international financial flows - even surpassing traditional development aid and
approaching foreign direct investment levels - there's still significant
uncertainty about how they actually affect recipient households and economies.
This is a crucial gap in our understanding of global development economics.
Three Key Research Challenges:
a. The Investment vs.
Consumption Question: The study aims to determine whether remittances are
primarily used for immediate consumption (like food, clothing, daily needs) or
if they're being channeled into productive investments (like education,
business creation, or infrastructure)
b. Economic Buffer
Function: Researchers want to understand how effectively remittances help
recipient households weather economic difficulties in their home countries
c. Methodological
Challenge: The text highlights a significant research difficulty: while
existing studies show correlations between remittances and various outcomes,
proving actual cause-and-effect relationships has been challenging. This is
because of unobservable factors that could influence both remittance patterns
and outcomes, such as, A family's natural entrepreneurial abilities, Local
economic conditions, Individual household circumstances.
a. How do remittances
affect recipient fall, what are their effects on development?
b. How do remittances
affect recipient households and countries? Do they facilitate investment, or do
they primarily fund households and countries?
c. Do they facilitate
investment, or do they primarily fund higher consumption?
d. Do remittances play an
insurance role, responding countercry- igher consumption?
e. Do remittances play an
insurance role, responding countercyclically to economic conditions in migrant
home areas?
f. From a policy
perspective, likely to economic conditions in migrant home areas?
g. From a policy
perspective, how do remittances fi ow do remittances figure into the
calculation of net benefit figure into the calculation of net benefits of
migration for ts of migration for migrant families?
h. Do migrants have
different preferences over the uses of household income—specific references
over the uses of household income—specifically, the remittances they calmly,
the remittances they send—than do household members remaining behind in the
home country?
i.
How do migrants weight their own utility versus the utility of
remittance recipients when making remittance decisions?
j.
Why are remittances typically sent in relatively small magnitudes
decision making. Why are remittances typically sent in relatively small
magnitudes at relatively high frequencies?
k. What pattern of costs
and frictions would predict t relatively high frequencies?
l.
What pattern of costs and frictions would predict this
characteristic of remittances in the context of a rational economic model?
m. Do his characteristic of
remittances in the context of a rational economic model?
n. Do behavioral factors,
perhaps self-control problems, help to explain this pattern?
a.
Literature Review and
Research Gap
Remittances are funds sent by
migrants working abroad back to their home countries, serving as a significant
source of household income. These transfers can be made in cash or kind and
utilize various formal channels, such as dedicated money transfer operators
like Western Union and MoneyGram, alongside banks and credit unions. Informal
channels also exist, exemplified by systems like hawala in South Asia and
padala in the Philippines, which facilitate remittance transfers through
non-financial firms or brokers within migrant communities. Collectively, these
mechanisms play an essential role in the economies of recipient countries.
Remittances in international
balance-of-payments data are categorized into "workers' remittances"
and "compensation of employees." Workers' remittances refer to funds
sent by migrants to their home households, classified as one-sided transactions
without an exchange of goods or services. In contrast, compensation of
employees pertains to earnings from temporary workers in host countries, which
are expected to return home with the workers. For reporting purposes, migrants
are viewed as residents after one year in the host country, regardless of
immigration status. Although most remittance transactions occur between
relatives, this definition is not limited to familial relationships. For
further insight into the complexities of compiling systematic country-level
remittance data, readers can refer to IMF (2009).
Migrants send remittances for
various motivations related to both their migration decisions and the financial
support of their families back home. Key reasons include altruism, compensation
for services provided by recipients, insurance against unforeseen
circumstances, loan repayment obligations, and investment in their home
communities. These motives can operate simultaneously, reflecting a complex
interplay of personal and economic factors influencing remittance behavior. For
a deeper understanding of these dynamics, readers are encouraged to refer to
the work of Docquier and Rapoport (2006).
Generous, motivated remittances
serve various purposes, including enhancing recipient consumption, acting as
insurance during shocks, and funding investments in human and physical capital.
Self-interested motives may include repaying educational debts or covering
migration costs. While numerous studies explore these motivations through
microdata and find correlations, determining the relative importance of each
reason remains challenging. Aggregate analyses at the country level yield
inconclusive results regarding the impact of remittances on economic
performance, with some studies reporting positive relationships and others
finding no effect or negative correlations. These discrepancies stem from
differences in research methods and data used across studies. Understanding how
remittances affect household expenditures is crucial, as both consumption and
investment uses can be optimal depending on a household's financial situation
b.
Research Gap
This paper addresses key limitations
of prior studies by employing robust causal identification methods, including
natural experiments and randomized controlled trials. Unlike previous research
that focuses on correlations, Yang’s study provides evidence on the causal
impacts of remittances, particularly:
i.
The role of exchange rate shocks in driving remittance-driven
investment and consumption changes.
ii. The effect of granting migrants
greater control over the allocation of remittances through innovative savings
products.
By filling these gaps, the paper
adds significant value to understanding how remittances influence household
behavior and offers actionable policy insights.
2.2.Data and Method
Including Identification Assumptions
Research utilizing microdata aims to
enhance causal identification and to gain a deeper understanding of the impacts
of remittances on recipient households. It distinguishes between the
consumption and investment expenditures of these households without assuming
that one use is inherently better than the other. For households with low
consumption levels, prioritizing consumption may be optimal, while those
slightly above subsistence can leverage remittances for investments that would
otherwise be hindered by credit constraints and high fixed costs.
The text discusses methodological
challenges in understanding the impact of remittances on household consumption
and investment, emphasizing that migrant earnings are often not randomly
distributed. This complicates the interpretation of observed relationships, as
unobserved factors, such as entrepreneurial ability or adverse shocks to
investments, can influence both migration patterns and household outcomes. To
address these issues, an experimental approach is proposed where households
with migrants would receive a randomly sized economic shock to determine the
subsequent effects on their economic activities. The study uses household panel
data during the 1997 Asian financial crisis to analyze the impact of exchange
rate shocks on recipient households. Exchange rate fluctuations across migrant
host countries provided quasi-random variations in remittance flows. Salvadoran
migrants in the U.S. were offered financial products like savings accounts to
examine the impact of migrant control over remittance allocation.
An experimental approach to
establishing the impact of migrant economic opportunities on household outcomes
could start by identifying a set of houses- that already had one or more
members working overseas, assigning each migrant a randomly sized economic
shock, and then examining the relationship between changes in household
outcomes and the shock dealt to the household’s migrants.
2.1.Identification
Assumptions
● Exchange rate changes are assumed to be exogenous and unrelated to household characteristics in the Philippines.
● Random assignment in the RCT ensures that differences in outcomes are attributable to the treatment.
We also Explain The Following Figure
and Table.
Table
1.1 Top Remittance Recipient Countries.
Table one Shows the 30 largest
remittance-receiving countries ranked both by total remittance volume (column
1) and by their share of GDP (column 2). In 2010, India and China topped the
list in absolute terms, receiving $55 billion and $51 billion, respectively.
Mexico and the Philippines followed closely, with remittances amounting to
$22.6 billion and $21.3 billion, respectively.
However, when ranked by remittances
as a percentage of GDP (based on 2009 data), the list changes significantly.
Smaller countries with high migration levels dominate, led by Tajikistan, where
remittances constituted 35% of GDP. Tonga ranked second with 28%, followed by
Lesotho at 25%, and both Moldova and Nepal at 23%. Seven countries appear on
both lists due to their high remittance inflows and the significant proportion
these inflows represent in their GDP. These countries include the Philippines,
Bangladesh, Lebanon, Serbia, Guatemala, Jordan, and El Salvador.
Figure 1 Shows Remittances vs. Other
International Financial flows to Developing Countries. The Data is from 1990 to
2009. This Figure clearly explains Foreign Direct Investment is increasing
slowly and decreasing fast. 2008 FDI is increased but 2009 FDI is downward due
to the Financial Crisis. Remittance is Increasing at an increasing rate.
Table
2. Remittance Activity in selected Origin– destination Country Paris
Data from various surveys indicate
that many migrant populations send a significant portion of their earnings home
as remittances. Notably, Mexican migrants remit 31.1 percent of their U.S.
earnings, while Salvadorans send 37. percent. Higher percentages are observed
among Senegalese in Spain (49.9 percent) and Ghanaians in Italy (23.3 percent).
In contrast, some groups remit more modest amounts, such as Moroccans in France
(10.4 percent), Algerians (7.7 percent ), Turks in Germany (2.1 percent),
Chinese in Australia (6.1 percent), Filipinos in the U.S. (5.8 percent ), and
Cubans in the U.S., who remit just over 2 percent.
Figure
2. Distribution Of Number of Annual Remittance Transactions.
While these figures are for a sample
of migrants from a particular country, a particular host location, and a
specific money transfer organization, the broad patterns are consistent with
other surveys of Hispanic immigrants in the United States. For example, Orozco
and Fedewa (2006) report that 81 percent of individual remittance transactions
sent to a major bank in Guatemala were equal to or less than $300. Bendixen
(2008), in a survey of 5,000 Hispanics in the United States, found that 50
percent sent remittances on a regular basis, remitters sent on average 15
remittances per year, and the average amount sent per remittance was $325.
Other survey-based studies finding similar results include Menjivar, DaVanzo,
Greenwell, and Valdez (1998), DeSipio (2000), Clark and Drinkwater (2001),
Bendixen and Associates (2001, 2004a, b), and Amuedo-Dorantes, Bansak, and Pozo
(2005).
International financial flows to
developing countries are often viewed primarily through the lens of corporate,
institutional, and governmental channels - specifically foreign direct
investment (FDI), portfolio investment, and official development assistance.
However, since the late 1990s, a different source has gained prominence:
remittances from international migrants. These remittances have surpassed both
official development assistance and portfolio investment, and at times have
come close to matching FDI levels.
The scale of these remittances is
substantial, reaching $325 billion in 2009 and $307 billion in 2010 for
developing countries. Looking at the data from 1991 to 2009 (in constant 2005
dollars), remittance growth has been remarkable. In the period from 1999-2008,
just before the financial crisis, remittances grew at an average annual real
rate of 12.9% - comparable to FDI's 11.0% growth and significantly higher than
the 5.8% growth in official development assistance.
A particularly noteworthy
characteristic of remittances is their stability during economic turbulence.
This resilience was evident during the 2008-2009 financial crisis, when
remittances declined by only 5.2%, while FDI experienced a dramatic 39.7% drop.
This stability has been widely recognized by economic observers and
institutions like the World Bank.
Remittances stand apart from other
major international financial flows to developing countries (like foreign
direct investment, portfolio investment, and official development flows) due to
their distinctive pattern: they tend to be sent more frequently and in much
smaller amounts.
This pattern becomes clear through
an examination of detailed transaction-level data collected from Salvadoran
migrants in the Washington, D.C. metropolitan area. The study focused on 253
customers who had used a specific money transfer service, analyzing their
transactions over a 12-month period from April 2007 to March 2008.
The data reveals remarkably high
transaction frequencies. The study group of 253 individuals made a total of
4,271 remittance transfers during the year, averaging about 16.9 transactions
per person annually. The frequency distribution shows considerable variation,
with a notable right-skewed pattern: approximately 79.1% of senders made
transfers at least every two months, 56.5% sent money at least monthly, and 21%
transferred funds at least bi-weekly. This distribution pattern demonstrates
that regular, frequent remittance sending is common among these migrants.
This paper highlights the critical
economic role of remittances sent by migrants to developing countries. These
financial flows have grown substantially in size, often surpassing foreign
direct investment and development aid. More importantly, they are characterized
by their stability, particularly during global economic crises, which makes
them a reliable source of income for households and economies in developing
nations.
The study establishes that
remittances serve two primary roles: as a driver of investment and as an
informal insurance mechanism. Through a natural experiment using exchange rate
shocks, the paper provides causal evidence that remittances positively
influence household investments in education, entrepreneurship, and asset
acquisition. This demonstrates that remittances are not merely used for
consumption but are directed toward productive activities that contribute to
long-term development. Additionally, the study finds that remittances offset
income losses caused by economic shocks, acting as a buffer to stabilize
household consumption.
A unique contribution of the paper
is its exploration of migrants' control over the allocation of remittances.
Randomized controlled trials reveal that migrants strongly prefer directing
remittances toward savings and investments. Providing financial tools that
enhance migrant control significantly increases household savings, highlighting
the potential of tailored financial products to maximize the development impact
of remittances.
The findings underscore the
transformative potential of remittances in reducing poverty, fostering
investments, and enhancing economic resilience. The paper calls for policy
measures that lower remittance transaction costs and promote financial
innovations tailored to migrants' preferences. By addressing these areas,
policymakers can unlock the full potential of remittances to contribute to
sustainable development.
Overall, the study provides valuable
insights into how remittances can be leveraged to drive economic development
and offer a roadmap for future research and policy interventions
a. Data:
⮚
The use of natural experiments with exchange rate shocks is
innovative but may not capture other unobserved macroeconomic factors affecting
remittances.
⮚
Panel data from the Philippines is robust, but expanding the
analysis to other countries could enhance generalizability.
b. Methods:
⮚
The identification assumptions are well-defended but rely heavily
on the exogeneity of exchange rate shocks. A sensitivity analysis exploring
alternative scenarios could strengthen the findings.
⮚
RCTs provide strong causal evidence, but the limited sample
(Salvadoran migrants) reduces applicability to other migrant populations.
c. Findings:
⮚
While the insurance role of remittances is well-documented,
further analysis of consumption smoothing mechanisms could provide additional
insights.
⮚
The findings on migrant control are compelling but could benefit
from a deeper exploration of gender or cultural differences in remittance
allocation preferences.
2.5.Minor Comments
Content
Improvements
⮚
Discuss how findings could apply to other regions beyond the
Philippines and El Salvador.
⮚
Include a breakdown of the different uses of remittances (e.g.,
education, business, health) to provide more granular insights.
⮚
Explore the potential role of fintech innovations in reducing
remittance costs or increasing efficiency.
Structure
Improvements
● Enhance the clarity of tables and figures to make data interpretations more accessible.
● Reorganize the literature review to separate motivations, macroeconomic impacts, and microeconomic impacts more clearly.
Advances
in Recent Literature
● Studies on digital remittance platforms and mobile money services (e.g., M-Pesa) could be discussed, as they have transformed remittance dynamics in some countries.
● Research on gender dynamics in remittance-sending and allocation behavior is not addressed in this paper but has gained traction in recent literature.
2.6.Conclusion
The study by Dean Yang provides a
comprehensive analysis of migrant remittances and their economic implications
for recipient households and countries. Remittances have emerged as a crucial
financial flow, rivaling foreign direct investment and official development
assistance in magnitude while demonstrating remarkable stability during global
economic crises. This paper offers valuable insights into the dual role of
remittances: as a driver of investment and as an informal insurance mechanism.
The findings establish that
remittances are primarily used for productive investments rather than
consumption, particularly in response to favorable exchange rate shocks. By
leveraging natural experiments, the study confirms that remittances facilitate
entrepreneurial activities, increase educational expenditures, and contribute
to household asset accumulation. Additionally, remittances act as a financial
safety net, replacing income losses during adverse economic shocks and
stabilizing household consumption levels.
A unique contribution of this paper
is its examination of migrant control over remittance allocation through
randomized controlled trials. It reveals that migrants strongly prefer
directing remittances toward savings and investment goals, which has significant
implications for the design of financial products. Policies that enhance
migrant control and reduce transaction costs can amplify the developmental
impact of remittances.
In conclusion, the paper underscores
the transformative potential of remittances in reducing poverty, fostering
investment, and enhancing economic resilience in developing countries. Future
research should expand the scope to include gender dynamics, the role of
digital platforms, and the long-term macroeconomic impacts of remittance flows.
Policymakers and financial institutions must work together to develop
innovative solutions that maximize the benefits of remittances for both
migrants and recipient households.
References
Ashraf,
N., Aycinena, D., Martinez, C., & Yang, D. (2011). Remittances and savings: Evidence from a field experiment among
migrants from El Salvador. Working Paper.
Chami, R.,
Fullenkamp, C., & Jahjah, S. (2003). Are
immigrant remittance flows a source of capital for development? IMF Working
Paper. https://doi.org/10.5089/9781451859538.001
Ratha, D.
(2003). Workers’ remittances: An
important and stable source of external development finance. Global
Development Finance Report. World Bank.
World
Bank. (2006). Global Economic Prospects
2006: Economic implications of remittances and migration. Washington, DC:
World Bank.
Yang, D.
(2011). Migrant remittances. Journal of
Economic Perspectives, 25(3), 129–152. https://doi.org/10.1257/jep.25.3.129
Yang, D.,
& Choi, H. (2007). Are remittances insurance? Evidence from rainfall shocks
in the Philippines. World Bank Economic
Review, 21(2), 219–248. https://doi.org/10.1093/wber/lhm003
Yang, D.
(2008). International migration, remittances and household investment: Evidence
from Philippine migrants' exchange rate shocks. The Economic Journal, 118(528), 591–630.
https://doi.org/10.1111/j.1468-0297.2008.02134.x
https://www.aeaweb.org/articles?id=10.1257/jep.25.3.129
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