Global Development: Views from the Center
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October 19, 2006
María and José Know How to Spend Their Remittances
Posted by Michael Clemens at 04:31 PM
Nearly every time there is a news story about the billions of dollars flowing to poor countries as remittances, someone worries that not “enough” of that money is being saved and invested. A case in point is today’s piece in the Washington Post. Latin American workers in the US will send home $45 billion this year, but “only a small portion … has gone to economic development.”
Where does it go instead? Primarily to consumption -- but is there anything wrong with that? The article points out that “only … 15 to 20 percent” of remittances are saved and invested by the households that receive them. But only around five percent of non-remittance income of poor households in Peru, for example, is saved and invested. What do low-income Peruvians spend that money on instead? Food, rent, and transportation, mostly. Why should we expect them to spend money differently according to the country their primary provider happens to work in?
First, notice that they do save and invest more of remittance income than other income. Second, if they don’t save and invest more than 15 or 20 percent of it, there’s probably a good reason for that. Perhaps it’s the poor investment climate in Peru, which Hernando de Soto has spent years quantifying and publicizing. Remittances go to countries that people leave; people leave countries where the return to capital is low. By definition, little will be invested in those countries. No “remittance policy” can do much to help that until the fundamentals get better.
The best policy to get people to save and invest more remittance (or any other) income is to make it pay for them to do so. Greater investment of remittances will arise from improved returns to investment in developing countries, not primarily from schemes to try to convince migrants' families to invest when they'd rather not. Contriving such schemes and associations tends to assume we know what's good for those families better than they do. Do you?
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Comments
Quite right Michael.
Why don't people worry about the Dutch Disease effects of remittances like they do about the Dutch Disease effects of aid?
Owen
Posted by: Owen Barder at October 19, 2006 11:45 PM
Makes perfect sense to me. While I didn't love the Post's coverage of the latest IDB remittance figures, at least they did better than Lou Dobbs. Over at CNN, Dobbs spun remittance news into an "illegal alien crisis" because migrants are sending money out of the United States, therefore harming the US economy. In my opinion, this was a total hack job and typical of Dobbs - who has made a name for himself as a leading anti-immigrant voice. Here's the show's full transcript. Michael - what do you think about the politicization of remittances?
Posted by: Rob at October 20, 2006 11:29 AM
Rob asks what I think of the politicization of remittances. It's true, some ridiculous things have been said about remittances to push political agendas, as when Carol Adelman makes the laughable assertion that remittances constitute part of US "foreign aid". (Immigrant families work hard for what they earn; cash they give to each other does not constitute 'charity' by us citizens, not in any sense.)
Remittances are mostly intrahousehold transfers -- within households that happen to span international borders. Those transactions should be no more politicized than any other transactions involving a private individual giving money to his/her spouse, or a parent giving money to his/her children. That's what most remittances are. If you gave some money to your kid tomorrow, what would you think if the government showed up to tell you how it should be spent, or whether or not you should have given it? Likely, you'd scoff. So why is that any different when the money must cross a border?
Posted by: Michael Clemens at October 20, 2006 04:50 PM
Owen Barder asks why people don’t worry about the Dutch disease effects of remittances (as they do about the effects of aid). In a paper testing the effects of both, Rajan and Subramanian (http://www.imf.org/external/pubs/ft/wp/2005/wp05126.pdf) report that the in contrast to aid transfers, which do seem to matter for their measure of competitiveness, remittances don't. They suggest two possible reasons. One is that remittances may not increase the demand for scarce skills as aid does (for people to manage aid programs, for example) but instead increase demand for unskilled labor (in construction, for example). The second is that migrants send less home in cash if the exchange rate at home is overvalued, and indeed they find that remittances flows are lower, all other things the same, to countries with overvalued exchange rates (where remittance income will buy relatively less). That's interesting. The latter suggests that the fundamentals Michael Clemens refers to are likely to be reasonably sound in countries where remittances persist over many years. The bottom line may be, as Michael suggests, that there is no reason to believe that remittance income will be spent differently than other income, and that where it is spent almost entirely on consumption that reflects some combination of the poverty of the recipients and the absence of good investment opportunities.
Posted by: Nancy Birdsall at October 23, 2006 03:26 PM
Rob, what Michael is also too polite to say is, that you are right about Dobbs - he is a hack and an embarrassment to CNN. There are good questions to be asked about immigration, outsourcing, etc but Dobbs is just knuckledragging stuff.
Posted by: Todd Moss at October 24, 2006 12:55 PM