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.

Title
Topic 12 – Remittances and Multiplier Effects
Published
Social Science Research Council, March 2009
Citation
Topic 12 – Remittances and Multiplier Effects (Brooklyn, NY: Social Science Research Council, March 2009).