How Remittances Help Migrant Families

Millions of households in developing countries receive financial support from family members who work in wealthy countries in North America, Europe, Asia, and the Middle East. Yet, until recently, there has been surprisingly little hard evidence that shows how households benefit from such help.

New research, which focuses on households in the Philippines with relatives working overseas, has found that when migrants' economic prospects improve, they send more money home. In turn, the recipient households use these resources to make crucial investments for the future, leading to increased child schooling, reduced child labor, and greater entrepreneurial activity in migrants' source households. These findings are described in detail in Yang (2004a).

International Labor Migration from the Philippines

In 1974, the Philippine government initiated an "Overseas Employment Program" to place Filipino workers in overseas jobs. Encouraging emigration was one way the government could alleviate rising unemployment and bring in scarce foreign exchange. At first, the government directly managed placing workers with employers overseas, but it soon yielded this function to private recruitment agencies.

The annual number of Filipinos going overseas on officially processed work contracts rose six-fold from 36,035 to 214,590 between 1975 and 1980, and more than quadrupled again by 2002 to 891,908, according to the Philippine Yearbook 2001, a government publication. Today, the government authorizes some 1,300 private recruitment agencies to place Filipinos in overseas jobs.

Most overseas contracts are typically for two years and are usually open to renewal. For the vast majority of positions, overseas workers must go alone because they are not permitted to bring family members with them. By mid-1997, six percent of Philippine households had one or more members working overseas.

According to the dataset used in this study, Filipino workers are remarkably dispersed worldwide (see Figure 1). Saudi Arabia is the largest single destination, with 29 percent of the total, and Hong Kong comes in second with 12 percent. But no other destination accounts for more than 11 percent of the total. The only other countries accounting for six percent or more are Taiwan, Japan, Singapore, and the United States. In addition to the countries in Figure 1, Filipinos are reported to be working in an additional 38 countries worldwide, including Chile, Zambia, and Papua New Guinea.

On average, Filipino overseas workers are 34 years old; 38 percent are single and 53 percent are male. "Production and related workers" and "domestic servants" are the two largest occupational categories, each accounting for 31 percent of the total.

In terms of household position, the most common categories are male heads of household and daughters of the household head, each accounting for 28 percent of overseas workers; sons of household heads account for 15 percent, female household heads or spouses of household heads 12 percent, and other relations 16 percent (see Figure 2).

Contract Work in Perspective

Formal, temporary labor migration became a large phenomenon in the post-World War II period, when European countries established "guest-worker" programs, and oil-rich Gulf states initiated massive labor importation. In the Philippines, the central role of temporary labor migration distinguishes it from other labor-sending countries.

This type of international labor flow is likely to become more and more important in coming years. Because of the potential benefits for developing countries, current WTO negotiations and other proposals have focused on liberalizing temporary labor permits for workers from developing countries.

A Challenge for Research

Given the increasing importance of temporary labor migration from poor to rich countries, a crucial question arises: how exactly do remittances help migrants' families back home? Are resources mainly spent on food and housing, or on prestige items such as vehicles and VCRs? Or are they used in ways that will lead to long-term benefits, such as investments in education and entrepreneurial enterprises?

Discovering how migrants' economic opportunities affect their families back home is not a trivial undertaking. The main challenge researchers face is that remitting behavior differs across households and can reflect underlying differences that researchers cannot always observe.

For example, households with higher education levels should have more educated migrants. More educated migrants would have higher overseas wages, and might also send more remittances home.

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 a child's schooling, but this does not necessarily mean that higher remittances cause more schooling. Rather, both are being caused by an underlying third factor: the household's general education level.

A Unique "Natural Experiment"

An experimental approach to establishing the causal impact of migrant resources could start by identifying a set of households that had one or more members working overseas, assigning each migrant a hypothetical economic shock, and then examining how the size of the shock dealt to migrants affected their families back home. In this scenario, some migrants would receive a larger economic shock than others.

In fact, a real-world "natural experiment" comes close to replicating the hypothetical experiment just described: the Asian financial crisis. In late June 1997, the devaluation of the Thai baht led to speculative attacks on a number of other currencies worldwide. Many of the countries experiencing exchange rate devaluations were host to substantial numbers of overseas Filipino workers.

At the same time, the Philippine peso also depreciated substantially. For an overseas worker earning wages in a foreign currency, the depreciation of the Philippine peso was beneficial, as foreign earnings were convertible to more pesos after the depreciation.

Because migrants were located in a wide variety of countries, there was substantial variation in the size of the exchange rate shock experienced by migrants across Philippine households. Figure 3 depicts the variation in exchange rate shocks across 10 major destinations of overseas Filipino workers.

Households with migrants in the U.S. and Middle East benefited the most from the exchange rate shocks. Between July 1997 and October 1998, the U.S. dollar and currencies in the main Middle Eastern destinations of Filipino workers rose 50 percent in value against the Philippine peso.

In other words, where prior to the crisis US$100 in migrant earnings would have been worth roughly 2,650 pesos, that same amount of dollar earnings was worth over 5,000 pesos on average in the year leading up to October 1998.

By contrast, Philippine households with members working in other countries did less well. Over the same time period, the currencies of Taiwan, Singapore, and Japan rose only 26 percent, 29 percent, and 32 percent, while those of Malaysia and Korea actually fell slightly (by one percent and four percent, respectively) against the peso.

By using household survey data from the Philippine government on 1,600 households with overseas members, it was possible to examine the exchange rate shocks' impact on migrant workers' origin households from July 1997 to October 1998. Usefully, the survey captured informal as well as formal remittances sent by overseas household members. In particular, the focus was on how remittances sent home changed, and on household investments in children and in entrepreneurial enterprises.

In examining the research findings, it's helpful to think of exchange rate shocks of a given size. For example, the exchange rate change for Filipino migrants in the United States versus those in Singapore, or between migrants in Taiwan versus those in Malaysia, was roughly 25 percent in the 1997-1998 period. Therefore, one way to evaluate the findings is to consider how, on average, a 25 percent improvement in the location country's exchange rate against the Philippine peso affects the household.

How Exchange Rate Shocks Affect Household Investments

In households with an overseas worker, remittances accounted for a substantial portion of total income prior to the crisis: 40 percent, on average. When a household's migrants experienced more favorable exchange rate shocks, the household enjoyed an increase in remittance receipts.

According to estimates, a 25 percent improvement in the exchange rate faced by a household's overseas migrants led remittances to rise six percent as a share of household income. In addition, favorable exchange rate shocks raised the Philippine-peso value of migrants' overseas savings (unfortunately, savings data were not collected in this survey and could not be analyzed directly).

Positive exchange rate shocks helped recipient households fund a number of beneficial long-term investments, as described below.

Investments in children
Prior to the Asian financial crisis, a migrant's household back in the Philippines spent 5.4 percent of household income on education. A 25 percent improvement in exchange rates led to an increase in educational expenditures equivalent to 0.7 percent of household income.

Investments in children aged 10 to 17 also improved with positive exchange rate shocks, but in slightly different ways for boys and girls. The 25 percent exchange rate improvement led to a 3.3 percent increase in girls' school attendance and a 1.7 percent increase for boys, from base attendance rates of 95 percent and 93 percent, respectively.

Prior to the crisis, boys and girls aged 10 to 17 worked an average of 1.5 and 0.6 hours per week, respectively. A 25 percent exchange rate improvement decreased hours worked per week by 0.81 hours for boys, and by 0.54 hours for girls. Most of these declines in child labor were in unpaid work in a family farm or business.

Entrepreneurial activity
The exchange rate shocks also made it more likely for households to have certain types of entrepreneurial enterprises. A 25 percent exchange rate improvement raised the likelihood a household had a "transportation and communication services" or a "manufacturing" enterprise (by 1.9 and 1.5 percent, respectively).

"Transportation and communication services" include taxis and small bus services ("jeepneys"). "Manufacturing" includes small-scale operations such as mat weaving, dressmaking, and processed food making.

The exchange rate shocks also increased household hours worked in entrepreneurial activities. After the 25 percent improvement in the exchange rate, household members in the Philippines worked, on average, 2.5 hours more per week in self-employment.

Durable goods
Exchange rate shocks also increased households' acquisition of durable goods. Prior to the change in exchange rates, 83 percent of households with a family member working abroad owned a television, 68 percent owned a living room furniture set, and 13 percent owned a vehicle (jeep, motorcycle, or car).

In households experiencing a 25 percent exchange rate improvement, vehicle ownership went up 3.6 percent; television and living room furniture set ownership rose 2.4 percent and 1.5 percent, respectively. The increase in vehicle ownership is likely to be related to the increase in household participation in transportation services, mentioned above.

Conclusion

In discussions on international migration and remittances, one often hears that remittances are mainly spent on conspicuous consumption items that have few long-run benefits for households. Others claim that relatives and neighbors ask for handouts, leaving remittance recipients with little money for themselves.

New research on migrants' origin households in the Philippines finds little reason for pessimism. While resources from migration do pay for durable goods, households in the Philippines have also used these resources to make investments in education and household enterprises that are likely to improve their lives in the long run.

More broadly, this new research sheds light on how the migration policies of developed countries can affect households in poor countries. Countries that expand employment opportunities for overseas workers can stimulate human capital investment and entrepreneurship in poor-country households.

By contrast, eliminating temporary work permissions for overseas migrants could have the opposite effect. As such, this article documents a specific channel - the earnings opportunities of migrants - through which developed countries' immigration policies can help or hinder the economic development of poorer nations.

This research also demonstrates that data sets collected by national governments are useful in exploring the impact of remittances. Countries besides the Philippines conduct national household surveys that include questions on international migration and remittances. Future work could use these data sets, examining how "shocks" to migrant earnings affect remittance receipts and investment activity in migrants' origin households.

Sources

Philippine Yearbook (2001). Manila: National Statistics Office.

Rodrik, Dani (August 2002). “Feasible Globalizations.” NBER Working Paper No. 9129.

Winters, L. Alan, Terrie Walmsley, Zhen Kun Wang, and Roman Grynberg (October 2002). “Negotiating the Liberalization of the Temporary Movement of Natural Persons.” University of Sussex at Brighton Discussion Papers in Economics, No. 87.

Yang, Dean (2004a). “International Migration, Human Capital, and Entrepreneurship: Evidence from Philippine Migrants’ Exchange Rate Shocks.” Ford School of Public Policy Working Paper Series 02-011, University of Michigan. Available online.

Yang, Dean (2004b). “Why Do Migrants Return to Poor Countries? Evidence from Philippine Migrants’ Responses to Exchange Rate Shocks,” Ford School of Public Policy Working Paper Series 04-003, University of Michigan. Available online.