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 et al (2008) using household data from Ghana. Focusing on how households spend at the margin, these authors find that households receiving remittances do not spend more at the margin on food and consumer goods than households that receive no remittances. The authors find that migrant households treat remittance income just like income from any other source, and these households do not spend more – or less – at the margin on consumption or investment than households with no remittances.

Using data from El Salvador, Edwards and Ureta (2003) identify a more positive role for remittances. Specifically, these authors find that households receiving remittances do spend more at the margin 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.

Title
Topic 10 – Remittances, Consumption and Investment
Published
Social Science Research Council, March 2009
Citation
Topic 10 – Remittances, Consumption and Investment (Brooklyn, NY: Social Science Research Council, March 2009).