There are several theories relating to migration, remittance and development as well as the motivation to remit and the use of remittance. In development economics, several approaches have also been adopted to measure or assess the effect of migration and remittances on welfare among households due to its multidimensional nature. This chapter presents a review of theories and empirical studies in areas relevant to this study.
3.1 Theoretical Literature Review
The theories on remittances have been historically based on pessimistic and optimistic views.
There have been significant increase in the study of remittance transfers and migration since the 1950s.Although there is a strong link between remittances and migration, it is worth noting that remittance transfers may occur not in the context of migration, and sometimes migrants are recipients not necessarily non-migrants. Some studies adopt a limited approach given that remittance transfers are made by migrants and attributable to the intertwined nature of the concepts of migration and remittances (see Lucas and Stark, 1985; Liu and Reilly, 2004; and Brown, 1997).In this light, in discussing the subject of migrant remittances it is fair to draw from the theories of migration which explain the migration-remittances and development nexus. It is therefore expedient to review some critical theoretical advances which explain these concepts.
There are four distinguished theories based on the post-second world war thinking on migration, remittances and development. The developmentalist optimism theories which was dominant in the 1950s and 1960s, the historical-structuralist views of the pessimist in the 1970s and 1980s, and the pluralist perspective which is the new economics of labour migration in the 1980s and 1990s (NELM).
The optimist theories of the 1950s and 1960s constituted the developmentalist and neo-classical views. To the optimist, poor countries could achieve the desired rapid economic development and modernization through large scale transfer of capital resources and industrialization. During this period, a policy of large scale transfer of labour from developing to developed nations also gained momentum.Labour in many developing countries such as the Mediterranean got involved in the migration process in expectation of positive developmental returns. Governments of developing countries were attracted to actively encourage emigration as a major tool to promote national development.
Developmentalist 'migration optimists' tend to think that migration leads to a North-South transfer of investment capital and accelerates the exposure of traditional communities to liberal, rational and democratic ideas, modern knowledge and education. From this perspective, return migrants are perceived as important agents of change, innovators and investors. The general expectation was that the flow of remittances as well as the experience, skills and knowledge that migrants would acquire abroad before returning would greatly help developing countries in their economic take-off. Return migrants were expected to invest large sums of money in enterprises in their country of origin. Interestingly, this optimistic view has recently experienced a renaissance, although it is now linked to (neo) liberal, rather than the state-centrist, visions of development policy that predominated in the 1950s and 1960s.
The neo-classical optimist also views migration in a positive light which is built on the balanced growth theoretical model. To them countries can attain optimal allocation of factors of production through migration process for the benefit of all. This is possible with factor price equalization as wages become equal in both the sending and receiving countries of migrant workers and in the process migration ceases to occur. In this vain, the reallocation of labour from rural agricultural to urban areas and accross national borders to industrial destinations is an essential pre-requisite for economic growth and integral component of the whole development process (see Todaro, 1969).In an unconstrained labour market, the free movement of labour from the migrant sending areas will result in increasing scarcity of labour which translate into higher marginal productivity and increasing wage levels to them. However, it is important to note that neoclassical migration theory has no place for remittances (Taylor, 1999).
Untill recently, the developmental role of migration and remittances was viewed strictly in terms of factor price equalization based on the neo-classical perspective. A World Bank report (2002) saw the benefits of migration uniquely in terms of factor price equalization to receiving countries but did not mention remittances. This is in contrast with Ratha's (2003) chapter entitled 'Workers' remittances: 'An important and stable source of external development finance' in the World Bank's Global Development Finance only one year later, and which played a major role in the sudden resurgence in the interest for remittances.
Migration pessimist expressed their views on migration, remittances and development through the historical- structuralist or dependency theory. Migration was seen as responsible for causing movement of valuable labour from their originally stable and traditional communities thereby breaking down such economies. This inevitably results in the development of passive, non-productive and remittance-dependent countries. Besides the 'brain drain' a 'brawn drain', the massive departure of young, able-bodied men and women from rural areas is typically blamed for causing a critical shortage of agricultural and other labour, depriving areas of their most valuable work force. Because it is generally not the poorest that migrate the most, migration and remittances were also believed to increase inequality in communities of origin (see Lipton, 1980; Adams 1969; Penninx, 1982; Lewis 1986).
The proponents also argue that, remittances were used for conspicuous consumption and were hardly spent on productive investment. Besides weakening local economies and increasing dependency, increased consumption and land purchases by migrants were also reported to provoke inflationary pressures and soaring land prices (see Appleyard 1989; Rubenstein; 1992; Russell, 1992).The increase in income or wealth of recipients through remittances was also believed to shift taste from domestic to imported or foreign goods and food often demanded by migrants which reinforces the cycle of dependency. In particular, the dependency school of development thinking viewed capitalist penetration and its concomitant phenomena such as migration not only as detrimental to the economies of underdeveloped countries, but also as the very causes of the 'development of underdevelopment '(Frank, 1966).
In a process known as cumulative causation increasing prosperity in the economic core areas of the Western world was causally linked to the draining of capital and labour from peripheral areas (Myrdal 1957). In neo-Marxist terms, migration and remittances is viewed detrimental which is believed to reproduce and reinforce the capitalist system based on inequality.
Contrary to the views of the developmentalist and the structuralist, the new economist of labour migration (NELM) theory emerged which offered a more subtle approach to explaining the migration-remittance subject. The NELM adopts a pluralist method by combining and acknowledging both the positive and negative developmental outcomes of migration and remittances rather than the rigid and deterministic views espoused by the earlier theories. This revitalized the thinking on migration by considering not the individual but the household as the main decision -making unit and model migration as the risk-sharing behavior of the household.
This is because it is believed that households seem capable than individuals in diversifying labour resources in order to minimize their income risk (see Stark 1978, 1991; Taylor 1999; Stark and Levhari, 1982). This approach integrates motives other than individual income maximization that play a role in migration decision making. Migration is perceived as a household response to income risk since migrant remittances serve as income insurance for households of origin (Lucas and Stark 1985).
NELM scholars argue that migration is a livelihood strategy by households in their bid to overcome various market constraints, so as to invest in productive activities and improve their welfare. Hence migration is said to play a crucial role in providing a potential source of investment capital in developing countries where there exist imperfect capital and risk markets which are not accessible to mostly non-elite groups or some households(see Taylor et al; 1996).
What is fundamental is not ascertaining whether migration and remittance transfers has either positive or negative developmental outcomes but accounting for why this has contributed to development in some communities and much less, or even detrimentally to others and the factors attributable to them. Again the impact of migration and remittances changes in communities with time and at different stages of the process. Hence, we need to better understand the geographically differentiated and socially disparate nature of migration and remittance impacts as well as how these impacts change over time (see Ghosh 1992; Taylor 1999; Jones 1998b; Lucas, 1987).
3.2 Emperical Literature Review
Empirical studies revealed quite controversial results regarding the effects of remittances on development. Besides protecting against income shocks, a range of empirical studies have indicated the often positive contribution of international remittances to household welfare, nutrition, food, health and living conditions in places and regions of origin.
For instance, half of the households surveyed by Lindley (2006) in Hargeisa were entirely reliant on remittances. In the Moroccan Todgha valley, 40 per cent of all surveyed households received international remittances, which doubled their income in comparison to other households. Internal and international remittances accounted for 10 per cent and 33 per cent, respectively, of the cash income of all surveyed households, and 53 to 59 per cent of the income of households involved in international migration (de Haas, 2006).
Agunias (2006) cited evidence from Latin America indicating that remittances accounted for a significant proportion of the average recipient's annual income. This share ranged from 18 per cent in Ecuador to 43 per cent in Brazil (Bendixen and Onge, 2005). Another study in Bangladesh and Nepal found that remittances may account for at least half of total household income in some areas (Seddon, 2004, cited in Agunias 2006). A study in southeast Nigeria concluded that the contribution of those who migrate outside of the African continent may be up to 50 per cent of household expenditure (Nwajiuba, 2005). The optimistic view refers to empirical findings which show that an essential part of remittances is spent on savings and investments (Haas, 2005).
The pessimistic view emphasizes such negative effects as lack of incentive to work (Ratha, 2003), appreciation of national currency (Amuedo-Dorantez and Pozo, 2004), Dutch disease and others. The migration pessimist argument is also espoused in the historical- structural and dependency views. In the past, researchers have often taken a rather pessimistic view of how remittances are spent or used and the impact of these monies on development. For example, a recent review of the literature by (Chami et al., 2003) reported three stylized facts: 'rst, that a 'signi'cant proportion, and often the majority,' of remittances are spent on consumption; second, that a smaller part of remittance funds goes into saving or investment; and third, the ways in which remittances are typically saved or invested in housing, land and jewellery are 'not necessarily productive' to the economy as a whole. Remittances from historical-structuralist perspective consider remittances to be responsible for creating dependent relations between the sending and the receiving countries (Portes and Borocz, 1989).
This belief which also formed the cornerstone of structuralist and dependency-inspired visions that claimed that migration and remittances do not lead to, or can even undermine development is remarkably persistent, particularly in the policy literature. A recent report commissioned by the European Investment Bank concluded that 'remittances remain primarily used for daily expenses and therefore do not have large developmental impact' (European Investment Bank/Facility for Euro- Mediterranean Investment and Partnership, 2006). Such views usually underpin ideas that governments should develop policies to 'channel' remittances into productive investment (Zarate-Hoyos 2004; European Commission 2005).
Since the 1990s, an increasing number of studies have emerged that challenge the dim views that migrants would fritter away their remittance earnings on personal consumption (Adams 1991). Most studies seem to suggest that households receiving international remittances have a higher propensity to invest than non-migrant households when controlling for income and other relevant household variables. Rapport and Docquier (2005) cited several studies indicating that there is considerable evidence that remittances promote access to self-employment and increase investment in small businesses. Many researchers and economists in their studies reflect the idea that remittances should be directed towards investment, such as small businesses, to improve country's production and level of wealth. It may also help to reduce the unemployment level. Ratha and Sanket (2007), describe the influence of remittances on poverty, growth, real wages and external competitiveness. They emphasize that in countries with a good investment climate remittances are often used as an investment fund for small businesses.
In line with NELM and livelihood approaches, most recent empirical research supports the view that labour migration, rather than being a response to destitution or absolute poverty (Hampshire 2002), is a livelihood strategy pursued by social groups typically households in reaction to relative deprivation (Stark and Taylor 1989; Quinn, 2006) in order to spread livelihood risks, secure and increase income and acquire investment capital. Remittances are central elements of such household strategies to overcome local development constraints. For instance, recent studies conducted in Burkina Faso (Hampshire 2002; Wouterse, 2006) and Morocco (de Haas 2006) suggest that internal and international migration within the African continent should primarily be seen as a means to enhance livelihood security through income diversification because the welfare gains, if any, are relatively small. In both countries, it was mainly migration to Europe that allowed households to accumulate substantially more wealth.
Analyzing survey data on Mexico'United States remittances, Amuedo-Dorantes and Pozo (2006) concluded that income increases in migrant receiving countries significantly raises both the propensity and the proportion of labour earnings sent home for family-provided insurance as well as for self-insurance. A growing number of studies indicate that economic and currency crises in origin countries tend to increase remittance transfers (see, for instance, Blue 2004). Such evidence further corroborates the risk-spreading and co-insurance hypotheses.
An analysis of household data collected in the North-West Frontier Province in rural Pakistan indicated that the ability to cope with negative income shocks is lower for households that do not regularly receive remittances (Kurosaki 2006). Similarly, a recent study of Turkish remittances concluded that consumption smoothing is an important short-run motive for sending remittances to Turkey (Alper and Neyapti 2006). Lindley (2006) equally found that migrants in Hargeisa, Somalia, tend to send more remittances from abroad when the family experiences a decline in fortunes and, therefore, concluded that people receiving regular remittances are better protected from exchange rate fluctuations and have an improved ability to assist relatives in rural areas in times of crisis. Such evidence corroborates the NELM hypothesis that remittances function as income insurance and protect people from income shocks caused by economic downturns, political conflicts or climatic vagaries.
In the case of Somalia, for instance, it has been argued that remittances have been far more important for livelihood and survival in the country than development and humanitarian aid put together (Gundel, 2002). Remittances often cover an important part of developing countries trade deficits. Besides their importance as a source of foreign currency, remittances can also improve a country's credit worthiness for external borrowing, and they can expand access to capital and lower borrowing costs (World Bank, 2006).
Yang, (2004), used four linked household surveys from the Philippines to analyze how exchange rate shocks during the 1997 Asian 'nancial crisis affected the expenditure patterns of 1,646 Philippine households receiving international remittances. Using panel data from before and after the 1997 crisis, to study how different types of exchange rate shocks, positive and negative, affected changes in the expenditure patterns of remittance-receiving households. This represents a type of 'natural experiment,' because the size and direction of exchange rate shocks are probably uncorrelated with other household-level shocks.
The study 'nds that positive exchange rate shocks had no statistical effect on the level of expenditures by remittance-receiving households on food. In other words, households receiving more remittance income as a result of favorable exchange rate shocks are not 'wasting' such income on increased food consumption. Rather, positive exchange rate shocks led to a statistically signi'cant rise in household-remittance expenditures on education and a reduction in total hours worked by male and female children. For example, a 1-standard deviation increase in the size of the exchange rate shock led to a 0.4% increase in household remittance expenditures on education in the Philippines.
The analysis also 'nds that favourable exchange rate shocks were associated with increased investment by remittance-receiving households in entrepreneurial activities, speci'cally transportation, communication and manufacturing enterprises. In all likelihood, households receiving more remittances as a result of positive exchange rate shocks were able to invest more in these relatively capital-intensive enterprises because they no longer faced the credit constraints that had previously hindered such investments.
McCormick and Wahba (2001), expands upon the theme of remittances and investment in entrepreneurial activities by using a 1988 survey of 1,526 Egyptian migrants who had worked abroad and then returned home. As the survey includes data on the pre- and post-migration employment histories of migrants, the study is able to examine how international migration and remittances affect the probability that a migrant will become an entrepreneur'employer, self-employed person or business owner upon return from working abroad.
They found that two factors, time spent working abroad and total amount of money saved abroad have a positive and signi'cant effect on the likelihood of a return migrant becoming an entrepreneur. However, these two factors work differently for literate as opposed to illiterate migrants. For the 70% of return migrants in the Egyptian data set who are literate, the primary factor affecting the probability of becoming an entrepreneur is the amount of time spent working abroad. In contrast, for the 30% of return migrants in the Egyptian data set who are illiterate, the total amount of money saved abroad is the most important factor.
According to the analysis, illiterate Egyptian migrants may not learn many new skills working abroad, and this is the reason that savings accumulated abroad, rather than time spent abroad, is the critical factor affecting the likelihood of becoming an entrepreneur. Woodruff and Zenten (2004) continues on the theme of remittances and entrepreneurships by examining how international remittances affect the level of capital invested in 6,044 small enterprises in urban Mexico. Most of the enterprises included in this 1998 survey are, in fact, micro-'rms: 60% of them hire no employees and the median cost of invested capital in all 'rms is less than $1,500. As it is important to separate the supply of wealth/credit from the demand for investment capital, the paper identi'es an instrumental variable, the historic rate of Mexico-to- US migration, which is correlated with access to wealth but not with demand for credit.
Using this instrumental variable, and controlling for various factors, the study 'nds that international remittances (principally from the United States) are responsible for more than 25% of all capital invested in small and micro-enterprises in Mexico. Within those regions of Mexico with the highest rates of migration to the United States, the paper estimates that remittances are responsible for 40% of all capital invested in these enterprises. Like the work in the Philippines, the study 'nds that the access to international remittance income helps to overcome the wealth and credit constraints that tend to restrict small and micro-business activity in the developing world.
Edwards and Ureta (2003) used a 1997 household survey of 14,286 people (aged 6'24) to examine the impact of international remittances on school retention rates in El Salvador.
International remittances represent a key source of household income in El Salvador: In 1997, about 15% of all households received international remittances. Although the standard economic theory suggests that the source of income should not affect how money is spent, the study analyses how two different types of income, income from other sources and remittance income, affect the household choice of schooling levels for children. The results suggest that the source of income does matter for investment in schooling: income from remittances has a much larger impact on school retention rates than income from other sources. In urban areas in El Salvador, international remittances have 10 times the size of the effect of other income on the hazard of dropping out of school. For example, in urban areas, the average level of remittances lowers the hazard that a child will drop out of elementary school (grades 1'6) by 54%. In rural areas in El Salvador average level of remittances in rural areas lowers the hazard rate that a child will drop out of elementary school by 14%. According to the study, one possible reason why remittance income has a greater impact on school retention rates than income from other sources is that households may have a higher propensity to spend on education out of remittance earnings.
A survey of self- employed workers and small firm owners located in Mexico found remittances to be a significant source of capital for micro-enterprises (Lopez-Cordova and Olmedo, 2006). The Asian Development Bank (2009) found that Philippine families with a high share of remittance-based income are more likely to include family members who are either self-employed or run a small business. According to the survey, about 18% of Philippines who invested remittances in small business managed to shift from the low-income group to a medium-income group. There was also an observed decrease in the poverty rate by about 5%.
In a much earlier study of internal migration in Ghana, Caldwell (1969) found that migrants spent remittances to pay for schooling and wages of farm labourers, and to develop small businesses. Also, a survey conducted by the Sussex Centre for Migration Research in Ghana, particularly in the Ashanti Region in March 2003, identifies three main uses of the remittances. First, remittances are used to satisfy individual needs such as smoothing consumption needs, organizing funerals and meeting other pressing social needs. The second motive is to support social projects in migrant's origin communities. The third motive, less common but perhaps the most important for the promotion of economic development, is for productive investments. Under this third category, the most common objective is for migrants to invest in businesses of their relatives in their home country.
A study by Litchfield and Waddington (2003) on Ghana also examined the welfare outcomes of migrants and non-migrants in Ghana using GLSS data. They found that migrant households have statistically significantly higher living standards than non- migrants, although there appears to have been a slight decline in the extent of migration over the decade.
In conclusion, despite the conflicting results of the impacts of remittance flows, an overwhelming amount of the empirical literature suggests that remittances make a powerful contribution to reducing vulnerability at least at the household and local community levels. It is important to emphasize that much of the effect is seen at the household level, suggesting that remittances underpin the welfare of households (Quartey, 2006).
3.3 Motivation for Remittance
In the remittance literature another issue of importance relates to the often raised question about; why do people remit? Theoretically this has been attributable to two main reasons which are altruism motive and self-interest or exchange motive. Rapoport and Docquier (2005) have observed that until recently, altruism was more frequently assumed than tested against competing theories. Current thinking on remittance motivations, however, gives considerable importance to self-interest-based exchange. It is important to stress that, the debate about remittance motives is not trivial; it has significant implications for fiscal policy, since remittances 'response to public transfers depends on the predominant remittance motive. This is because if remitters are motivated by altruism, then an increase in public transfers will lead to a reduction in private transfers, and this will result in the impact of the public transfers being less than originally planned (see Cox and Jimenez, 1990; and Cox and Rank, 1992).
Thus, the incidence and effectiveness of public transfers are influenced by whether or not remittances are motivated by altruism or by self-centered exchange. The altruism motive is based on the fact that the sender of the remittance cares about the welfare of the recipient and his utility consequently increases as the wellbeing of the recipient improves. In other words, there is altruism motive when the utility function of the sender of remittance partly and positively depends on that of the recipient (Boakye-Yiadom, 2008).
As noted by Cox and Jimenez (1990), Garry Becker was one of the first to provide a theoretical framework for the altruistic motive. In his seminal contribution, Becker (1974), developed an economic model of social interactions, within which the implications of self-interest and exchange are treated as separate motives (see, for example Park, 2003b), but as suggested by Cox and Jimenez (1990), there is a sense in which each of the two labels can broadly represent the same motive. Altruism together with those of other socio-economic phenomenon were analysed.Other studies that espouse altruism include Ishikawa (1975) and Adams (1980). A key prediction of the altruistic model is that, ceteris paribus, there will be a negative relation between a recipient's pre-transfer income and the amount of remittance received (Cox and Jimenez, 1990).
The fundamental principle of the exchange motive is the issue of reciprocity. It is believed that people remit because they expected some payment or something in return. A migrant may send remittances back home to relatives because of their earlier investment in his/her education. In the reverse case, parents can invest in their child with the expectation of receiving remittance in return. A migrant, for instance, might send remittances to relations residing at the migrant's place of origin as a way of repaying the extended family's expenses on his/her education or migration (see Bates, 2000). Remittances might be motivated by the interest of a migrant or sender by the interest to acquire or inherit property back home.
In the remittance literature there are several models of the exchange hypothesis. For instance, Bernheim, Shleifer, and summers (1985) developed a model of bequests, in which the testator intentionally influences the behaviour of beneficiaries via his choice of a bequest-sharing rule. Even though this particular model deals with bequests, it provides support for the notion that remittance behaviour is often motivated by self-serving exchange considerations. From his model of the exchange motive for sending remittances, Cox (1987) concluded, that contrary to what pertains under altruism; remittances do not necessarily decrease with increases in the recipient's income if remittances are motivated by exchange. One way of rationalizing this result is to reckon, that by enhancing the recipient's bargaining power, the increased income can result in a higher amount of remittance receipt (Boakye-Yiadom, 2008).
The third school sees both altruism and self-interest as playing a role in the motivation to migrate and remit (Ballard et al., 2001). Despite the fact that the pure altruistic and pure self-interest motives play a vital role in shaping the decision to remit, it is fair to state that a more plausible explanation of the motivation to remit can be in some scenarios by incorporating both altruism and exchange principles. In a pair of influential papers, Robert Lucas and Obed Stark have formulated a model that exhibit elements of altruism and self-interest in explaining the motivation for remittance flows (see Lucas and Stark, 1985; and Stark and Lucas, 1988).
Cast in the context of the interactions between migrants and relatives back home (that is, at place of origin), Lucas and Stark (1985) and Stark and Lucas (1988) employ a game theoretic framework to advance a model of tempered altruism or enlightened self-interest. In this model, remittances are seen as one element in a self-enforcing arrangement between migrant and home. The model, thus, treats remittances as part of a co-insurance arrangement between the donor and the recipient, insuring both parties against shocks, such as, liquidity constraints, unemployment, and poor harvest.
Even though the model emphasises the crucial role of self-interest as a motivation for remitting, it highlights the importance of altruism in reducing any inclination on the part of the contractual parties to renege on their obligations. The views of Lucas and Stark are further echoed by Bates (2000), who notes that the pleasure gained by parents from the success of their children helps to sustain the informal contractual arrangements. Additionally, the threat of social sanctions is usually enough to deter the migrant from breaking his or her promise.
There are empirical studies which demonstrate that the various motivations to remit are inevitably crucial in understanding why people remit. The evidence from U.S.-Nigeria migration study (Osili, 2006) suggests that transfers to origin family are motivated by altruistic considerations, with poorer origin-family members in Nigeria receiving larger transfers. The migrant is simply part of a spatially extended household that is reducing the risk of impoverishment by diversifying across a number of activities (de Haas, 1998; Agrawal and Horowitz, 2002). On the basis of survey data on Tongan and Western Samoan migrants in Sydney, Brown (1997) also found evidence to the effect that migrant's remittance transfers to their countries of origin are motivated by non-altruistic factors such as asset accumulation and investment back home. Some empirical evidence consistent with the exchange motive can also be found in studies that utilise data on typical developing countries [see, for example, Hoddinott, 1992 (for Kenya), Cox and Jimenez, 1998 (for Colombia), and Gubert, 2002 (for Mali)].
In the study by Lucas and Stark (1985), remittance patterns among individual migrants in Botswana were found to be consistent with the model of tempered altruism or enlightened self-interest. What is clear from the analysis is that, the motivation to remit lies within the continuum of altruism-exchange motives, and the issue about which motive is dominant largely depends on the relationship between the donor and the recipient (see Park, 2003b). On the basis of an analysis of the First Indonesian Family Survey data, Park (2003b) concludes, that amongst three main types of transfers (that is, parent-to-child, child-to-parent, and inter-sibling), remittances between siblings are most consistent with the altruistic motive.
3.4 Use of Remittance
The relationship between remittance and household spending can be explained theoretically by viewing remittance as a source of income. The traditional consumption models such as the permanent income and life cycle theories of consumption postulate that the source income does not matter in consumption behavior as households tend to smooth their consumption. This implies that we should expect households receiving remittances to behave the same like any other household with other things being the same. However, other studies using behavioral approach show increasing tendency of household receiving remittances to be influenced by the source and size of remittance to be consumed or invested. Moreover, because of the fungibility of remittances household spending remittances on consumption could devote other incomes to investment or vice versa.
Examining the impact of remittance receipts and migration has been the subject of several studies. This is because the magnitude of such transfers has attracted the attention of Governments, policy makers, international organizations and the academia. A growing body of literature has been devoted to measuring its impact on aggregate economic measures such as poverty, growth, and development in several nations. However, it is strongly noticed that such transfers directly benefits the household and that their decisions or spending behavior determine whether it has short or long 'term impact on welfare. In this vain, a huge body of studies has focused on the use or spending behavior of household receiving remittance income.
The body of literature on this has been divided into two views. The earlier view was pessimistic arguing that households receiving remittances do not spend it on productive investment. Rather remittances and migration has led to dependency of households on remittances, negatively affected local production and encouraged conspicuous consumption. However, some studies recently have challenged this view. Yang (2005), using bigger samples found that, remittances induce households to invest in human capital such as education. Remittance income via exchange rate shocks also influence households to engage in entrepreneurial activities. Infact, even without investing these remittances, they can still contribute to the local economy by way of the multiplier effect of consumption done by the households receiving the remittances income (Taylor, Arango, Hugo, Kouaouci, Massey, & Pellegrino, 1996). These benefits have not been recognized in past research. Taylor & Mora (2006) attributed these pessimistic results to narrow definition of productive investment, inadequate samples and more importantly, to poorly-designed research approaches.
3.4.1 Remittances and Human Capital
Exploring the impact of remittance on human capital is important since it reflects the long-term welfare effect on households. First, one could see the effects of remittances on the health and educational outcomes of recipient households as complementing the analysis of the monetary dimensions of poverty. Second, through its effects on human capital remittances can have lagged effects on household income and consequently on monetary defined poverty indexes. For example, if children in recipient households accumulate more or better human capital than otherwise similar kids, then remittances can also be expected to positively affect long run growth and hence long run poverty levels(Acosta et.al; 2008).
The impact of remittances on health and education in developing countries is mixed. Most studies reveal that remittances improve infant mortality and child health through rising household incomes and increasing the health knowledge of mothers. However, the impact of remittances on educational outcomes is most controversial. While some studies prove that remittances raises school retention rates others find it to have a negative effect on school attendance rates for teenage boys and girls because of the absence of their parents due to migration.
In a study using nationally representative data Hildebrandt and McKenzie (2005), find that remittances reduce infant mortality in rural areas in Mexico. Using a large rural data set from Mexico, and employing an instrumental variables approach based on historic state-level rates of migration in Mexico, they find that international migration has positive effects on both infant mortality and child weight. For example, children born in international migrant households are 3 per cent less likely to die in their first year than children in non-migrant households. Similarly, children born in an international migrant household are estimated to weigh 364 grams more, on average, than children in non-migrant households.
McKenzie and Rapport (2006) use a nationally-representative data set from Mexico and an instrumental variables approach focusing on historic state-level rates of migration to analyse the effect of international migration on education. Their findings are similar to those of Lopez-Cordova (2005), namely, Mexico-to-United States migration has a significant negative effect on schooling attendance and attainment for 12 to 18 year-old boys and 16 to 18 year-old girls. Probit results show that living in an international migrant household in Mexico lowers the chances of boys completing junior high school by 22 per cent and of girls completing high school by 15 per cent. One reason for these lower rates of school attendance is that boys and girls from migrant households are more likely to become international migrants themselves, and rates of return to education are lower in the United States than in Mexico.
3.4.2 Remittances and Investment
The question of whether remittances are spent on consumption or invested in entrepreneurial activities is an issue lively debated in the literature. Some studies find that households receiving remittances spend on consumer goods and hence patterns of expenditure have little positive or no impact on the local economy. However, other studies find that, remittances are often spent on investment goods such as housing, education for example, with the patterns of expenditure having a positive effect in building human and physical capital in developing countries.
In a recent study of how international remittances are spent, Chami et al. (2003) report that a significant proportion, and often the majority of remittances is spent on 'status-oriented' consumption goods. These authors also find that the ways in which remittances are typically invested in housing, land and jewellery are 'not productive' to the economy as a whole.
However, these pessimistic findings are challenged by Adams and Cuecuecha (2010b) using nationally-representative household data from Guatemala. Using a two-stage Heckman model and employing an instrumental variables approach focusing on rainfall shocks and historic distance to the railroad, the authors find that households receiving international remittances spend less at the margin on one key consumption good ' food, and more at the margin on two investment goods 'education and housing than what they would have spent on these goods without remittances. At the mean, Adams and Cuecuecha (2010b) find that, households receiving international remittances spend 194 per cent more at the margin on education than what they would have spent without the receipt of remittances. According to the authors, households receiving international remittances tend to spend more at the margin on investment goods because they treat their remittance earnings as transitory rather than permanent income, and the marginal propensity to invest out of transitory income is higher than that for other sources of income.
The review of theoretical literature on remittances reveals four theories highly relating to and originating from the theories of migration because of their inextricable nature. These include the developmentalist, neo-classical, structuralist and the new economics of labour migration theories (Hein de Haas, 2007). These theories present optimistic, pessimistic and a combination of both pessimism and optimism in conceptualizing and analyzing the mixed effect of remittances on welfare and development. The review of previous literature on remittances and its welfare effect reveal both micro and macro level significance of the use of remittances by households, communities and nations in the short and long-term as well as the motivation for remittance.
In Ghana however, few studies have been conducted to find out the effect of remittances on household spending or use of remittances for investment especially in the long-run.
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