RICH COUNTRIES’ OPENNESS TO MIGRANT WORKERS HELPS POOR COUNTRIES’ DEVELOPMENT THROUGH THE MONEY SENT TO FAMILIES BACK HOME

Money sent home to developing countries by migrant workers in the rich world is typically spent wisely, helping to pay for family members to go to school and start businesses. That is the central finding of new research by Professor Dean Yang published in the April 2008 issue of The Economic Journal.

His study documents a specific channel – the earnings opportunities of migrants (and hence the size of the ‘remittances’ they are to able to send back home) – through which rich countries’ immigration policies can help or hinder poorer countries’ development.

Countries that expand employment opportunities for overseas workers can stimulate investment in human capital (education) and entrepreneurship in poor-country households. By contrast, eliminating temporary work permissions for overseas migrants could have the opposite effect.

Some claim that remittances are mainly spent on conspicuous consumption that has few long-run benefits for recipients. But this study of the impact of increased remittances sent to migrants’ origin households in the Philippines in the wake of the Asian financial crisis finds little reason for pessimism.

While remittances did pay for durable goods like televisions, households also used these resources to make investments in education and household enterprises to improve their future prospects.

Millions of developing-country households receive financial support from family members who work in the rich world. Yet, until recently, there has been surprisingly little hard evidence that shows how households benefit from such help.

Discovering how families might benefit from remittances is not a trivial undertaking. The difficulty is that differences in remittance receipts across households may reflect other underlying differences not observed by researchers. For example, households with higher education levels should have more educated migrants. More educated migrants would earn more overseas, and might also remit more.

In addition, highly educated parents would also be more likely to send their children to school. There would then be a positive relationship between a household's remittances and child schooling, but this does not necessarily mean higher remittances cause more schooling. Rather, both are being caused by an underlying third factor: the household's education level.

Scientists conduct experiments to determine cause and effect in the lab, but experiments are often impractical in the real world. But a real world ‘natural experiment’ nearly replicates a laboratory experiment among migrant families: the Asian financial crisis. In June 1997, the Thai baht’s devaluation led to speculative attacks on several other currencies worldwide. Many countries experiencing exchange rate devaluations hosted substantial overseas Filipino populations.

During the crisis, the Philippine peso also depreciated substantially. For an overseas worker earning wages in foreign currency, the peso’s depreciation was a boon: foreign earnings became convertible to more pesos.

Because migrants were located in a wide variety of countries, there was substantial variation in the size of migrants’ exchange rate shocks. Households with migrants in the United States and the Middle East benefited the most. Between July 1997 and October 1998, the US dollar and currencies in the main Middle Eastern destinations of Filipino workers rose 50% in value against the Philippine peso.

In other words, where prior to the crisis, $100 in migrant earnings would have been worth roughly 2,650 pesos, $100 was worth over 5,000 pesos on average in 1998. But Philippine households with members working in other countries did less well. After the crisis, the Taiwanese, Singaporean, and Japanese currencies rose only about 25-30%; the Malaysian and Korean currencies fell slightly against the peso.

When exchange rates for overseas Filipinos improved, remittances received by their families back home increased, and families became better off on several dimensions. Children became more likely to stay in school, and child labour declined. Families purchased more durable goods (vehicles, televisions and living room furniture).

In addition, families invested more in entrepreneurial activities. They initiated more capital-intensive types of entrepreneurial activities (small manufacturing and transportation services) and worked more hours in self-employment.

ENDS

Notes for editors: ‘International Migration, Remittances, and Household Investment: Evidence from Philippine Migrants’ Exchange Rate Shocks’ by Dean Yang is published in the April 2008 issue of The Economic Journal.

Dean Yang is at the University of Michigan

For further information:contact Dean Yang on +1 734 764 6158 (email: deanyang@umich.edu); or Romesh Vaitilingam on 07768 661095 (email: romesh@compuserve.com).