Do migrant remittances promote human capital formation? Evidence from 89 developing countries

Abstract

The few published empirical studies on the effect of migrant remittances on educational attainments are roughly based on cross-sectional microdata from household surveys. This paper applies the generalised method of moments (GMM) estimator on aggregate level data from 1970 to 2010 in five-year intervals to examine the impact of migrant remittances on human capital formation in 89 developing countries. The estimation results show that, on average, an increase in migrant remittance inflows by 1% is associated with a 2% rise in years of schooling at both the secondary and tertiary levels. This suggests that migrant remittances have the potential to relax liquidity constraints and generate spillover effects that facilitate more schooling opportunities in remittance-receiving countries.

Keywords:

• remittances
• human capital formation
• aggregate level data
• dynamic model
• developing countries

Notes

1. In 2009, among the top recipient countries of recorded remittances as a percentage of GDP were: Tajikistan (35%), Tonga (28%), Lesotho (25%), Moldova (31%) and Nepal (23%) (World Bank, 2011).

2. Kugler (2006) highlights the possible externalities associated with remittances received by households through job creation. Migrant remittances are perceived to be specific to households with migrant workers abroad. Moreover, it is also possible for households without migrant children abroad to acquire remittance income from relatives and friends and also as loan repayments.

3. http://www.indexmundi.com/facts accessed on 09/11/2012.

4. Migrant remittances are “unrequited, nonmarket personal transfers between households across countries” (Chami et al., 2008). Motives for migrant remittances include altruism, investment, insurance and repayment of loans. Migrant remittances are said to be motivated altruistically when they increase with the decline of migrant dependents’ income level. Conversely, they are stimulated by investment motive if they rise with increase in dependents’ income level in the origin country. Remittances are sent to insure migrant dependents at home in the event of unexpected adverse economic shocks. They are also transmitted to service loans received prior to migration by migrant workers.

5. Year-fixed effects are also used in Columns 2a and 2b, but the results are insignificant.

6. Although international migration and remittances are twin phenomena in developing countries, this paper only concerns itself with the impact of migrant remittances on human capital formation.