Remittances, crowd-in effect, and household welfare

Abstract

Migrant remittances are associated with consumption smoothing and poverty reduction. However, the effect of migrant remittances on non-remittance income is not clear. Moreover, remittance cost is often implicit in analysing the impact of remittances on welfare. Disentangling cost environments allows us to minimize the potential bias arising from the implicit factors that might explain the observed heterogeneous welfare outcomes. This study aims to investigate the potential crowd-in effect of remittance flows on recipient households’ alternative incomes, controlling for remittance transaction costs. We use data for 4,079 households from one of the most expensive remittance corridors in Southern Africa and employ the Inverse Propensity Weighting approach to compare the welfare outcomes of treatment (recipient) and control (non-recipient) households. The results show a 2% increase in the welfare of treatment households, with an associated crowding in of non-remittance income streams. Households that receive remittances report investing in business that increase alternative streams of income, going beyond spending on consumption. Further, remittances have a potential multiplier effect, as they are associated with a 4% reduction in poverty. Our results back the welfare-enhancing role of remittances beyond one period, through building secure and sustainable futures. This is evidence of the contribution of personal remittances to economic development from the “bottom”, hence a motivation for reducing remittance costs in expensive corridors.