The Socio-economic Impact of Remittances on Poverty Reduction1
Admos Chimhowu
Institute for Development Policy and Management, University of Manchester
and WISE Development Ltd
Jenifer Piesse
School of Social Science and Public Policy, King’s College London,
University of Stellenbosch, RSA
and WISE Development Ltd
Caroline Pinder
WISE Development Ltd
September 2003
Abstract: Remittances in the form of monetary and other assets are an increasingly important share
of international capital flows, both in terms of the absolute amounts and their proportion of GDP for
many developing countries. Transfers can be between countries, regions and from urban to rural
households. Expenditure patterns by recipients vary from basic items essential to prevent vulnerable
households falling into poverty, to income smoothing and the purchase of consumer goods or
investment in human or physical capital. Gender, inter-generational and kinship ties all have a role in
the impact of remittances in poverty reduction. Negative aspects of remittances can be dependency
and increasing inter-household and community inequality.
Admos Chimhowu has a BA in Geography from the University of Zimbabwe, an MSc in Rural and
Urban Planning and a PhD in Development Studies from the University of Manchester. He is a
lecturer in the Institute for Development Policy and Management at the University of Manchester. His
major research interests are poverty, rural livelihoods, agrarian change and social transformation in
Africa
Jenifer Piesse has a BSc in Economics from Columbia University and an MSc and PhD in Economics
from the University of London. Previously at Brunel University and Birkbeck College, she is
currently Reader in International Finance at King’s College London. She has published extensively on
productivity measurement, poverty and aspects of emerging and developing financial markets.
Caroline Pinder has expertise in social research linked to programme development, particularly in subSaharan Africa and has extensive experience in micro and small enterprise development. She is
currently project manager for the DFID funded Enterprise Development Impact Assessment
Information Service. She founded WISE Development Ltd in 2002.
Keywords: Remittances, expenditure patterns, poverty reduction
1
This paper is taken from: Report on the Development of a Framework for Assessing the Socio-economic Impact of
Migrant Workers’ Remittances on Poverty Reduction, commissioned by DFID to WISE Development Ltd.
The Socio-economic Impact of Remittances on Poverty Reduction
Admos Chimhowu, Jenifer Piesse and Caroline Pinder
Introduction
While capital flows have declined during the past decade, workers’ remittances have become an
increasingly important source of external funds in poor countries. In 2001 recorded global remittances
amounted to $72.3 billion, however it is estimated that this official figure represents only half the real
total and as much again is transmitted through informal and unrecorded channels, so precise
measurement is problematic.2 Even so, this official figure represents the second largest capital inflow
to developing countries, after foreign direct investment and is well ahead of official development
assistance, making remittances the most important contribution to total external financing. Thus, it is
no surprise that donors are keen to examine ways of facilitating an increase in the flow and use of
remittances that may lead to a reduction in poverty in the countries from which migrants
predominantly originate. However, whilst there have been numerous studies of the impact of
remittances on migrant sending communities, very little work has been done to develop a
comprehensive framework to assess the impact of remittances on poverty reduction. In particularly,
there is no generic body of theory that encapsulates assessment of such impacts, although Stark (1991)
and Russell (1996) note the emergence of ideas coalescing around what is known as the new
economics of labour migration, which have been increasingly prevalent since the 1980s3.
This paper is structured as follows. In the first section the nature of remittances is described, followed
by a brief summary of some of the empirical evidence on the expenditure patterns of recipients and the
poverty reducing outcomes that result. Section three discusses the social and economic impacts of
remittances and examines the positive, and sometimes negative, effects on recipient households,
communities and regions. The last section presents some methodologies for assessing the impacts of
remittances on well-being in order to contribute to the debate on policies aimed at poverty reduction.
1
The Nature of Remittances and their Role in Poverty Reduction
Remittances are the money that migrants earn and send to their families, when they are working away
from home, and as such, are one of the most visible outcomes of migration. However, although the
conventional approach to analysing the impact of remittances on the domestic economies of receiving
countries focuses exclusively on officially recorded flows and their effects on the various economic
aggregates in the formal economy, this seriously understates the total benefits transferred. It is widely
acknowledged that officially recorded remittances fall short of the actual savings of migrant workers,
or potential remitters, although the true magnitude of unrecorded remittances and their economic
implications are difficult to estimate. A fraction that are not recorded represent pure leakages and the
largest part are remittances sent through informal channels in order to finance domestic consumption,
investment and foreign trade transactions in the migrants' country of origin (Russell, 1996; Puri and
Ritzema, 1999; Bracking, 2003), Taylor (1999).
However, it is not only cash remittances that are sent to households and community projects although
most empirical studies on the poverty impacts have tended to be narrowly defined and restricted to
formally transmitted monetary assets rather than physical and social assets (Gammeltoft, 2002).
Recently, there is increasing evidence that remittances are much more than pecuniary assets (Clark
and Drinkwater, 2001; Ballard, 2002; Orozco, 2002). Thus, any study of their impact on poverty
requires that additional attention is given to these often neglected kinds of transfers. For example,
food, clothing, medicines, gifts, dowries, tools and equipment, and a range of domestic consumer
2
In 2002 the value of recorded remittances is expected to have reached $100 billion (World Bank Development Indicators,
2000)
3
See Stark (1991) for a good summary of these ideas, particularly that voluntary migration and remittances are part of
household level strategies managing and coping with idiosyncratic and covariate risks.
2
goods are frequently transported between home and the workplace and these can make up a significant
part of household consumption. They are often difficult to quantify, although anecdotal evidence
suggests that such transfers are substantial, particularly between countries that border one another,
such as South Africa and Zimbabwe. Also important is the use of family savings, which are
frequently sourced from established migrants, to provide the initial funds that assist additional family
members wishing to migrate. Finally, one of the most important forms of remittance is the transfer of
human capital. It is acknowledged that many migrants arrive as unskilled workers but are able to
benefit through training and experience during their employment, enabling them not only to earn a
higher salary and therefore increase the amounts they are able to remit, but also to return home and
obtain higher earnings than when they left. This capacity building is highly beneficial and provides an
indirect but crucial contribution to remittance benefits. However, again, these gains are difficult to
identify, measure or quantify.
While capital flows have declined during the past decade, workers’ remittances have become an
increasingly important source of external funds in poor countries. Table 1 shows the relative impact
of remittances compared with other sources of international money transfers.
Table 1: Remittances received and sent by developing countries (2001 $ billions)
All
Low-income
Lower
developing
middleincome
Total remittance receipts
72.3
19.2
35.9
% of GDP
1.3
1.9
1.4
% of imports
3.9
6.2
5.1
% of domestic investment
5.7
9.6
5.0
% of FDI flows
42.4
213.5
43.7
% of total private capital inflows
42.9
666.1
44.9
% of official flows
260.1
120.6
361.7
Other current transfersa
Remittances/other current transfers
Total remittance payments
Total (excluding Saudi Arabia)
27.2
99.5
22.0
6.9
6.1
25.3
1.2
1.2
14.0
49.9
1.7
1.7
Upper
middleincome
17.3
0.8
2.7
4.9
21.7
20.2
867.9
7.1
24.4
19.1
4.0
a
Other current transfers include gifts, donations to charities, pensions to retired expatriates, etc. Sources: IMF Balance of
Payments Yearbook 2001; World Bank, World Development Indicators 2001
Most countries, and all regions, benefit from remittance transfers although as a share of GDP, the
greatest impact is in the Middle East and North Africa and South Asia, reported in Table 2.
Table 2: Remittances received by developing countries, by region, 1992-2002
Regions
1999 2000 2001 2002 1999 2000 2001
Billions of $
As % of GDP
Total
67
66
72
80
1.2
1.1
1.3
East Asia & Pacific
11
10
10
11
0.7
0.7
0.6
Europe & Central Asia
8
9
9
10
0.9
0.9
0.9
Latin America & the
17
19
23
25
1.0
1.0
1.2
Caribbean
Middle East & North Africa
12
11
14
14
2.2
1.9
2.3
South Asia
15
13
14
16
2.6
2.3
2.3
Sub-Saharan Africa
4
3
3
4
1.3
0.8
1.0
2002
1.3
0.6
1.0
1.5
2.2
2.5
1.3
Sources: IMF Balance of Payments Yearbook 2001; World Bank, World Development Indicators 2001
It should be noted that the sub-Saharan African countries, with some of the highest levels of poverty,
receive the lowest absolute level of remittances. Two comments can be made on this. Firstly, this
suggests that international migration is not an option for the poorest households, who lack the initial
3
funds to travel, perhaps have the lowest standard of health and nutrition and have few support
networks. Thus, the chance of being able to find well-paid overseas employment and subsequently
send remittances home is low. But at the same time, this region is subject to considerable levels of incountry and inter-regional migration where remittance receipts are particularly difficult to measure.4
So, no clear conclusions about the relative importance of remittances in this region can be made with
any certainty.
Several features of remittances differentiate these transfers from other international investment flows.
Remittances play a central role in the total income available to recipient households and communities,
and appear to be more stable than other international funds flows. For example, both private capital
flows and foreign direct investment to middle and low-income countries move cyclically, depending
on market conditions and the availability of attractive investment opportunities. This can result in
increased investment during up-turns in the economy and the reverse during downturns. Even aid
contributions may be subject to influences derived from changes in the international political
environment. However, economic recession and low domestic employment opportunities may be an
incentive for more workers to migrate in order to increase the resources available for families at home.
Regional and international differences in relative wage rates will have the same effect. As shown in
Table 1, the trend of remittances indicates that these were a relatively stable source of foreign
exchange earnings when others were not. For example, when private capital flows declined following
the Asian financial crisis in 1997/8, remittances continued to rise steadily or at least remained
constant, much more so than either foreign direct investment or official flows, which are the more
stable of all international capital transfers. The non-synchronicity of business cycles provides a means
of income smoothing and may help poor and vulnerable households to recover from unexpected crises.
The stability of remittance income is likely to be a function of the purpose for which the funds are
intended, an issue discussed in the next section. An argument can be made that remittances used for
consumption by receiving households may be less volatile than those used for investment. Where the
remitter has knowledge of the domestic household income, and can estimate the shortfall between
received income and expenditure, they can ensure that the additional funds contributed remain at a
sufficient level to meet the needs of the household. Migrants tend to increase remittances in times of
economic hardship or crisis for their families, particularly in low-income countries where households
are close to subsistence level.
By comparison, remittances transferred for investment purposes can be more volatile, although still
less than those that characterise portfolio flows to emerging markets. A World Bank study (World
Bank, 2001) found a similar effect to the home bias phenomenon noted in investment patterns, where
migrants’ perception of risk in their home country is not the same as that of foreign investors. There is
some evidence that remittances are used for investment purposes, particularly in low-income
countries. Woodruff and Zenteno (2001) estimate that remittances from the US account for 20% of
the capital invested in micro-enterprises in urban Mexico.
One noted effect is that remittances were significantly higher in countries that are high-risk, as
measured by their Institutional Investor rating, and with a high level of debt to GDP. This is
consistent with the finding in Table 2 that low-income countries, which are more likely to be high-risk,
receive more remittances as a share of GDP than middle and high-income countries. Remittances tend
to be higher, and more uniform, in low-income countries, since these funds are more frequently used
for consumption than investment. Inflation in the home country, too, has been shown to have a
positive and significant impact on the inflow or remittances, reflecting the need for increased support
for families where prices are rising. Zimbabwe is a prime example of this, where money remittances
are quickly devalued and the benefits of other forms of transfers, such as domestic goods, medicines
and food become increasingly attractive. However, if cash remittances are sufficiently large, this will
4
The legacy of apartheid and enforced migratory labour patterns remains in many countries in the region.
4
lead to a weakening of the exchange rate of the home country, further depressing the economy and
providing even more reason to migrate.5
Two further aspects of migration and the resulting flows of remittances that should be mentioned
briefly here are the impact of urban/rural drift and the potential negative effects of both household and
government dependency, both of which are noted in the literature (see Ballard, 2002). During the
process of structural transformation, labour moves from rural economies to centres of manufacturing
and later services, increasing the migration from predominantly rural areas to the cities. However,
migration to urban employment, whether on a local or global scale, can result in a reduction in the
supply of available agricultural labour before sufficient levels of agricultural productivity have been
achieved. This may have a devastating effect on food production.
Secondly, the scale and character of the flows of value, people and information can result in an inflow
of capital to emigrant areas that is a substantial multiple of that which the local population could ever
otherwise have expected to have access, even in the case of local movements to nearby cities. In
particular, these are in the nature of a large marginal gain, even when the migrant intends to return.
However, apart from any resulting inequality within the family or community, and the social
instability that may cause, there may also be a culture of dependency that minimises the benefits from
economic gains. An analysis of the contemporary literature suggests that critics of policies that
encourage remittances claim they have a negative impact on developing countries (Osili, 2002). The
implication is that this additional income is embedded within structures that perpetuate poverty in the
developing countries, and can promote economic stagnation rather than economic growth. Where the
primary result of remittances is a level of economic dependency, and the only rational strategy for
labour is to migrate, the local community will not benefit but rather lose resources and long-term
poverty reduction is a less likely outcome.
A slightly different view of dependency considers remittances to be responsible for creating dependant
relations between the sending and the receiving countries (Portes and Borocz, 1989), emphasising
macro-economic relationships and the structures within which the movement and flow of goods and
services occurs on a global scale. Within countries, remittances are seen to generate inequality among
households (Adams, 1991) while they also can generate macro-economic stability problems for
countries with low GDP (Jones, 1998).
At the national level, dependency on migration and remittances does not release governments from
their responsibility for job creation and the provision of a welfare net for those truly in need. Not all
families have members that are able or willing to migrate and even if they do, they may not be able to
depend on regular and sufficient levels of remittances to support the family. Relying on remittance
support is not a substitute for poverty reduction programmes and economic growth.
2
The Uses of Remittances: Consumption versus Investment Expenditures
The analysis of remittance expenditure is frequently prefaced by an examination of the motivation for
migration and subsequent remitting behaviour. Three strands of literature are relevant here. Firstly,
the risk-sharing motive suggests that remittances are part of a risk management strategy (Stark, 1991;
Stark and Lucas, 1988). The remittances provide benefits to both the migrant who intends to return
home and the recipient household, providing security and the maintenance of a sufficient income in
the event of external shocks. These may be the result of a loss of employment on the part of the
remitter or drought in the case of a rural beneficiary. Remittances are thus a mutual benefit and are an
enforceable contract between the remitter and the recipients. Therefore, this suggests that remittances
are a constant premium that is not affected by the number of migrants from the same family that are
remitting or the poverty status of the receiving household. Any altruistic behaviour is seen as
5
This follows from the relative form of purchasing power parity, where the change in the ratio of domestic prices of
internationally traded goods in two countries is reflected in the change in the exchange rate.
5
coincidental to personal self-interest. However, one of the main problems of this approach is that it
assumes the migrant is a rational economic being whereas emerging evidence, for example Hadi,
1999; Kannan and Hari; Yang, 2003, shows that family bonds of trust and not simply economic
expediency play an important role in the decision to remit.
Secondly, there is the view that remittances fulfil an obligation to the household, based on affection
and responsibility towards the family. The migrant is simply part of a spatially extended household
that is reducing the risk of impoverishment by diversifying across a number of activities (Banerjee,
1984; de Haan, 1998; Agrawal and Horowitz, 1999). Thus, migration is a family decision. Here, the
migrant uses established networks for both potential employment opportunities and the transfer of
funds and other resources. When motivated by altruism, remittances can vary depending on the
number of household members that migrate and the poverty status of the receiving household,
although it has been noted that poorer households receive a greater proportion of their total income
more than the non-poor ones.
The third model is a combination of the previous two, where altruism and self-interest both are
determinants in the decision to migrate and remit (Ballard, 2001; Clarke and Drinkwater, 2001). While
migrants are motivated by self-interest, this is usually within the context of existing kinship ties,
although there are gender differences and de La Cruz (1995) has observed that male migrants are more
likely to follow self-interest whereas female migrants remit more out of altruism.
However, whatever the motivation to migrate and remit there are very clear differences in the potential
for poverty reduction and economic security for the household and community that are directly related
to the uses to which the funds are put. Remittances that are part of productive investment tend to have
an impact on long-term poverty reduction, resulting in less vulnerability at both household and
community level. There may also be a reduction in inter-household inequality. Conversely, where
remittances are used in local consumption, this can have a short-term significance only and can also
increasing inter-household inequality.
The decision to use remittances for consumption or investment is a function of a number of factors,
not least of which is the pattern of control of total household resources. This is particularly relevant in
respect to the social aspects of remitting behaviour and will be discussed further in the next section.
However, it is clear that the role of the remitter in the household, and whether they have an intention
to return to home in the future, has a major influence in the decision to consume or invest funds that
are received. Migrants that remit funds in order to build a house or start a business when they return
are likely to be displeased to see their earnings spent on consumer goods while they are still away.
A number of surveys from a range of countries have found fairly consistent results. The bulk of
remittances, up to 80 per cent in some regions, is spent on consumption and welfare while only a small
amount is invested in land and housing and new productive investments (Taylor, 1999; Gammeltoft,
2002). Clearly, expenditure on land and housing is also employment creating, and ultimately, so is
expenditure on consumption and human capital and welfare. However, it has been found that for the
long-term economic growth of a community, it is the new productive investment that is the critical
factor (Ballard, 2001). Apart from increasing disposable incomes and thus creating a spillover effect
by raising the effective demand for local goods and services, remittances play a central role in
developing local capital markets and productive infrastructure (Ballard, 200; Keely and Tran, 1989).
A summary of the literature on consumer versus investment remittance use is shown in Table 3. It is
interesting to note that whatever the motivation for remitting, the patterns of remittance use is not
significantly different. However, the distinction between consumption and investment is not as
straightforward as Table 3 suggests. Some consumption patterns do have long-term influences on
poverty, such as expenditure on health and education, and clearly, these can be considered to be
investment in human capital. Neither are pure consumption expenditures solely for the benefit of
individual households as secondary effects follow if production enhances the local economy. In some
instances, the use of remittances is encouraged through special schemes established to promote retail
6
trade in the home countries. For example, in the Philippines, special tax and duty free shops have
been set up to provide gift packs to local relatives of migrants.
Table 3: Remittance Motivation and Use
Motivation/Use
Consumption
Risk sharing
Remittances help household to cope with
risks. Cash receipts are used to purchase
daily food and luxury consumables or to
purchase locally available essential
services (health, education). Ensures the
households functions on a day to day
basis (Dreze and Sen, 1989)
Altruism
Goods and gifts are sent to the
household to fulfil altruistic obligations
to the family (Agrawal and Horowitz,
1999)
Productive Investment
Remittances help the households to
manage idiosyncratic risks.
Investment in liquid assets like
livestock, agricultural implements,
new technologies help the households
to cope better in future (Lucas and
Stark, 1985)
The remittances are used to expand
the capitals/assets available. Indirect
benefit to the household but is more
long term and beneficial to the wider
community (Adams, 1991; Martin,
1999; Skeldon, 2002)
From the discussion of the uses of remittances, three main issues emerge. The first is that there is a
gender difference in remittance use. Female remitters are more likely to contribute to household
consumption needs as a risk reduction strategy, out of altruism, whereas males invest in productive
activities, or risk management, largely out of self-interest. Explanations for this vary, but a
contributing factor may be the observation that female migrants tend to settle in the host country for
the long term while male migrants often intend to return home or are following inter-country labour
demand. Secondly, remittances sent through organised groups or associations tend to be used to
mitigate covariate risks. Thus, these tend to be of long-term productive benefit to the local community.
Although not benefiting directly, households of remitters experience better quality local amenities
through such activities (Meyers, 1998; Ratha, 2003). Finally, apart from remittance decline due to
cyclical fluctuations in migration prospects, voluntary remittances from individual migrants
progressively reduce over time as the migrant become more integrated in the host country
(Gammeltoft, 2002, Taylor, 1999).6
The implications to be drawn is that while the use of remittances for risk coping is an important factor
in averting families from falling into a livelihood crises, in the long term it is the investment in risk
management that is likely to have a sustained impact on poverty. This means that policies that enable
organised group remittances to be transferred in a secure and cost effective way, while at the same
time allowing individual remittances to continue to be used to mitigate against idiosyncratic risks, will
provide the greatest benefit to recipient developing countries.
3
The Social and Community Impacts of Remittances
While the previous sections have focused largely on the economic aspects of remittance flows, a
number of additional social factors should be considered including the impact of gender on remitters
and recipients, inter-generational issues and kinship implications. The impact of remittances on
economic inequality within communities and households has been noted above. But, equally
important, is the change in social structures and cultural practices that can result from remittance
flows, and the concept of social remittances, that is, transfers in ideas and attitudes when migrants
return home, is receiving increasing attention. However, the impact of both social remittances, and of
the effects of financial remittances on social structures and values, may be ambiguous. For example, a
positive result may be that remittance income enables girls to complete their schooling, rather than
6
Only voluntary remittances have been consider here, but there is increasing evidence of the importance of involuntary
remittances (see Sparreboom and Sparreboom-Burger, 1996; Taylor et al, 1996; Dostie and Vencatachellum, 2002).
7
leaving early to work in the home or on the farm. The empowerment resulting in this type of social
change can increase the aspirations of young women to continue education and training, leading to
higher earnings in the future. However, a negative result can occur where migrants return with nontraditional attitudes, which can cause disharmony in the family or community.
Other gender effects can be noted. Large numbers of receiving households in the countries and
regions of origin are headed by women, (Kothari, 2002; Hadi, 1999), many of whom are elderly. In
households where decisions are taken by women, including the allocation of financial resources,
expenditures patterns can differ from those in male headed households (Piesse and Simister, 2003). In
particular, this can result in important difference in choices concerning consumption versus
investment. From the remitter perspective, although regional variations exist, women comprise a
small but growing percentage of migrants and are generally considered to be the more reliable
remitters in the short term. For this reason, single woman are often selected by their families to
undertake migration (de la Cruz, 1995; Dostie and Vencatachellum, 2002). Female migrants are also
beginning to exert some influence in the use of their remittances while they are away from home, and
evidence of female preferences for expenditure on welfare enhancing consumption have been noted,
for example, the education of younger siblings and the health of parents (de la Cruz, 1995; Yang,
2003). Conversely, male migrants tend to remit money to savings accounts for themselves, or for
investment on their behalf in land and housing for the future. Males are more likely to take home
consumer goods for their own uses, such as televisions and cars (Adams, 1991).
With respect to the decision to return home, female migrants from cultures that curtail women’s
empowerment are less likely to return home than men from those societies or women from more
equitable societies (Hadi, 1999; De Sipio 2000; Ballard, 2001). For those that do return, their status
may be enhanced as a result of their financial contribution to the household, leading to better
employment or marriage prospects or social standing within the community.
In addition, inter-generational effects should not be ignored. Again, recognising regional differences,
the majority of migrants are less than 35 years old, unmarried, and likely to be the oldest daughter or
son of the household (Taylor, 1999; Adger et al 2002). Receiving households are therefore more
likely to be led by older relatives, usually parents or grandparents. Funds remitted are often used on
education of siblings who may also migrate eventually, or on the health needs of elderly relatives
(Yang; 2003), indeed, the provision of health and education is frequently a large factor in the
motivation to migrant. However, in some regions, it is more often parents, young and old, who are the
migrants. Examples of this are the traditional Southern African labour-sending communities that
provide resources for the mining sector, usually men, or export-processing zones attracting women
workers into factories or seasonal agricultural work such as flower and fruit picking. They may leave
behind teenage children, usually girls removed from school early, to care for any remaining children
and the household in general.
Multi-generational and kinship ties may have a more permanent dislocation where migration is a longterm strategy for the household. The longer a migrant is away, the more likely they are to settle in the
country where they work, establish a household and raise a family there. This subsequently reduces
their remittances to their country of origin and successive generations are less likely to continue
sending remittances. Frequently, the remittances cease altogether (De Sipio, 2000; Ballard, 2002).
However, in other cases, successive generations of migrants actually increase the size of their
remittances to the family in the country of origin as they obtain better paid jobs than their migrantparents. This is more likely where groups of migrants from the same community retain close links
with their families and each other, sometimes joining associations that finance community-based
projects rather than individual households (Clark and Drinkwater, 2001).
While these links provide economic support and help to retain kinship ties for long-term or permanent
migrants, this can result in increasing inequality in the receiving community where some households
are remittance recipients and others not. This can cause a previously cohesive community to become
divided and lead to conflict (Russel, 1996; Hadi; 1999; Ballard, 2002). The impact on the migrant8
sending community as a whole, and households within it, can vary from extreme dependence on the
remittances, with consequent vulnerability to changes in legislation or work requirements in the host
countries; or it can lead to increased prosperity, both in absolute terms and also relative to other
communities in the area, especially when the remittances are used to finance productive investment
such as businesses, houses, and infrastructure (Taylor, 1999; Ballard, 2001).
4
A Framework for Assessing the Impact of Remittances on Poverty Reduction
To assess the impact of remittances on poverty reduction, it is necessary to develop a framework that
adopts the widely accepted multi-dimensional definition of household poverty. That is, poverty is not
only about cash income and consumption levels, but includes the capacity to accumulate assets that
reduce vulnerability to financial shocks, and to gain access to entitlements such as education and
health that contribute to livelihood security and sustainability. Therefore, a medium-term time horizon
is required to evaluate the extent to which remittances provide a progression out of poverty, rather
than simply effect immediate consumption patterns. In this way, it is possible to include the impact of
remittances on the recipients’ empowerment and their ability to participate in social and economic
institutions. Remittances alone are unlikely to lift people out of poverty, but their interaction with
other economic, social and cultural factors determines the scale and nature of the impact on poverty
reduction. Thus, the crucial task is to examine the marginal benefit of remittances to the household in
the medium and long term and develop policy interventions that increase the impact on their economic
and social status and hence reduce their vulnerability to poverty.
However, a major constraint in the development of an inclusive framework for policy interventions is
the legal status of migrates. Legal immigration usually implies better pay and conditions of
employment in the host country. It also tends to result in a greater awareness of the formal methods of
funds transmission, which are generally cheaper and more secure. These factors can affect both the
volume and pattern of remittances. Conversely, illegal migrants are more likely to be less educated or
skilled and originate from poorer households. These individuals may be ineligible for work permits,
or unable to use legitimate recruitment agencies, leading to a higher likelihood of exploitation.
Given that the balance of evidence clearly supports the view that remittances are an important means
of poverty reduction, one challenge for donors and governments is to find ways that can provide funds
transfer mechanisms for illegal migrants. This would enable them to benefit from reduced
transmission charges and other support programmes, and hence encourage remittances. However,
another consideration is that many migrant workers send money home via informal means in order to
avoid taxation or other income tracing in their home countries, indeed, some informal transfer
mechanisms, such as hawala, are considered more efficient and cheaper.
As has been shown in the previous sections, the approach adopted to the analysis of the assessment of
the impact of remittances, can lead to different conclusions. However, the overwhelming results from
empirical studies on the overall poverty effects show that, apart from the possible inequality increasing
effects, and dependency, remittances make a powerful contribution to reducing poverty or
vulnerability in the majority of households and communities. Table 4 summarises the main positive
and negative impacts. The importance of investigating the differential effects of remittances at
different levels becomes apparent when noting that inequality induced by remittances varies
depending on the level of analysis. For example, while at the local level remittances increase
inequality, at the international level, they transfer resources from developed to developing countries
and so in that respect, help to reduce inequality. National level impacts are more significant in
countries with large numbers of migrants, and where the GDP is low. In such cases, studies show that
the destabilisation of macro-economic stability that can be caused by remittance flows can cause
poverty particularly for the wider population that may not have remitting migrants. At the community
level, the impacts are mainly indirect although in countries where migrants remit as organised groups
the impacts can be direct.
9
Table 4: Summary of Key Impacts of Remittances on Poverty at Different Levels
Recipient
Poverty Reducing Impact
Households Increased household income helps in income and consumption smoothing (In
some regions accounting for up to 40% of income (see Azan and Gubert, 2002;
Kannan and Hari, 2002)
Increased savings and asset accumulation (liquid and non-liquid assets) provide
collateral security for loans and can be liquidated in times of crises (see Lucas
and Stark, 1985; Hadi, 1999)
Improved access to health services and better nutrition (potential for improved
productivity (see Yang, 2003)
Access to better education for longer and stop child labour-(see Edward and
Ureta, 2001)
Increased social capital and ability to participate in social groups and activities,
savings clubs, money rounds, reciprocal labour pools (see)
Improved access to information (see Adams, 1991; Ballard, 2001)
Community Improved local physical infrastructure (see Ahmed, 2000 Alarcón, 2002).)
Growth of local commodity markets
Development of local level capital markets (availability of new services
(banking, retail and trade, travel), construction see Ballard, 2002)
Development of new development institutions (local development associations
see Meyers, 1998; Ballard, 2002 Alarcón, 2002)
Changing cultural practices (especially attitudes towards girl children)
Generating local employment opportunities
Reducing inequality between households, particularly for poor households.
National
Improved foreign currency inflows (in some countries remittances constitute up
to 9% of GDP- (see Martin, 2001; Orozco, 2002; Ratha, 2003)
Employment creation as remittances are invested in the productive sectors (see
Puri and Ritzema, 1999)
Increased human capital as migrants learn new skills and work practices (see
Leon Ledesma and Piracha, 2001)
International Reduction in inequality among countries as remittances now exceed official
development aid transfers in some regions (Ratha, 2003)
Non-Poverty Reducing
Dependency on remittances leaves households vulnerable
to changes in migration cycles
High share of remittances spent on non-productive
investment and short term consumption gains (see
Ballard, 2001)
Differential access to the additional resources according
to sex or age (see Kothari, 2002; Dostie and
Vencatachellum, 2002)
Adopting innovations that are not suitable for the local
environment (see Osili, 2001)
Initially can increase inequality between households
(those with access to remittances and those without)
Distortions in local factor markets (especially land and
labour)
Transmission of negative cultural practices that reduce
local quality of life (Levitt, 1996)
Fluctuations in exchange rates especially for countries
with a low GDP (Amuedo-Dorantes and Pozo, 2002)
Growth of parallel foreign exchange markets
Distortions on property markets (see Bracking, 2003)
Withdrawal of state welfare programmes due to
remittances
Creates dependency on unreliable sources of foreign
exchange that are subject to cyclical fluctuations
(Amuendo-Dorantes and Pozo, 2002)
Promotes the development of money laundering
Any investigation of the impact of remittances is by necessity inter-disciplinary, and methods and
techniques used in the assessments are equally plural and varied. There is an emerging consensus that
there is a need for a multi-method framework that may include an integrated approach encompassing
qualitative life histories, conventional quasi-experimental designs that can be used in programme
evaluations, and econometric models to simulate the impacts at local household, community and
national levels. Longitudinal anthropological investigations based on multi-generational recipient
households offer further possibilities. What is often difficult in the studies is separating the impact of
remittances from the cumulative effects of other development centred policies. Table 5 shows that
substantially more impacts are recorded at the household level than at community, national and
international level. This confirms the dominance of voluntary individual remittances in household
welfare. All of these approaches can be adapted and used in a specific intervention impact assessment.
Conclusion
This paper has considered the nature and role of remittances in household income and considered the
impact they may have on poverty reduction. While noting that there is little accurate data on the real
volume of funds transferred, there is evidence that these flows are substantial. They are also more
stable and better able to be directed to vulnerable families both as support during a crisis or as an
income smoothing mechanism. Expenditure patterns and the use of these additional resources for
consumption or investment influence whether the poverty reducing effect is short or long term, as does
the control on the use of the remittances by different family members. The impact of gender of both
the remitter and recipient, both from an economic and social perspective is important, as does the
expectation that the migrant will return in the future. The effect of inter-generational and kinship ties
also influence the extent to which migration and remitting is an ongoing strategy of the household.
A number of conclusions can be drawn about the poverty impacts. Firstly, at a local level, remittances
now form an important part of household livelihood strategies. Remittances contribute directly to
raising household incomes as well as broadening the opportunities to increase incomes. They also
allow households to increase their consumption of local goods and services. Available evidence
suggests caution in drawing conclusions on the extent to which remittances can be a broad strategy for
poverty reduction for two main reasons. Remittances can be unreliable and hence can only make
specific contributions at a particular moment in time and in the long term, they can cease altogether as
the migrants either return to the home country or are integrated into the host community.
Second, at the community level, remittances generate multiplier effects on the local economy, with job
creation and new economic and social infrastructure and services put in place. This is particularly so
where there are effective structures and institutions for interfacing with the remitters. Where these
have been set up and encouraged, and the state is supportive, remittances can make a difference
particularly in remote rural locations where state resources have not been effective (Alarcón, 2002).
Third, at the national level remittances provide foreign currency and contribute significantly to GDP.
However, for countries with low GDP remittance receipts can distort the functions of formal capital
markets and also destabilise exchange rate regimes through the creation of parallel currency markets.
Fourth, remittances can redistribute resources from rich to poor countries. Since remittances now
surpass official aid transfers to developing countries, they play a major role in reduce inter-country
inequality and promote poverty reduction.
Finally, assessing the impact of remittances requires that an appropriate framework is sufficiently
flexible to consider the impact of remittances at the four main levels, namely the individual,
household, community and national. Of these, the individual household is more important to assess the
potential for poverty reduction. To measure the impact of remittances on poverty requires a multidimensional approach and a broad-based framework. Indicators can form the basis of an assessment
exercise, although each analysis should relate to a specific intervention to assess the marginal benefits.
Table X: Pro-poor market development: examples of monitoring indicators to be used in assessing remittance-related interventions
Market
Domain of
Indicators of improved market development related to remittances
Characteristic
intervention
1 MARKET & REGULATORY FACTORS INFLUENCING VOLUME OF REMITTANCES:
Increased volume of remittances entering via formal banking system
Enabling
Economic policy
Removal of taxes and other penalties on incoming currency. Economic stability
framework
Transparent legal system underpinning financial services providers, leading to
Law and
increased confidence to use formal systems.
Administration
Market failure
Political and
social culture,
governance
International
markets
Market power,
monopoly
Information
asymmetry
Transactions cost
Means of verification
Political stability. Measures taken to close opportunities for rent-seeking
among civil servants. Extent of male-dominated institutions.
Economic surveys & reviews. Surveys of banks
and other transmitters
Surveys of remitters and receivers. Analyses of
banking systems. Review of civil service
procedures re currency importation.
Governance analysis.
Gender analyses.
Instability of capital flows and currency valuations
Economic reviews
Degree of competition amongst banks and other financial service providers.
Sector reviews.
Knowledge of currency regulations and enforcement mechanisms. Knowledge
Surveys of remitters and receivers
of transmission fees of range of providers
Lower charges by banks for transmission of remittances
Financial sector studies.
Contract enforcement mechanisms. Barriers to formal financial sectors.
Legal reviews
2 MARKET & REGULATORY FACTORS INFLUENCING USE OF REMITTANCES FOR PRODUCTIVE INVESTMENT:
Gender analyses. Review of regulations and
Adverse power Regulations anti- Female property rights limited, inheritance laws
Law favours formal enterprises. Time and complexity of business start-up
legislation
relations,
poor, antiprocedures
exclusion
women, antiyouth, ethnic bias
Absence of gender awareness in service providers. Unionisation
Gender analysis.
Organisational
Weak/non-transparent procedures
Organisational and institutional analyses
bias
Indebtedness to banks and other formal financial service providers for loans to
Social surveys.
Social relations
support migration
link to markets
Indebtedness to recruiters and transporters of migrant labour Intra-household
Household, gender studies.
control of cash
Barriers to accessing formal credit. Barriers to formal labour markets. Weak
Sector studies.
Market
BDS market
segmentation
Limited reliable facilities for savings. Limited availability of insurance.
Sector and client surveys.
Inter-market
Risk
linkages
management
Requirement for migrant labour in developed economies (by country and sector) Economic reviews.
Linked markets
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