Since the 1970s, remittances have been generally perceived to be largely spent on houses, food, cars, clothes, and important consumption goods, not on investments in productive enterprises. However, recently remittances have been increasingly used for investment purposes in developing countries, especially in low income countries. Adams, for example, finds that in Guatemala, the majority of remittance earnings are not spent on consumption goods. At the mean level of expenditures, households without remittances spend 58.9 percent of their expenditure on consumption goods compared to 55.9 percent on the part of households receiving international remittances.[1] He explains that households receiving remittances tend to view their remittance earnings as a temporary stream of income thus discouraging them from spending more on consumption.
Remittances may also alleviate credit constraints in the recipient community, thus stimulating entrepreneurial activity. A study in urban Mexico, for example, finds that almost one-fifth of the capital invested in microenterprises was made possible by remittance from the United States.[2] Yang’s study on the Philippines also suggests that an increase in remittances raise household investment in entrepreneurial activities. Specifically, he finds that remittances raise hours worked in self-employment and lead to greater entry into relatively capital- intensive enterprises by migrants’ origin household.[3]
However, though remittances have been increasingly used for investment purposes in developing countries but remittances are affected by the investment climate in recipient countries. For example, during 1996-2000 remittance receipts averaged 0.5 percent of GDP in countries with a higher-than-median level of corruption compared to 1.9 percent in countries with lower-than-median corruption.[4]
Investment Climate and Workers Remittance Receipts
in Developing Countries.[1]
Climate
Indicator
|
Trend
|
Remittances
as % of GDP
|
Corruption
Level
|
High
Low
|
0.5
1.9
|
Inequality
|
High
Low
|
0.9
1.5
|
Financial
Depth
|
High
Low
|
1.2
0.9
|
Trade
openness
(export
+ import)
|
High
Low
|
1.2
1.0
|
Indebtedness
|
High
Low
|
2.3
0.8
|
Country
Risk
(based
on Institutional Investor Rating)
|
High
Low
|
2.4
1.0
|
[1]
Richard H. Adams,Jr., Remittances, Poverty and Investment in Guatemala’, in
Caglar Ozden and Maurice Schiff,’International Migration, Remittances and the
Brain Drain (Washington,DC:The World Bank;New York:Palgrave Macmillan,2006)p.78
[2]
Woodruff,Christopher, and Rene Zenteno,’Remittances and Microenterprises in
Mexico’,University of California,San Diego,2001
[3]
Dean Yang,’International Migration,Human Capital and Entrepreneurship:Evidence
from Philippine Migrants Exchange Rate Shocks’ Ford School of Public
Policy,Working Paper Series
No.02-001.(www.earthinstitute.columbia.edu/cgsd/documents/yang-001.pdf
[4]
Dilip Ratha and Samuel Munzele Maimbo,op.cit.,p.29