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Caroline B. Theoharides University of Michigan
MRTA Annual Conference October 5, 2011
• Economic Benefits of Remittances
• Patterns: Frequencies and Magnitudes
• Effects of Prices
• Innovative Experiments on Remittances
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-$200
-$100
$0
$100
$200
$300
$400
$500
$600
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
ODA
FDI
Remittances
PortfolioInvestment
Source: Yang, 2011.
3
Bill
ions o
f C
onsta
nt (2
00
5)
US
D
-$200
-$100
$0
$100
$200
$300
$400
$500
$600
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
ODA
FDI
Remittances
PortfolioInvestment
Source: Yang, 2011 and speaker’s calculations.
4
Bill
ions o
f C
onsta
nt (2
00
5)
US
D
Remittance Receipts (USD billions), 2010
Remittances received as % of GDP, 2009
1. India 55.0 Tajikistan 35
2. China 51.0 Tonga 28
3. Mexico 22.6 Lesotho 25
4. Philippines 21.3 Moldova 23
5. France 15.9 Nepal 23
6. Germany 11.6 Lebanon 22
7. Bangladesh 11.1 Samoa 22
8. Belgium 10.4 Honduras 19
9. Spain 10.2 Guyana 17
10. Nigeria 10.0 El Salvador 16
Source: Yang, 2011 and Development Prospects Group, World Bank.
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6 Source: Theoharides, 2009.
Source: Theoharides, 2009. 7
• Developing countries see huge economic benefits from remittances – Reason for establishment of public agencies
• Remittances fuel higher consumption
• Remittances lead to increased investment – Positive correlation between remittances and
entrepreneurship, agricultural investment, and schooling
• Unsettled debate
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Purpose % of Households
Food and maintenance 67.8
Construction or repair of house 17.7
Debt payment 11.1
Education expenses 7.86
Health expenses 2.95
Purchase of house or lot 2.70
Start/expand business 2.70
Savings 2.70
Purchase of vehicle 2.46
Purchase of consumer goods 1.72
Purchase of agricultural inputs 0.98
Purchase of tools 0.73
Purchase of livestock 0.73
Recreation/entertainment 0.49
Finance a special event 0.25
9 Source: Mexican Migration Project and speaker’s calculations.
Source: Snyder, 2011.
10
Source: Snyder, 2011.
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• The studies mentioned so far are mainly correlations
• Households that receive remittances may be different than households that do not
• If these households are compared, it may look like remittance receiving households are more industrious, but it may actually be because they have underlying differences
• To detect microeconomic benefits, we need to compare similar households
• Also want to know how remittances respond to both economic shocks and natural disasters
12
• Filipinos migrate to approximately 180 destination countries each year
• Asian Financial Crisis Many different exchange rate shocks Salaries worth more or less in terms of Philippine pesos
• Results: Increases in income used primarily for investment, not consumption –Raised hours worked, likelihood of starting a business –No significant effect on consumption –Large effects on education expenditures, more likely to exit poverty
• We can now say that remittances cause these benefits • Also provides evidence on how income shocks affect
remittances and subsequent purchases in the developing world
13 Source: Yang, 2008 and Yang and Martinez, 2005.
• Another purported theory is that remittances alleviate risk and buffer shocks
• Developing countries face substantial risk from adverse weather
• Weather shocks represent income shocks • These shocks are essentially random: other than the
weather shock, households are identical • In response to rainfall, remittances rise as income falls and
vice versa • Hurricane damage leads to an inflow of remittances for 20-
25% of the damage. – Remittance response is roughly one quarter of the size of the
foreign aid response
14 Source: Yang and Choi, 2007; Yang, 2008; and Clarke and Wallsten, 2004.
• Not only are remittances important for those in developing countries, but they also represent a significant portion of migrants’ earnings
• Remittances are high in absolute terms – $4,125 annually for Mexicans in the United States
(Yang, 2011) – $5,314 annually for Salvadorans in the United States
(Yang, 2011)
• How do migrants send these sums of money? – All at once? – In small amounts?
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16 Source: Yang, 2011.
Origin Country
Migrant Destination
Country
Average remittances as a percentage of
earnings
Average Annual Remittances ($
Value) Data
Source N
Senegal Spain 49.91% $3,304 Spain NIDI 399
El Salvador United States 37.72% $5,314 ESSMF 877
Mexico United States 31.12% $4,125 MMP 1268
Morocco Spain 30.80% $2,947 Spain NIDI 461
Ghana Italy 23.28% $2,528 Italy NIDI 497
Senegal France 11.23% $1,517 Fr. 2MO 40
Mexico United States 10.80% $1,769 US PEW 321
Morocco France 10.37% $1,283 Fr. 2MO 128
Dominican Republic United States 9.14% $381 US PEW 95
Algeria France 7.67% $1,079 Fr. 2MO 121
China Australia 6.09% $552 Aus. LSIA 65
Philippines United States 5.84% $958 US NIS 344
China United States 3.60% $568 US NIS 291
Vietnam United States 3.39% $297 US NIS 101
Cuba United States 2.32% $398 US PEW 111
Turkey Germany 2.14% $512 Ger. SOEP 334
Cuba United States 2.12% $230 US NIS 98
Mexico United States 1.91% $312 US NIS 790
India United States 1.39% $728 US NIS 526
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0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Annual Number of Remittance Transactions
Source: Yang, 2011.
Per
cen
t o
f R
emit
ters
18 Source: ESSMF and speaker’s calculations.
• Individuals should want to minimize fixed fees – Send large amounts infrequently!
• Why is this happening? – Safety – Debt to family members at home – Self Control Issues – Household Bargaining
• Innovative experiments seek to answer these questions and give a causal interpretation
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• Migrants often complain about lack of control over the way remittances are spent
• Yet, due to geographic distance, migrants cannot control expenditures and may remit less as a result
• Questions: – How much does lack of control affect remittance
magnitudes? – Can innovative payment technologies lead to
increased remittances, more savings, and more investment?
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• Three different financial products were offered to a sample of Salvadoran migrants in the DC area
• Focus was on improving migrants ability to monitor that remittances are saved in a bank account
• At the outset, migrants wanted 21.2% of remittances saved, versus 2.6% for recipients
• Migrants were randomly assigned to one of three financial products – Savings account in the name of the recipient only – Savings account in the name of the recipient and migrant
(joint account) – Savings account in the name of the migrant only
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• Due to random assignment in the treatment and control groups, they can identify the causal impact of different savings products on savings account adoption, remittances, and overall savings
• Results
– Migrants were much more likely to open an account when they had greater control
– Control also led to an increase in savings in El Salvador
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• Another randomized trial conducted in order to causally identify the effects of control on saving
• As treatment, they offer Mexican migrants assistance with obtaining the matricula consula (can be used as identification for opening of U.S. bank account)
• This would work for any US bank account, but they were given information about saving at one institution specifically
• They found that the treatment led to more opening of bank accounts, higher savings in the U.S., and reduced remittances to Mexico
• For migrants who report “no control,” the treatment has an even larger effect on these outcomes than otherwise
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• A number of studies have turned from control over savings to giving migrants the ability to pay directly for goods or services
• This has long been a feature of remittance behavior
– Balikbayan boxes in the Philippines – Mama Mike’s in Kenya
• These types of products enable the purchase of certain types of consumption goods, but what about services?
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• As a result, a number of new studies attempt to provide direct payment facilities to migrants
• Education in El Salvador
• Education in Kenya
• Commitment saving accounts in the Philippines
• Health insurance?
• Small enterprises?
25
• Because of the high frequency/low value nature of remittances, transaction prices are a large portion of the dollar amount of remittances
• Much more efficient to send less frequently to minimize the fixed cost
• Globally, the average fee constitutes 8.9% of the total remittance sent (Yang, 2011 and World Bank) – Could part of this be sent on to family members in
poor countries?
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Receiving Country Fee ($) Fixed Cost as % of
Transaction Exchange Rate Total Cost Total Cost as % of
Transaction
India 5.13 2.57 0.89 6.90 3.45
Ecuador 7.37 3.69 0.00 7.37 3.68
Peru 7.71 3.86 0.12 7.94 3.97
Colombia 7.59 3.80 0.51 8.61 4.30
El Salvador 10.43 5.22 0.00 10.43 5.22
Honduras 10.83 5.42 0.18 11.19 5.60
Nicaragua 11.40 5.70 0.00 11.40 5.70
Dom.Republic 8.01 4.01 1.96 11.93 5.96
Guatemala 9.72 4.86 1.13 11.99 6.00
Haiti 12.10 6.05 0.00 12.10 6.05
Philippines 10.31 5.16 1.08 12.46 6.23
Mexico 11.11 5.56 1.31 13.74 6.87
Nigeria 10.62 5.31 1.59 13.81 6.90
Guyana, CR 11.59 5.80 1.36 14.31 7.15
Jamaica 10.32 5.16 2.00 14.32 7.16
Indonesia 11.44 5.72 1.46 14.35 7.17
Vietnam 13.80 6.90 0.32 14.44 7.22
Panama 15.25 7.63 0.00 15.25 7.62
Pakistan 13.23 6.62 1.27 15.77 7.88
Brazil 8.89 4.45 3.90 16.68 8.34
Ghana 12.10 6.05 4.75 21.61 10.80
China 18.02 9.01 2.17 22.37 11.19
Thailand 21.41 10.71 1.51 24.44 12.22
Lebanon 24.66 12.33 0.23 25.13 12.56
Source: Remittances Prices Worldwide Database, World Bank and speaker’s calculations.
• While fees are a substantial part of the remittance transaction, it is important to consider how responsive remittances are to changes in price
• Freund and Spatafora (2008) find that fees are negatively correlated with the amount of remittances sent
• Gibson et al. (2006) pose hypothetical questions to Tongan migrants in New Zealand – Results suggest that migrants would send higher
remittances if the fixed cost (flat rate fee) were reduced
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• Randomly offered price reductions to Salvadoran migrants in the DC area
• Remittances cost between 9 and 10 dollars to send a remittance of $1500 or less
• Individual remitters were offered prices of 5, 6, 7, 8, 9, or 10 dollars for the sample period
• Margin of response was twofold – Higher frequency – Higher overall amount – Overall, remitters sent an additional remittance for the same
value as previous remittances, which increased the total – A $1 decrease in prices led to a $25 increase in remittances!
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• Follows-up on the results of Aycinera et al. – Their results seem indicative of some type of self control
or procrastination problem
– The increase in remittances was much larger than the decrease in prices
– Why?
• Question: Do prices or procrastination have a larger effect on the total amount of remittances sent?
• Goal: Separate the effect of decreased procrastination versus decreased prices on the amount of remittances sent
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• Middle Eastern immigrants in Dearborn shopping at the largest Middle Eastern market in the area
• Participants will be enrolled following a remittance transaction at the remittance counter in the grocery store
• Steps: – Baseline survey, including tests to calculate how much
individuals prefer money today versus money tomorrow – Enrollment in one of two treatment groups or a control
group • Treatment 1: Small discount for the entire sample period • Treatment 2: Same small discount for a short time-limited period
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• Hypothesis: – The time limited discount will enable migrants to overcome the
procrastination effect – If procrastination affects the frequency of remittances more
than price, then the second treatment will lead to a larger increase in remittances
– If prices have a larger effect, then the first treatment will lead to a larger increase in remittances
• If a time-limited discount has the same effect as a continuous discount, this has important implications for policy and the subsequent subsidies that may ensue
• Overall, research thus far suggests that reducing prices may have effects beyond what a simple price elasticity might suggest
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• Remittances are an increasingly important flow of funds to developing countries – They have positive effects at a macro level and in
terms of both consumption and investment • They are sent at a relatively high frequency for
low dollar values, though annual individual remittances are substantial – As a result, a large component in current research is
to enhance control over migrant remittances • Reductions in price seem to operate more at the
level of reducing procrastination than as a pure price effect
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