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Friday, 29 May 2009

Remittances Vs Conditional Cash Transfers

A new paper sheds new light on the impact of public and private transfers on credit markets, focusing on conditional cash transfers and remittances in rural Nicaragua. The paper finds that the reduction in income risk provided by remittances changes borrowers’ expected marginal returns to a loan and/or their creditworthiness, as perceived by lenders more effectively than conditional cash transfers from Government. In short, what makes remittances so powerful is their resilience (a strong signal to bankers). If Governments can work to increase remittances, it would help substantially in lifting people out of poverty:

Our findings show that, on average, CCTs did not have a significant effect on the likelihood of requesting a loan, while remittances increased it. The successful enforcement of the use of CCTs on long-term investments like education and health, shown in the literature1, seems to have left unchanged expected marginal returns to the short-term loans these households have access to or their creditworthiness as perceived by lenders. Likewise, any unspent part of the CCT seems to have left unchanged expected marginal returns to a loan and the lender’s perception of the household’s creditworthiness. 
Remittances, on the other hand, are the result of a household strategy to reduce income variability and overcome liquidity constraints. Its positive effect on the decision to request a loan suggests access to remittances improved their expected marginal returns to a loan and/or their creditworthiness as perceived by lenders, through the reduction in income risk. This positive effect seems to offset any other substitution effect caused by the rise in liquidity that may discourage the request of a loan. 

9 comments:

  1. Interesting, although these are not really alternatives since not all families have access to remittances, and as the recent crisis shows, they are not necessarily predictable.
    Makes sense to me to support both since in policy terms it doesn't have to be a choice either.

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  2. I agree with Ian the impact of remmittances only make sense for latin American and others that have a large proportion on the immigrant workers in the US.

    Specifically remmittances from Zambians only have a marginal impact in reducing poverty. following the much talked about "dead aid" approach which as fate or otherwise as happened that after Dambisa held talks with the Danish Embassy and other aid agencies in Zambia, they have now withheld the support to the health sector in Zambia. The primary basis of their decision was rampant corruption in the Zambian government, what steps can the Zambian people immediately take to curtail corruption since it is apparent per Prof Luo 's pronnoucements that the absence of donor aid to Zambia's health sector constitutes a crisis. The Zambian govt is appears from the yellow book which specifies government budget allocation does not or can not adequately meet the financial obligations of sustaining health sector needs. what are the people dependant on ARV's and other critical drugs going to do?
    This blogger has addressed corruption before, however there always appears a disconnect between solutions developed and what play out annually in Zambian budget disbursements. It is clear that adhoc efforts by TPI, donors and Goverment are not getting at the root that is there is an overwhelming number of people in government that are burnt on getting themselves out of poverty what ever the cost to others. Besides recent high profile prosecutions are there any further steps that government or others can implement to curtail
    corruption? Personally I have no faith in government to correct this , like a drug addict they can not help themselves.

    Lombwe, Kitwe

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  3. Ian,

    "Makes sense to me to support both since in policy terms it doesn't have to be a choice either." Agreed. But the stability effect of remittances, suggests that its wider benefits may be significant. More importantly, unlike cash transfers its cost to the Government is negligible beyond the policy costs of smoothing transaction costs.

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  4. Lombwe,

    "Specifically remmittances from Zambians only have a marginal impact in reducing poverty"




    What is your basis for this statement?

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  5. I disagree that the cost to government is negligible. The people sending remittances should be in Zambia running businesses which pay taxes, so the gov't loses on that one. Plus the government has likely invested a fair bit of money into these people before they left. Both of these are large costs. (and if they went through private schools - then its likely their remittances are going to people who aren't actually poor)

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  6. Mark,

    You are confusing the costs of the "brain drain" with the costs of remittances. I was talking about the latter. In others GIVEN people are abroad what is more costly, encouraging their remittances or conditional cash transfers programmes?

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  7. 'others' should read 'in other words"...

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  8. Which goes to show that the government should be making conditions for local businesses better, instead of suspending all the rules and laws to attract FDI at any cost.

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  9. While I certainly agree that there is a "brain drain" cost imposed on the society by way of investments in education (especially higher education with more limited capacity than universal primary education) when skilled persons emigrate, I think that it is incorrect to assume that had they not left, then they would have been able to translate their skills alone into increased productivity in Zambian businesses. I would say that what the nation's young people lack even more than access to education is access to investment capital with which to create jobs for themselves and others. There are currently many secondary and tertiary school graduates who are facing difficulties finding jobs in the formal sector (or the informal one even), and it is hard to understand how augmenting their numbers would somehow make the situation any better.

    Certainly it is tempting now to look at persons in the Diaspora who are living and working in other countries and have managed to earn and save enough to make remittances back to Zambia, and conclude that were they to bring all those capital resources with them and return, then they could start many new local businesses and purchase from many others. While this is true for many, and the eventual intention of a large proportion of Diaspora members, it is important to understand that they would not be in possession of the desirable capital resources in the first place had they not emigrated at all. The kwachas invested in education provide employment for teachers and staff, as well as utilities, construction, maintenance and school supply companies. The student walks out with a diploma and hopefully also the skill base it is certifying, but not with a wad of government cash with which to immediately begin applying their skills at maximum productivity.

    In the simplest of terms, Zambia can only become a richer nation (monetarily that is) by maintaining a positive balance of trade over time. More wealth has to come in to the country each year than leaves it. Zambians will become richer per capita when the amount of the positive balance is greater than population growth. The distribution of increased wealth across the whole population will depend on the policies of the country on job creation, wage disparities and taxation. The advantage of remittances is that they augment the inflow of money without reciprocal outflows, since remitters themselves generally expect no return of goods or services. Reducing the parasitical effect of high transaction costs on receipt of remittances would not only improve the percentage received by the intended person in Zambia, but would also encourage remitters to make more frequent and/or larger transfers.

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