Remittances, development (local economic growth) and poverty alleviation

The main research question of this first theme will be: To what extent do remittances contribute to development (local economic growth) and welfare including poverty alleviation, the reduction of inequality, vulnerably and increased capabilities?

The research project will be done in two steps:

  1. the effect of remittances on welfare (poverty, vulnerably and capabilities)
  2. the effect of remittances on development (local economic growth) with regards to how money is sent (remittance channels) and what the money is spent on (consumption, investment (also including human capital investment: education and health and savings.)

 

1) The first part of this project assesses the impact of remittances on poverty, vulnerability and capabilities of both the migrant and the remittance receivers. While the effects for the remittance receivers have been studied before, the consequences for the livelihood strategy of the migrant sending remittances are often lacking in previous studies; this project intends to fill that gap. The project assesses to what extent and how migration is used as a livelihood strategy by households. The study will analyse the extent to which remittances decrease poverty, reduce vulnerability and increase capabilities. Past studies have looked at the effect of remittances on poverty but little work has been done on remittances in relation to vulnerability and capabilities. Even fewer studies look at both sides of remittances (receiving and sending). This study will test, whether increased welfare happens in stages: for example people probably first care about securing their immediate situation (poverty), but once this is secured they would tend to look to the medium term (to what extent are people vulnerable to poverty-via shocks), subsequently once they have dealt with vulnerability they probably look to the long term and their capabilities. It is still an open question whether remittances in the receiving countries serve merely as a livelihood and survival strategy for the family in the sending countries or whether remittances feed “a culture of migration” and finance future emigration of family- and network member first left behind. It is also still unclear to what extent remittances are sustainable sources of income and whether and how quickly remittances stop being sent. This part of the research aims at exploring the answers to these puzzles and questions.

2) The second part of this project looks at how remittances affect development (local economic growth). To do this, the project considers two specific channels through which development can take place with regard to remittances: (1) how remittances are sent and (2) how remittances are used. Recently, international organisations such as the World Bank and the International Monetary Fund have made it a priority to encourage the sending of remittances through formal channels. There seem to be two main reasons for this. One reason is the strong concern after September 11, 2001 that money travelling through informal channels is more susceptible to money laundering and terrorist financing, hence there was a greater need to regulate and create transparency in money flows in general. The other reason is to increase the developmental impact of remittances.

When remittances are sent through the formal sector, and in particular, banks, the idea is that the money helps to strengthen the financial sector in the home country. Remittances are a source of foreign exchange (affecting the BOP) and foreign exchange can alleviate the balance of payments burden and pay for imports (Bugamelli et al. 2005; Ratha 2003; Ratha 2006). More money flowing through banks means more money to be used to finance loans. The money that is sent through the formal sector can be counted and can be used by the country’s central bank to securitize future flows and also to gain loans from international donors which can also be used to spur growth and development. If remittances are sent through formal financial institutions, customers can be offered a range of other banking products that help to create more financial literacy to “bank the unbanked”. Of course migrants respond to specific incentives in their choice for a formal or informal channel; understanding the determinants of these choices is part of the research question. Since large amounts of money are being sent and this money has a dramatic impact on the lives of many people, it is important to understand ways in which the sending of remittances can be made easier and more efficient and effective, so more money reaches its final destination.

The way remittances are used is another hotly debated topic. The research project aims at understanding the impact of remittances on the local growth potential of the economy by studying the way these funds find their way into the local economy (as consumption, investment, savings). Investment can be split into regular forms of investment as well as human capital investment (health and education) which affects long-term growth. There will be a focus on the extent to which and under what conditions remittances are used to finance entrepreneurial projects and Small-and-Medium Enterprises (SMEs). To get a firm understanding of the way remittances are spent is important in order to be able to create policies to facilitate the ‘productive’ use of remittances. This part of the project will also assess whether remittances are used in stages; for example do people first meet their basic needs through consumption and then move on to different uses of remittances?

The study will use the data stemming from the database described above together with other information available stemming either from other research projects or from alternative databases.

On the basis of the results of this project, policy options to enhance the benefits of remittances for the communities that receive remittances as well as those who send them will be suggested. This study links up with ongoing and planned research at the Maastricht University studying, for example, the possibility of linking remittances and micro-finance projects. Insights in the strategies of migrating members of household will teach us how remittances are or can be used as welfare instruments and consequently how they might contribute to the realisation of the Millennium Development Goals. The outcome of this research will make clear how to facilitate the ‘productive’ use of remittances for development and increased welfare.