The Impact Of Migrant Remittances On Poverty Reduction In Selected African Countries

Project and Seminar Material for Economics

The Impact Of Migrant Remittances On Poverty Reduction In Selected African Countries


Abstract


International remittance is fast becoming a stable potential source of household income. Migrant remittances have generated a lot of academic interests because of its potential benefits to the individuals, households, local communities and national economies. This is because unlike other sources of financial inflows like FDI and ODA, it is usually counter cyclical to the economies of its recipients.

This study using the Ravallion poverty growth nexus empirically examined the cushioning effects of international migrant remittances on poverty reduction in selected African countries. Secondary data colleted from IFS and global development finance were analyzed using the OLS panel regression method with the PCgive econometric package.

The following were found: international migrant remittances to Africa reduce poverty incidence by 3.2% for every 10% increase in remittances; and poverty depth by 4.2% for every 10% increase in remittance flows, And Per-Capita Income (PCY) reduces poverty depth by 3.13% and incidence by 3.0% in the selected countries of Africa for every 10% increase in per capita income.

This study recommends the following: to the governments of the recipient countries in conjunction with their financial institutions- an improved records on remittance flows to aid research; and better immigration policies to aid the migration. To the governments of the host countries, this study recommends that bottleneck policies which inhibit discretional remittances as willed by migrants to their home lands should be reviewed. This calls for a review of the minimum external transferable funds by people.


Chapter One


Introduction

1.1 Background of the Study

Migration is re-location of residence from the country of origin to another country. It has become one of the means of acquiring skills and improving standard of living of both skilled and unskilled labour force (Quartey, 2006). In Nigeria, many people, especially the young ones consider migration as a panacea to economic problems because of the macroeconomic instability, corruption and poor management of resources. That is why thousands of professionals especially scientists, academics and even those in the medical fields migrate mainly to Western Europe, the United States and the Persian Gulf states. At the same time, unskilled Nigerians with little education migrate abroad to work as cleaners, security guards, e.t.c.(Chukwuone, 2007).

These migrants remit a portion of their increased income to their families back home. The money which the families receive from their migrant members abroad is known as remittance. Remittances are referred to as unrequited transfer sent by migrant workers back to relatives in their countries of origin (Juthathip, 2007). Remittances are person-to person flows, well targeted to the needs of the recipients, who are often poor, and do not typically suffer from the government problems that are associated with official aid flows. Fundamentally, remittances are personal flows from migrants to their families and friends (Dilip and Sanket, 2007). Remittances can be inform of money, assets or informal or non-monetary forms. Non- monetary forms include clothing, medicine, gifts, tools, and equipment.

According to the World Bank (2003), remittances have become a rising source of external funding for developing countries, reaching 80 billion dollars in 2002. In addition, remittances are the second largest source of foreign capital in developing countries next to Foreign Direct Investment (FDI). Remittances can form a “family welfare system” that can help to smooth consumption, alleviate liquidity constraints and provide a form of mutual assistance (Manuel, Lindsay, and Schnieder, 2006). There is evidence that it alleviates poverty at household level in some countries by helping to fund schooling, reducing child labour, increasing family health and expanding durable ownership (World Bank, 2006). Remittances can improve a country’s creditworthiness and thereby enhance its access to international capital markets for financing infrastructure and other development projects (Ratha, 2007).
It is estimated that migrant remittance flows to developing countries now surpass official development aids receipts in many developing countries (Rath, 2005). Global flows of migrant workers’ remittances were estimated at US $182 billion in 2004, 5.7 percent above their level in 2003, and 34.5 percent compared to 2001 (World Bank, 2004). Although remittances to Sub-Saharan Africa are low, 5 percent of global estimate in 2003, Nigeria remains the single largest recipient in sub-Saharan Africa (Maimbo and Rath, 2005).

International remittances enter Nigeria through formal and informal sources. The Western Union Money Transfer Mechanism is one of the major ways through which remittances enter Nigeria. Informal sources include relatives and town unions and individuals entering Nigeria form their domicile foreign countries (Chukwuone, 2007). In Africa, remittances are part of a private welfare system that transfers purchasing power from relatively richer to relatively poorer members of a family. For most part, remittances seem to be used to finance consumption or investment in human capital, such as education, health and better nutrition (Lopez – Cordova, 2004).

Remittances also play a crucial role in developing local capital market and productive infrastructure as well as increasing effective demand for local goods and services (Ratha, 2003). Remittances are also associated with increased household investment in education and health which are human capital investment and entrepreneurship, all of which have a high social return in most circumstances (Juthathip, 2007).

According to Chimhowu, Piesse, and Pinda, (2003) remittances have made powerful contribution to the poor or vulnerable in majority of households and communities. Remittances can also indirectly promote community development through spillover mechanisms. First, increased consumption of migrant households can generate multiplier effects. If the recipient families increase their household consumption on local goods and services, this will benefit other members of the community through the increase in demand, which stimulates local production, thereby promoting job creation and local development. Second, remittances are also found to prop up the formation of small-scale enterprises, thereby, promoting community development. International remittances ease credit constraints by providing working capital for recipients to engage in entrepreneurial activities (Woodruff and Zeneto, 2001).


1.4 Statement of the Problem

Despite the increasing size of remittances both internal and external, it seems that little or no effort has been made to investigate its impact on economic development, especially on poverty and human capital formation in Nigeria. United Nation (2003) report shows that poverty is deep with over 70% of people earning less than US$1 a day. Adam (2005) observes that little attention has been paid to examining the economic impact of these transfers on households in developing countries despite the ever-increasing size of official international remittances.

Juthathip (2007) observes that in developing countries, remittances help households to set up their entrepreneurial activity and finance education and health. Chukwuone (2007) observes that remittances has been implicated as a vital source of income with crucial income smoothening effect and improving the standard of living, but its contribution in Nigeria is not known.

According to Yang (2005), remittances have contributed to the stability of recipient economies by compensating for foreign exchange losses due to macroeconomics shocks. In many conflict countries, it provides a lifeline to the poor. Muhammed and Naveed (2009) observe that remittances ease the household expenditure burden of poor families and smooth their consumption patterns. Income helps families to engage in several investment opportunities like human capital, microenterprises and property. Nigeria does not put remittances of migrant workers to their best use. Thus, the questions are:

  1. What is the difference in poverty level between remittance-receiving and non- receiving households?
  2. What are the effects of remittance on different zones, quintiles, sex, and sectors?
  3. What are the effects of remittances on human capital formation (education and health status)?

1.3 Objectives of Study

The main objective of this study is to analyze the effect of remittances on poverty and human capital formation in Nigeria. Specifically, this study seeks to:

  1. Examine the difference in poverty level between remittance-receiving and non-receiving households.
  2. Examine the effects of remittances on different zones, quintiles, sex, and sector.
  3. Ascertain the effect of remittances on education
  4. Ascertain the effect of remittances on health status using infant mortality as a proxy.

1.4 Research Hypothesis

  1. There is no significant difference in the level of poverty between remittance-receiving and non-receiving households.
  2. Remittances have no effects on different zones, sex, sector, and quintiles
  3. Remittances have no significant effect on education
  4. Remittances have no significant effect on health status using infant mortality as a proxy.

1.7 Significance / Justification of the Study

This study provides information, which will benefit Nigerians and help them to make use of migrant workers’ remittances. It will also help in some developmental goals such as spending remittances on education, health services, shelter, community projects and proper developments.

To policy makers in the National Planning Commission, it will help in antipoverty policies, since remittances can help to reduce poverty. It will also help in the initiation of policies to encourage the transfer of remitter’s funds through the new micro-credit banks, thus facilitating the access of the poor to finance. Due to this study, policies may come up to enhance remittances, which will help to facilitate access to long term finance made available by remitters especially through their investment in the capital market. Also, to researchers, it will have a meaningful contribution to the existing literature.

This study is justified by the level of poverty and human capital formation in Nigeria. Although, some recent studies have been carried out on the effects of remittance on poverty and human capital formation, for example, those of Juthathip (2007), Adam (2004), Bodin and Sinaia (2009), Yang and Martinez (2005) and Pablo et.al. (2007), most of these studies focused on Central America, Caribbean countries and Latin American countries. To the best of our knowledge, a study of this nature has not been carried out in Nigeria. Even though few people have studied the impact of remittance on poverty and inequality in Nigeria, for example, Chukwuone (2007) and Anyanwu and Erhjakpor (2006) on how remittance affects poverty in Nigeria, they have not studied its effect on human capital development.

Furthermore, this study is justified by the fact that it will account for comparison or difference in poverty level between remittance receiving and nonreceiving households and its effect on poverty and human capital formation.


1.8 Scope of the Study

The discussion of this study is on the effects of remittances on poverty and human capital formation (education and health status) in Nigeria. The scope covers only Nigerian households for 2004. The study would have covered, the year 2009, but for the fact that the available household survey for Nigerian households on remittances, poverty, education and health status is Nigeria National Living Standard Survey (NNLSS) 2003/2004. According to National Bureau of Statistics (NBS, 2009) the 2009 NNLSS is not yet out; it is still in process.

We used NNLSS 2004 for health status because it gives us vital information that we needed for the measurement of health status (infant mortality). Also, instead of using the current data on poverty, which is Nigeria Core welfare indicator, 2006, we used NNLSS 2004, because the latter gives us more information on the variables that we needed in our work. In case of remittances, we used remittance variables under transfer payment indicator in NNLSS 2004, rather than those in the current transfers of Nigerian Balance of Payment Statistics, because our study is based on the microeconomics aspect (households); so, we used household’s data.

Besides the above problem, finance has been a serious constraint to the study.


Chapter Five


Conclusion

This work studies the effects of remittances on poverty and human capital formation in Nigeria. It explains how remittances can have negative effect on households by reducing the motivation of recipients to be more industrious, venturesome and enterprising and positive effect by helping to smooth consumption and improving the standard of living.

From the results of the estimation on the effect of remittances on poverty reduction and education, remittances yield positive contributions on poverty reduction, educational attainment and yield negative effect on health status-using infant mortality. Other variables in the work such as variables for household characteristics, characteristics of household heads, and characteristics of child’s mother have both positive effects for some variables and negative effects for others on poverty reduction, education and health status.

To get the following results we employed econometric models such as linear regression model for counterfactual situation of household without remittances and educational attainment probit regression model for the difference in poverty level between receiving and non-receiving households, Heckman selection bias in the model, and the linear probability model for estimation of infant mortality.

This work also shows the effects of remittances on different zones, quintiles, sex, and sector. From the estimated results, the effects of remittances on rural, female, quintile 1, South west, North central, North east, and North west is about 10080.19, while urban, quintile 2,3,4,5, South south and South east are higher 750.663, 1464, 4311.197,480.4828, 3625.636, 1122.646, 3162.646 and 1211.402 respectively. Although, urban, male, quintile 2,3,4,5, South south and South east are higher with different values, their estimated co-efficients are not statistically significant. This implies that remittances have more effect on rural, female, quintile 1, South west, North east, and North west. It employed dummy variable regression model for the differences.


5.2 Policy Recommendation

Remittances-receiving households should not over depend on remittances by working less which may negatively affect the development of their own financial and economic resources, even though, it has been shown that remittances have positive effects on poverty reduction and human capital development in Nigeria. This over- dependency can also reduce labour supply and economic growth.

Another recommendation is that receiving households should diversify their investment options especially those in rural areas, by using the higher share of their remittances on business activities other than farming. Again, unskilled people should use their remittance to engage in any of the skilled labour of their choice that would increase their finance.

Recipient households should maximize the benefit from remittances by saving part of the remittances received, especially those remittances that are received through informal sources in the bank for any investment such as education, health problems or any emergency that may occur.


5.3 Conclusion

This work has explored the effects of remittances on poverty and human capital formation Nigeria. Remittances appear to lower poverty level, increase educational attainment, and lower Infant mortality. Equations were estimated using data from Nigeria living standard survey 2003/2004. We used linear regression model for estimating counterfactual situation of households without remittances, probit regression model for estimating difference in poverty level between remittances-receiving and non-receiving households, linear probability model for infant mortality, and dummy variables regression model for estimating the effects of remittances on different zones, quintiles, sex, and sector. We also employed Heckman selection model-two step estimates to control selection bias in the model.

There are two key findings from this work. Firstly, remittances seem to have a positive effect on poverty reduction and human capital development. Secondly, remittances have increased the volume of household expenditure through increase in income.


The Impact Of Migrant Remittances On Poverty Reduction In Selected African Countries


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