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IA-Forum Interview: Dr. Dean Yang

International Affairs-Forum: Remittances are seen by many as a very positive aspect of migration as a means to assist those in developing countries. Your thoughts? How well do they work to alleviate poverty? Increase investment, not only in business but in public sectors such as health and education?

Dr. Dean Yang: There’s a great deal of evidence that remittances have a number of positive effects, and bring a number of benefits to households in developing countries that receive them. All the ones you listed are areas that are likely to be affected: small business investment, poverty reduction, improvements in educational investments, and increases in human capital in remittance receiving households. The evidence on health is there as well. One publication that does a good job of reviewing the state of knowledge on this topic is a World Bank report, Global Economic Prospects (2006).

The bottom line is there’s a great deal of evidence from micro level household surveys in developing countries that households receiving remittances do much better on a number of different dimensions than households that don’t: on the income dimension, the poverty dimension, education of their children, small enterprise investment. The natural question that arises, of course, is whether these differences across households that do and don’t receive remittances reflect the impact of remittances, or do they reflect other things that are different across these households? Is it really because of any causal effect of remittances? Or is it just the fact that these households differ on other dimensions as well? Do the heads of these households tend to have more education, for example? Are they more ambitious on some dimension, etc? A great deal of hard thinking and statistical analysis is applied to this question in development economics to really understand whether these differences across remittance receiving and non-receiving households truly reflect the causal impact of remittances, or whether they reflect differences along some third factor.

Some of the most creative studies have actually found that remittances have a positive causal impact on families. You may think that this is a bit of a no brainer, that more money coming into a household would be a good thing but there are some people in migration studies that will argue that remittances are a source of dependency, remittances make people lazy, and encourage people not to work and simply rely on the remittance coming in from overseas. My own work and the work of many others have found no evidence of that. It’s not to say there aren’t some individuals and cases where individuals reduce their labor supply and make less effort in the home country because they’re receiving remittances. But in my own research, for example, I’ve found that when households receive more remittances from overseas, they actually invest more in small enterprises and devote more labor hours to work in their household enterprise. That’s a striking finding, and I think a strong piece of evidence against those who would argue that remittances on average make people lazy and reduce work incentives in developing countries receiving remittances.

IA-Forum: You’ve performed considerable research on the effect of shocks on remittances. Would you elaborate on these, your work on exchange rates first perhaps?

Dr. Yang: What I’ve done is to look at exchange rate shocks that were due to the Asian financial crisis in ’97, and look at how that affected remittances migrants sent home, and subsequently how that affected what was going on in the remittance receiving households. In that situation, many Filipino migrants around the world experienced quite a windfall in the sense that the Philippine peso depreciated dramatically in the wake of the Asian crisis while the currencies overseas where migrants were earning their income tended not to depreciate by as much, if at all. The migrants who were earning US dollars did the best as their peso value of overseas earnings increased by about 50% as a result of the depreciation of the Philippine peso. What that meant was that they could send much more home in Philippine pesos, which essentially meant higher purchasing power for their families back home. What I show is that families back home responded to this windfall by investing more in small enterprises and taking any children who were working out of the labor force, investing more in their children’s schooling. Basically we saw reductions in child labor, increases in child education, increases in small enterprise investment, and increases in labor supply in small enterprises.

These analyses take advantage of what is known in economics as a natural experiment, and it’s one way of trying to get at the causal questions that I mentioned earlier: what is the causal impact of remittances on outcomes in remittance receiving households? That paper is probably one of the more widely cited papers in the literature when scholars and practitioners are looking for evidence that remittances bring positive benefits to the families that receive them.

IA-Forum: And your research on the effects tied to shocks from droughts and hurricanes?

Dr. Yang: Another set of work that I’ve done is related to negative shocks that developing countries experience and how remittances help cushion the effects of those shocks. That’s an important but different type of benefit that remittances may bring. Remittances tend to be counter-cyclical. They rise when adverse shocks occur in recipient household countries. They tend to fall, or at least remain stable in more normal times.

In other words, remittances often serve as a form of informal insurance. In developing countries that tend not to have well developed, government run social insurance systems, like unemployment insurance or disaster recovery funds, remittances can serve a very important informal role for families that have members who are working overseas. For example, one paper I wrote looks at the Philippines, and that remittances from overseas respond quite strongly to a drought. It looks at remittances over a certain time period, across families in the Philippines who have migrant members overseas. When some of the families (and not others) were exposed to drought that occurred in certain parts of the Philippines, and family incomes drop because of it, remittance flows come in and make up about 60% of the declines in income that these families are experiencing. So the informal insurance provided by remittances provided a 60% replacement rate for income that was lost due to low rainfall. That’s just one example of a general point that remittances can serve as insurance in the wake of negative shocks experienced by families with migrant members.

Another paper takes a more global perspective and looks across countries that experienced large hurricanes. I find that in a subset of countries, particularly the poorest countries, remittances do replace a large fraction of losses due to hurricanes. In the poorest half of countries, for example, remittances replace about 20% of hurricane induced financial losses. This is at the aggregate at the country level, looking at countries over time.

So in sum, whenever I discuss the impacts of remittances, I usually describe these two types of benefits. First, increased funding for current consumption, as well as investment in households. And second, insurance in the wake of adverse shocks.

IA-Forum: What effects on remittances have you observed related due to the recent world economic downturn?

Dr. Yang: I think the recent downturn is actually quite striking. It supports another general point that’s related to this idea of insurance, which is that remittances tend to be much more stable in the face of economic downturn than other types of international financial flows. This is in some ways sensible when we think about what remittances are. They’re transfers between family members who have very close social ties. Unlike foreign direct investment, which is very motivated by private interests and private profit, in large part, remittances are motivated by altruism and aren’t going to decline nearly as dramatically in times of economic stress as will other types of international financial flows that are more profit oriented, like portfolio investment or foreign direct investment. We can see that quite dramatically in the data for 2009, when remittances were fairly stable and fell by only about 6%, vis-à-vis their level in 2008 globally, if you’re looking at remittances going to developing countries. But that’s quite a small decline compared to declines in other private financial flows, like foreign direct investment which essentially fell off a cliff in 2009. FDI flows to developing countries contracted by roughly a quarter vis-à-vis 2008. That’s just a huge fluctuation from one year to the next, obviously driven by the global crisis and credit crunch. So the fact that remittances only fell by 6% is quite striking.

Basically, unlike other types of international financial flows going to developing countries, remittances tend to stay quite stable in the face of crisis. This most recent crisis in ‘08/09 is just the most recent example of the remarkable stability of remittances in the face of economic fluctuations.

IA-Forum: How important to you see remittances relative to other sources of external finance? Do you think remittances should be promoted for development more than other sources such as ODA?

Dr. Yang: I’d rather not say that any type of financial flow is inherently more or less effective at spurring development. Each type of flow has different characteristics. Foreign direct investment is the largest type of financial flow going to developing countries. In some years, they tend to be roughly twice as large as remittances. In other years, they may not be much larger than remittances. In 2009, FDI to developing countries was in the $450-500 billion range, with remittances at roughly $320 billion.

The comparison with Official Development Assistance is also striking. Official Development Assistance has risen in recent years, but still is only in the realm of about $100 billion a year, only about a third the size of remittances. Just in terms of magnitude of flows, remittances are three times larger than ODA, and ODA gets a great deal more attention in economic circles and international development circles as a flow that’s promoting development.

The relative sizes are the first point but there is still the question of which is the most effective, which type of flow is more effective dollar for dollar at promoting development. That’s really a question that we don’t have very good data on yet. But even if it’s hard to say which of these types of flows have the greater effect on development overall, remittances are likely to have distinct different effects that are worth emphasizing and supporting. In particular, it’s very attractive that remittances go directly to individual households and families as opposed to going through government and bureaucracy. That’s attractive purely from an efficiency standpoint if you think that government bureaucracies or international bureaucracies are a source of inefficiency and cause some waste of resources as the resources channel through official channels. It’s also attractive if one is worried about corruption from the standpoint of siphoning resources away once they get into a government bureaucracy.

Another positive is from the standpoint of public opinion. One of the biggest challenges facing those who argue for greater levels of efficient development assistance is the public perception is that ODA is often wasted because of the problems of inefficiency or corruption that I just mentioned. Remittances don’t have that problem. The fact that they go directly to the needy families is a very important characteristic of remittances that isn’t shared by ODA or foreign direct investment.

Remittances are a very large flow, and yet we are still learning about what their exact impacts are on various aspects of economic development. We’re still learning about how to magnify or maximize the impact of remittances on economic development. When one thinks about policy measures that can be undertaken to maximize the impact of remittances on development, the list of proven strategies is very short. It’s close to non-existent, actually. It may be true of many types of international flows, but the entire community right now is struggling to find evidence as to how the development impact of remittances can be maximized. That’s the central subject of my own research and of others who are interested in this area. I think it’s a gaping hole and it is very important to really figure out what policies and strategies can be undertaken to maximize the impact of remittances on development.

IA-Forum: What policies do you think should be adopted or enhanced in host and originating countries to enable more and better utilization of remittances? What role do you think world financial institutions should play?

Dr. Yang: On the first question, I think there are two interrelated lines of inquiry. First, how can one increase the flow of remittances to developing countries? And second, for a given amount of dollars that are channeled back to a particular developing country, how can one increase the short run and long run development impact of those resources? There are some strategies that actually help address both questions simultaneously. The approach that I’ve been pursuing in a number of projects recently is the idea that one can potentially achieve both objectives simultaneously by finding ways to give migrants more control over how the remittances they send home are used by recipient families. This is analogous to conditionality in foreign aid.

On the ODA side, it’s widely accepted that even though it’s hard to do, it’s desirable to have some controls in to monitoring and direct how foreign aid is used by recipient countries. One tends not to think about public policy approaches to this kind of issue when it comes to remittances because it’s a private flow between individuals and within families. But it doesn’t take away from the fact that when one interviews migrants, a large concern that often comes up is concerns over misuse of remittances, difficulties in getting families to allocate remittances to long term investment purposes, as opposed to short term consumption or even luxury consumptions, difficulties in making sure that the money is used exactly as intended. For example, if the money is intended to sponsor the education of a child or a young relative, concerns are often voiced that the money is siphoned away, or that, in the extreme, aren’t even used for the intended purpose. That difficulty in controlling and monitoring how remittances are used does two things. One, it may end up channeling resources more towards short term consumption rather than long term investment, and away from educational investment and small enterprise investment. In addition, it is likely to reduce the total amount of remittances that might be sent home. If migrants can’t be assured in many cases that the remittances sent home are going to be used as they desired, migrants on the margins are probably going to be sending home less than they otherwise would if they had more control.

This is the general idea. We’re starting to get some evidence that there is something to this idea, that giving more control to the migrants has positive effects. But overall, it’s a research agenda that’s just starting. The most developed piece of work on this topic is a project I’ve done with migrants from El Salvador in Washington, DC. We’ve been looking at what happens when you give Salvadoran migrants in the DC area greater control over a particular use of remittances in the home country: savings. One thing that migrants often say is, I’d like my mom and dad back home not to spend the remittance money I’m sending to them all at once. I’d like to have them save some of the money for the future and create this little buffer stock for themselves, so they don’t have to keep asking for money in emergencies, or for some other long term savings purpose. The frustration many migrants have is that it’s very hard to get families to do that when you’re in the US, and family members are back home.

So we worked with a Salvadoran bank and set up a facility to create joint bank accounts between migrants in the US and family members back home. These are bank accounts that the migrants and the family members back home had joint access to, had joint ownership over, and which the migrants in the US could monitor. They could monitor the amount of savings that were maintained in these accounts. We found that when we offered these accounts to migrants, savings went up quite dramatically in the remittance recipient households. So it’s actually giving migrants more control over these resources, giving migrants control over savings accounts in El Salvador, which led to dramatically higher savings in El Salvador. In general, we think that a higher savings rate in a country contributes to overall economic growth. So increasing migrant control over savings can form part of a strategy for raising aggregate savings in El Salvador and aggregate growth in the country.

Another example would be a project that’s just getting started in the Philippines that I’m running, where we’re working with financial institutions to give Filipino migrants overseas the ability to directly pay for educational tuition and to get reports back from the schools as to how the students are doing. They will be able to get reports on attendance and grades of the students that are being sponsored. This is a way of directly alleviating the control problem, the inability to direct funds to the schools for fees, and also reducing the problem that migrants have difficulty figuring out whether students are actually attending school and doing well in response to being sponsored by the migrant. These are some initial strategies that I’m pursuing in a couple of different contexts at international financial institutions like the World Bank and the Inter-American Development Bank. I think the initial signs are quite positive at this point.

Now, the question that you may raise is, what role does this type of approach imply for institutions like the World Bank, the IDB, or USAID, because these are products that one could imagine offering on a purely private basis. Bank accounts that are joint between a migrant and a family member back home, that’s a private product. A payment service and an information channel on how students are doing back home is also something that can be provided as a private service. As with many things, I think the roles for international development institutions can be to serve as catalysts to get private sector players to offer these types of services.

I’m optimistic that these types of services and facilities can be offered on a profit making basis. But they are very new products, and organizations may need a little prodding to try them out and to figure out how they can be made to work. They may also not be as profitable as other initiatives that bank institutions may want to pursue. Some amount of prodding or subsidy from international funding institutions could be useful in terms of encouraging them to try these products out. Very simply, pilot projects demonstrating that these products can be offered profitably while simultaneously having development benefits can be useful in prodding private institutions to offer these types of products. There are also some regulatory issues that developed countries can address in making these types of facilities easier to set up. For example, setting up a joint bank account between a migrant in the US and a family member back home is something that’s in a grey area in terms of legality from the standpoint of US money transmission regulations. It’s quite unclear as to whether a private bank from El Salvador or elsewhere can offer these products on a wide scale to migrants in the United States. There are many good reasons to have financial regulations in place such as to avoid money laundering and so forth but one thing that’s not as well recognized is that remittance flows can have enormous development benefits. Some loosening of regulations to allow these types of potentially beneficial financial innovations (such as products that enhance migrant control over remittances) could potentially have big benefits. I think that’s the one place where public policy in the US and other developed countries could help facilitate maximizing the development impact of remittances.

IA-Forum: A common policy recommendation is that remittance transaction fees should be lowered. Do you agree?

Dr. Yang: I think there is an important set of policies that can lower the cost of remittances from the standpoint of migrants. Anything that lowers the cost of remittances is likely to have a big impact on remittances sent home. Related work that I’ve done among the Salvadorans has shown that when you lower the cost per remittance transaction, migrants respond quite dramatically. They actually send more frequently and end up sending more resources home in total over a given time period.

The study we undertook among Salvadorans in DC involved essentially giving migrants discount cards they could bring to a remittance money transmission institution we worked with. Different people got allocated different prices, anywhere from $4.00 to $9.00 in dollar increments. These cards were allocated to people randomly, experimentally, and we tracked their remittance flows over the course of the next year. We got the data from the partner money transmitter and we also surveyed them in the end to ask them about their remittance behavior. We found quite a dramatic response. Our estimates indicate that for every one dollar reduction in the price of sending remittances, migrants sent about $25 more in total per month. Aggregated over the course of the year, that’s about $300 a year in additional remittances. That’s quite a dramatic increase, for just a one dollar decline in remittance, much larger than anyone expected, actually.

I think this is the first estimate as to how much more migrants send home in response to getting per use prices for their remittance transactions. That’s very encouraging. The general takeaway from this is that policies to reduce remittance prices are likely to have a large impact on remittance that migrants decide to send home. Then the question is, what kind of policies are likely to lead to lower remittance prices?

One of the most remarked on patterns in the remittance price area is remittance channels or remittance pathways (for example, Washington, DC to El Salvador is one pathway) with higher remittance volumes also tend to have lower prices. Another pattern is that remittance pathways that have more competition between and among money transmission services also have lower prices. Here, public policy needs to find the right balance between removing barriers to encourage competition and regulations that inhibit money laundering, which comes at the cost of inhibiting competition in the money transmission industry. Reducing regulation and increasing competition in the money transmission industry can have the benefit of reducing remittance prices, and therefore can lead migrants to send more money home. That’s probably the most obvious policy implication.

Another implication is that innovation in payment services that lead to lower costs should also be encouraged, or at least not inhibited by public policy and regulation. So cell phones, the internet, facilities that allow much lower cost remittance sending, for example, are on the horizon, being tested out at various scales and in a variety of places. There’s always a question as to whether these new services should be regulated. There might be good reasons to regulate these types of services, again, for the purpose of reducing money laundering, but regulators should keep in mind that any regulation is likely to increase the cost of using these services, and possibly choke off the additional remittance flows that may arise due to reductions in cost and increases in convenience.

IA-Forum: What challenges have you experienced in gathering data for your work? Finding good, reliable data, that is. What would you recommend to obtain better data?

Dr. Yang: I think there is a very important data collection and centralization effort going on at the World Bank right now, the Migration and Remittance Factbook, led by Dilip Ratha. That effort is doing an excellent job at centralizing aggregate annual data on remittances at the country level. The more pressing need in my mind is for micro level survey studies that try to shed light on how migrants make their decisions on remittances that they send home, how exactly they send it home, with what frequency they send money home. How much they send each time? Who do they send their remittances to? And what impacts do those remittances have on receiving families in the home country? That is the type of data that’s extremely rare today, and if we had more such data, it would be incredibly insightful for analyses of remittances, and in shedding light on policies that could facilitate remittances and increase their impacts.

For example, there are very few data sets that that reveal individual remittance decision making on the part of migrants in a developed country and simultaneously the use of those remittances, the impact of those remittances in the receiving household back home. Now, because the migrant and the family back home are separated geographically, it’s inherently a very difficult type of data to collect. But these types of data are essential for understanding in depth how migrants make remittance sending decisions and how these remittances affect the families that receive them.

There are very few data sets that collect data on both sides of the remittance transaction. One of the few exceptions is the work I’ve done among Salvadorans that I mentioned, surveys with migrants and the families in El Salvador that receive remittances from these migrants. We have a very unusual window into the remittance decision making of the migrants and what’s going on in the remittance receiving households.

I think the most pressing need in remittance studies today is for more such data sets, more such studies, and surveys of migrants in the developed country and the family members in the home country that are receiving remittances. That, and to not only collect data, but also test new and innovative approaches designed to increase the development impact of each remittance the migrants are sending. That is, in my mind, that’s the most data needed at the moment.

Dean Yang is an Associate Professor at the University of Michigan, where he holds appointments at the Ford School of Public Policy and the Department of Economics. His areas of interest include international migration and remittances, microfinance, human capital, disasters, international trade, and crime and corruption. He is currently running survey work and field experiments among Central American migrant workers in the U.S., among Philippine migrant workers in Qatar, among potential overseas migrants in the Philippines, and on microfinance in Malawi and Mozambique. He teaches courses in development economics and microeconomics at the undergraduate, master’s, and Ph.D. levels. He was a visiting professor at Princeton University in 2006-07. He has worked as a consultant on development issues for the World Bank, the Inter-American Development Bank, the UNDP, and in El Salvador and Peru. A native of the Philippines, he received his undergraduate and Ph.D. degrees in economics from Harvard University.

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