The role of loans and remittances in
Consumption and Investment
decisions in Urban Ethiopia
Abbi Kedir
University of Leicester, UK
&
Gamal Ibrahim, UNECA
October, 2011
Outline of the talk
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Purpose
Motivation
Related literature
Theory
Data
Methodolgy
Results and discussion
Purpose
• Do remittances and loans lead to higher/lower
household asset accumulation, food and nonfood consumption?
• Do remittances and loans increase the
likelihood
of
self-employment
or
entrepreneurship?
Motivation I
• Finance and growth (macro level ‘link broken’)
• Informal financial transfers are fundamental
anchors of welfare and employment
• Most micro level literature focuses on what
determines access to credit and the motives
for private transfers such remittances (Alvi and
Dender, 2009).
• Often credit and remittances are studied
separately (Christensen and Pan, 2010).
Motivation II
• There is a dearth of evidence on how access to
credit and remittances affect household
investment and consumption decisions in SSA
( an attempt to trace the mechanism)
• Labour market – one mechanism to link
growth and poverty (Kedir et al 2011).
• Provide relevant policy recommendations
Literature(only micro) I
• Alvi and Dender, 2009 : what factors significantly
affect household loans and private transfers in
Ethiopia.
• Liverpool and Winter-Nelson (2010) no
relationship b/n participation in microfinance
programs and the use of technologies or
consumption growth among the poorest
households (Ethiopia).
• For other households, microfinance has positive
effects on both consumption and asset growth as
well as on the use of improved technology.
Literature II
• Adams (1998)- effect of remittances on asset
accumulation in Pakistan. Household are
impatient (high discount rate) and do not
sacrifice present consumption for the sake of
asset accumulation.
Theory I
• Remittance flows over long distances (severe
asymmetric information problem).
• Credit need to be repaid and often provided
by informal lenders (less serious asymmetric
information problem)
• Propensity to consume(invest) in the former
(latter) is stronger than to invest(consume).
Theory II
• We test the following propositions:
C / R  0; E / R  0; C / L  or  0;
&
A / R  0 ; E / L  0
Data and Econometric framework
• Panel data from urban Ethi0pia (1994,1995,
1997, 2000, 2004 on 1500 households)
• Fixed effects of consumption and asset
accumulation equations (Hausman test)
• Random effect Probit of self-employment
(stability of quadrature points)
Key Results
• Remittances are positively associated with
food consumption, non-food consumption
and asset (unproductive) accumulation.
• Remittances are negatively associated with
self-employment and entrepreneurship while
the opposite is true for credit
Policy I
• The need for credit access to households to
create employment is obvious.
• Self-employment in the data is characterised
by low-tech and low return small/micro firm
activities.
• Hence for meaningful development volume of
capital provided must be much larger than
what households can get via informal
networks
Policy II
• Small/micro firms are unlikely to grow large.
They simply provide subsistence for millions of
unskilled workers.
• About 800,000 urban informal sector firms
(mfg, trade, services) with 1 million people
employ.ed (Soderbom, 2010)
Future work and econometric issues
• Distinguish between domestic and external
remittances
• Remittances and labour supply to explore why
remittances lead to lower self-employment.
• Endogeneity (IV) and parameter heterogeniety
(quantile regression).