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Rural Mexico Research Review, Volume 2

Remittances and Development in Mexico
Part One
The New Labor Economics of Migration: A Critical Review

J. Edward Taylor
Peri L. Fletcher


  1. Introduction
  2. Estimating and Defining Remittances
  3. Remittances and Development: Two Approaches
  4. The New Economics of Labor Migration: Models of Migration and Remittances
  5. Beyond Migrant Households: Remittances, Poverty, and Inequality in Migrant-Source Economies
  6. Public Controversy and Research Priorities


Remittances represent one of the largest economic impacts of migration on migrant-sending areas in rural Mexico and Central America. However, the interactions among migration, remittances and development are complex and are among the least researched and understood topics in the social sciences. Often, the role of migrant remittances has been judged in terms of whether or not migrant remittances stimulate self-sustaining growth in migrant-sending areas. This narrow criterion for understanding the impact of remittances overshadows the complex role remittances play at the household, community and regional levels. The ability of remittances to improve standards of living, access to medical care and education should not be underestimated. Remittances may also entitle and empower new groups, such as women and the landless, and they provide a way for migrants to maintain social and financial obligations to their families and households. Underlying these concerns is the larger question of what constitutes “development,” and in particular, what benchmarks for development should be used when assessing the economic impacts of migrant remittances. For example, a frequently used benchmark is whether migrant-sending areas become more or less dependent upon migrant remittances over time. In other words, do migrant remittances set in motion self-sustaining growth in migrant-sending areas? However, the use of this criterion in assessing remittances is arbitrary—we do not ask the same question when assessing economic welfare in developed-country communities.

This issue of Rural Mexico Research Review examines remittances and economic development in rural Mexico. It takes the position that an understanding of the role of remittances in rural development must consider the multiple, sometimes subtle, effects of remittances, and must also take into account the market and regional contexts within which migration and remittance-sending take place. The next issue will review selected empirical research on remittances in rural Mexico.

Estimating and Defining Remittances

In a number of countries, remittances nearly match or exceed total income from merchandise exports, highlighting the importance of migrants for generating foreign exchange and savings. However, estimating the amount of remittances a particular country or region receives is problematic, in part because of differing definitions of what constitutes a remittance, and in part because many of the forms remittances can take are difficult to measure.

The International Monetary Fund separates remittances into three categories: workers' remittances, from workers who have lived abroad for more than one year; compensation of employees or labor income, including wages and other compensation received by migrants who have lived abroad for less than one year; and migrant’s transfers, the net worth of migrants who move from one country to another. However, inconsistencies in the way that different countries report remittances blur the categories, and there are serious information problems with estimating remittance flows. For example, in 1998, Mexico reported $5.6 billion in workers’ remittances and only $876 million in compensation of employees, even though many Mexican migrants were abroad fewer than 12 months. When a cashiers check or postal money order is sent from an individual in the U.S. to someone in Mexico, the Mexican banking system has no way of knowing how long that individual has been abroad, or even if s/he is really a migrant from Mexico. Estimation of international migrant remittance flows is complicated further by the fact that an unknown but probably large share of remittances are not channeled through formal banking systems.

Official International Monetary Fund (IMF) estimates placed total world worker remittances plus compensation of employees at 95 billion in exceeding official development assistance. The International Monetary Fund (1998) reports that the sum of workers remittances and compensation of employees—the most comprehensive definition of migrant remittances—increased from less than $1.5 billion in 1970 to $94.6 billion in 1998. Mexico was second to India in the amount of remittances received, with $6.5 billion in 1998.

The above-mentioned problems notwithstanding, these figures understate the true value of remittances, which include in-kind and clandestine transfers. They may be monetary or non-monetary, and they may originate in activities other than wage labor, for example, commercial or productive activity (Lozano Ascencio 1993). Micro-level field studies indicate that clandestine or in-kind transfers are substantial; however, remittance studies generally do not attempt to put a value on in-kind remittances.

Lozano Ascencio (1993), based on work in Mexico (and drawing on earlier work by García y Griego and Giner de los Rios, 1985, and Portes and Guarnizo,1991) develops a broader, alternative typology, which is based on two fundamental criteria: the origin of the remitted resources (how the resources are earned and who sends them), and the type of remittance, which distinguishes between monetary and non-monetary transfers. The origins of resources include wages by temporary migrant workers born in Mexico who work temporarily in the U.S.; permanent migrants, including wage earners and businessmen and women; permanent returning migrants who bring their savings with them to Mexico; American born workers who remit to family in Mexico; and Mexicans who reside in Mexico but receive U.S. pensions or social security (Lozano Ascencio 1993:6).

Remittances can take the form of monetary, or cash, transfers or remittances in kind, including consumer goods, capital goods and skills, and technological knowledge. They can be personal, or they can be group remittances, as when individuals join together in migrant “hometown associations” to send money back to Mexico and Central America to support fiestas, public works projects and other activities.

Many factors determine how much is remitted to the country of origin. An important factor, of course, is the number of migrants. However not all migrants remit, and there are many factors that determine how much a migrant will remit. The economic situation in the host country is an important factor--the wage rate, exchange rates and inflation may determine the volume of remittances (Russell 1986). Other important factors include the socio-demographic characteristics of migrants; for example, female migrants are more likely to have family with them in the host country, and this, in turn, is more likely to decrease the amount they remit. Two studies of Mexican migrants found that the length of time spent in the United States was negatively associated with the amount remitted, as the longer time meant that more money was spent in the United States (Massey et al. 1987 and Cornelius 1990). Studies from Central America found some differences from Mexico. Segundo Montes (1987, cited in Lozano Ascencio) found that Salvadoran refugees remit at low levels during the first year while they are still looking for work or paying for their trip. Their remittances increase rapidly in the first few years and then gradually decrease with time in the United States. Until 1992, war in El Salvador also affected remittances of Salvadorans, as many migrants did not return to their country and/or were reunified with their families in the United States, thus loosening their ties with El Salvador. Another study found that Nicaraguan workers remitted considerably less than Salvadorans and Guatemalans due to their more recent incorporation into the U.S. migrant work force and subsequent lower paying jobs (CEPAL 1991).

Nevertheless, total remittances generally have not fallen over time as migration streams develop. In the case of Mexico, new workers continue to join the migration stream. How much, and over how long a period of time, individual migrants are willing to remit depends partly on economic and saving policies in the host and home countries, exchange rate and risk factors, and the efficiency of transfer facilities. Changes in economic policies in some countries have encouraged increases in remittances in some cases; in other cases, simply making it easier or less expensive to send money home has increased remittances, as have increases in migrant earnings abroad (Taylor, 1999).

International migration represents only a small share of total world migration (which also includes internal migration). Estimates of internal-migrant remittances are not available. Nevertheless, household surveys in rural communities suggest that internal migrant remittances frequently constitute a large share of total income in households with migrants. Internal-migrant remittance shares of 15 to 20 percent or higher are not uncommon (e.g., see Taylor and Martin, 2001; and Yunez-Naude, Taylor and Becerril 2001).

While difficulties in accurately assessing the amount of remittances persist, it is quite obvious that migrant remittances represent the largest direct economic impact of migration on migrant-sending areas. However, assessing the nature of the impacts, especially in terms of economic development, remains controversial. In recent years, new methods have become available to test for, and estimate, remittance-development interactions.

Remittances and Development: Two Approaches

Methodological and theoretical problems that pervade the migration and development literature make it difficult to assess the real impact of remittances. Most empirical migration-impacts research has relied on remittance use surveys, which use simplistic models of how remittances influence the expenditures of receiving households. A whole-household economy approach that also keeps in mind community and regional contexts is essential to examine how migrant remittances affect consumption and investment decision in migrant-sending households and regions.

Two opposing perspectives on migration and remittances comprise current economic thinking. The first, characterized as the "migrant syndrome" (Reichert 1981) or the "Dutch disease" perspective, views migrant activities as a drain on the labor and capital (including human capital, or skill) resources of migrant-sending areas. According to this view, migration competes with local production, at least the production of “tradable goods.” Proponents of this position argue that per-capita incomes in migrant-source regions can actually fall when migrants leave. Migration may reduce income in migrant-sending areas if the marginal production of the migrant's labor is large prior to migration and/or if migrants take productive capital (including human capital) with them when they go. Income remittances by migrants may only partially compensate for these lost-labor and lost-capital effects.

In this pessimistic scenario, poverty may increase if migrants originate from poor households, or if the labor of poor villagers--on their own or on others' farms--becomes less productive as a result of the lost migrants' labor (and capital). From the point of view of the source region, migration represents a "labor export," and remittances are payment for that export. The availability of lucrative migration opportunities for some households may have a "Dutch disease" effect on source economies, as local production activities compete with migration for limited labor and other resources, and the production of tradables (such as staples and cash crops) declines.

Households and individuals participating in migration benefit (otherwise, it is not clear why they would participate). However, according to this viewpoint, the beneficiaries of migration may not include the rural poor. If migration is costly and risky, at least initially, migrants may come from the middle or upper segments of the source-area income distribution, not from the poorest households. If migration adversely affects local production, the incomes of the poor may fall, both relatively and absolutely.

Decreases in production and income may create negative multipliers and even a downward spiral in local economic activity according to this perspective, adversely affecting the poor. Remittance-receiving households may not spend their income on goods or services offered by poor villagers. This would limit migrations' potential to alleviate poverty through local expenditure linkages.

In contrast to this pessimistic scenario, a more positive, developmentalist, perspective is associated with the New Economics of Labor Migration (NELM). This position views migration decisions as part of an overall family or household strategy to raise income, obtain funds for investment, and insure against risk. Remittances, or even the potential for remittances, can loosen production and investment restraints, setting in motion a development dynamic in poor, rural environments (Taylor and Martin 2001).

Traditional economic research overlooks the ways in which remittances may reshape migrant-sending communities indirectly, through linkages among local economic actors. Many of the most profound impacts of migration may not even be found in the migrant-sending households, but rather, in others that interact with migrant households in local or regional markets. Remittance-use studies, by focussing on whether or not households with migrants use their remittances for productive investments, overlook the many ways in which expenditures by migrant households may stimulate local economic activity. For example, increased consumption demand by migrant households can trigger investments by other households or firms to meet this demand. Furthermore, the importance of increased consumption in impoverished households should not be slighted, as the nutritional and health advantages are obvious.

This more optimistic perspective sees potential for migration and remittances to reduce poverty in rural areas, provided that the benefits of migration reach the poor. Migrant remittances may contribute directly or indirectly to the incomes of poor households that participate in migration. If migrants originate disproportionately from poor households, remittances may reduce poverty in migrant-source areas by raising the incomes of the poor or by facilitating production in which the poor participate.

Migration and remittances may contribute indirectly to incomes at migrant origins and destinations, in myriad ways. In the imperfect market environments characterizing LDC rural economies, they may loosen liquidity and risk constraints on production in migrant-source households. Expenditures by remittance-receiving households may create income multipliers in migrant-source economies, perhaps increasing income in nonmigrant households. This means that even if migrants do not originate from impoverished households, the indirect effects of remittances, through expenditure linkages, may nonetheless favor the poor.

Studies on "migradollar" spending in Mexico by Massey and Parrado (1994) and Massey, Goldring and Durand (1994) suggest that the positive aspects of remittances have been underestimated or misunderstood (also see Conway and Cohen, 1998:29). Massey and others argue that "migradollar" spending leads to varied and substantial multiplier effects in rural communities.

The optimistic scenario is that migration raises household income in source areas by shifting population from the low-income rural sector to the relatively high-income urban (or foreign) economy. If income in the migrant-source economy does not fall (or falls only slightly) in migration’s wake—e.g., if the marginal product of the migrant's labor prior to migration is small—the loss of population to migration raises the average incomes of those left behind, and remittances may raise incomes further.

The NELM perspective views migration decisions as taking place within a larger context--typically the household, which potentially consists of individuals with diverse preferences and differential access to income--and influenced by the social milieu (Taylor and Martin, 2001). This is a central assumption in the NELM literature, as is the contention that people act collectively (usually in families and households) not only to maximize income, but also to minimize risks and loosen constraints created by a variety of market failures, including missing or incomplete capital, insurance and labor markets. Even if the loss of family labor to migration reduces rural output, migrant remittances may compensate for this production loss, both by adding directly to household income and by enabling households with migrants to invest in their production activities.

The NELM perspective recognizes that migrants typically do not sever their ties with their source households after they migrate. Family members who remain behind may reorganize both their consumption and production activities in response to the migrant’s departure, and migrants typically share part of their earnings with their households of origin, through remittances. This continued interaction suggests that a household model would be more appropriate than an individual model for assessing the role of remittances in rural communities.

NELM Models of Migration and Remittances

A fundamental difference between individual and household migration models is that, in the individual (e.g., Todaro 1969) model, there is no rationale for migrants to share their earnings with their households of origin. Models in which the individual is the basic unit of analysis offer few insights into how migration and remittances reshape rural economies. In the new economics of labor migration, migration decisions take place within a larger context and they are influenced by cultural and social variables. NELM household models differ from individual models also because they contend that people act collectively, not only to maximize income, but also to minimize risks and loosen constraints created by a variety of market failures, including missing or incomplete capital, insurance, and labor markets.

The NELM research also represents a fundamental departure from past migration research in that determinants and impacts of migration are explicitly recognized as being interrelated. For example, if the lack of liquidity or credit to invest in a new technology is a determinant of migration, then migrant remittances should provide liquidity and stimulate technological change. This kind of production effect is ruled out both by Todaro and by traditional, neoclassical agricultural household models that assume perfect markets (e.g., Singh, Squire and Strauss, 1986). In the standard neoclassical household-farm model, migrant remittances are simply an income transfer. They affect consumption, loosening the remittance-receiving household’s budget constraint. However, they do not affect production, because an income transfer leaves the conditions for farm profit maximization unchanged. This contrasts with the NELM model, in which market imperfections result in household-specific “shadow prices” that transmit remittance impacts to the production side of the household-farm economy.

Migrants, through remittances, may play the role of financial intermediaries in the context of imperfect markets that characterizes most of the world's rural economies. For example, a farm household wishing to invest in a new technology or make the transition from familial to commercial production lacks access to both credit and income insurance. By placing a family member in a migrant labor market, this household can create a new financial intermediary in the form of the migrant. Source households incur the costs of supporting migrants initially. In turn, once migrants become established at their destination, they provide their households with liquidity and income security, in the form of remittances.

In a household approach, individual family members' labor time is allocated between migration and nonmigration work so as to maximize household expected utility, which may be a function of both the expected value and variance of end-of-period household wealth. Thus, household variables shaping both expected income and income variability--including the human capital characteristics of all family members and family assets—figure prominently in the migration decision, together with the human capital of the prospective migrants, themselves. In this approach, as in any portfolio-allocation model, maximizing expected utility does not necessarily imply allocating each family member's labor time to the market or activity in which her expected earnings or contributions to household income are highest. Risk also matters.

Lucas' (1987) study of migration to South African mines; Rozelle, Taylor and de Brauw’s (1999) study of migration and agricultural productivity in China; and Taylor's (1992) and Taylor and Wyatt's (1996) studies of remittances, incomes, and inequality in rural Mexico all provide evidence that remittances have positive effects on production in migrant-sending households. However, they also find that the loss of family labor to migration has negative effects on this production. A complicated balance between negative lost-labor and positive remittance effects determines the net impact of migration on production in the migrant-sending households. These studies all highlight the importance of rural market imperfections in shaping both the motivations for migration and the impacts of migration on rural economies.

Remittance Behavior

The NELM’s association with household models of migration is motivated by the observation that migrants share part of their earnings with their household of origin, through remittances. While some family members migrate, others stay behind.

This observation raises the question of why migrants remit. Classical or neoclassical models of migration behavior do not explain the remitting of a (frequently large) share of migrant earnings back to the rural place of origin. However, remittances are a cornerstone of the NELM, representing one of the most important mechanisms through which determinants and consequences of migration are linked.

The NELM view that migration entails an implicit contract between migrant and households suggests a venue for collective models of household behavior (e.g., Bourguignon and Chiappori, 1992), including game theoretic approaches, and the role of altruism in shaping both migration and remittance behavior. In a Nash-bargained rural household (e.g., McElroy and Horney, 1981) containing migrants, household utility might be represented by the product of net utility gains deriving from household membership for migrants and other household members. Migrants' utility as nonmembers of the household -- that is, the utility they would enjoy by severing their ties with the household -- represents the threat point in this game. The more insecure migrants perceive their future prospects outside the household, the smaller this threat point, the less likely migrants will sever ties with the household, and the more income migrants will remit, other things (including migrant earnings) being equal. While a model of pure altruism would predict a negative association between migrant earnings and rural-household wealth, a game-theoretic model would predict just the opposite, particularly if the migrant stands to inherit all or part of this wealth. In short, the greater the migrants' threat point, the greater the likelihood that migrants sever their ties with their rural households and the lower remittances are likely to be.

Although never used to study Mexican migration, this type of game theoretic perspective underlies Lucas and Stark's (1985) analyses of remittance behavior in Botswana (see Part III of this chapter) and a Nash-bargained household model appears explicitly in Hoddinott’s (1994) study of rural out-migration in western Kenya.

Beyond Migrant Households: Remittances, Poverty, and Inequality in Migrant-Source Economies

The impacts of remittances do not stop at the migrant household. Households with migrants interact with others in the economies of which they are part—communities, regions, or nations. Through these interactions, the impacts of remittances are transmitted from migrant to nonmigrant households in migrant-source areas. For example, remittances may enable a household to hire local workers—say, for a house-renovation project. A migrant household may loan some of its remittance-savings to a nonmigrant household or increase its demand for food from local farmers. In these cases, some of the benefits of remittances are transmitted to others in the local economy—the labor-supplying, borrowing, or farming household. Local market structures are critical to creating these linkages between and nonmigrant households. Without an efficient local labor market, the benefits of remittances may not reach the household that wishes to supply its labor. Without a local capital market, remittance savings will not be channeled to the nonmigrant household. If the village is integrated with outside food markets, the benefits from higher food demand by migrant households may accrue to farmers outside the village.

Just as interactions among households diffuse the impacts of remittances throughout communities, integration between communities and outside markets diffuses the benefits of migration outside the migrant-sending community. As market integration links rural communities with regional and national markets, more and more of what rural households purchase originates outside the communities in which they are located. Expenditure linkages, which once bound households within communities, increasingly connect households with regional, even national or international, markets (Taylor, Yunez-Naude and Dyer-Leal 1999). That is why the Binational Study of Mexico-U.S. migration concluded that, over time, the benefits of migrant remittances eventually become concentrated in Mexico’s growing regional commercial centers (U.S. Commission on Immigration Reform, Binational Study, 1997).

Understanding the impacts of migrant remittances on migrant-sending economies requires the use of modeling methods that go beyond the NELM’s focus on households (Taylor, Yúnez-Naude and Dyer-Leal 1999). Starting with Adelman, Taylor and Vogel (1988), general equilibrium analysis uses various economy-wide modeling techniques to estimate both the direct and indirect impacts of remittances on local incomes, production, expenditures, and trade, as the influence of remittances winds its way through migrant-sending economies (Taylor and Adelman, 1996). Based on a study of a Mexican migrant-sending village, Adelman, Taylor and Vogel (1988) estimated “remittance multipliers” from international migration to be to equal to 1.78. That is, $1 of international migration remittances generated $1.78 in additional village income, or an additional 78 cents on top of each dollar remitted. The additional income was created by expenditures from remittance-receiving households, which generated demand for locally produced goods and services, bolstering the incomes of others in the village. They also found that remittances created new rural-urban growth linkages by increasing the demand for manufactured goods produced in Mexican cities. Finally, remittances stimulated investments in physical capital and schooling (by $.25 and $.13 per dollar of remittances, respectively) among both migrant and non-migrant households in the village. Most of these remittance impacts are overlooked by “micro” models that focus on households with migrants.

The most commonly used measures to assess development outcomes of emigration and remittances include income growth, inequality, and poverty. Each of these criteria is associated with different facets of migration impacts, which often have little to do with each other. For example, income growth in migrant-sending communities may be associated with more or less income inequality. Rising income inequality may be associated with more or less poverty, and vice versa. The incidence of poverty may increase as average incomes rise. Because of these ambiguities, a combination of measurement tools is required to obtain a comprehensive picture of how migration and remittances reshape migrant-sending economies


Migration and remittances can influence rural poverty in many different ways. If production falls when migrants leave the rural sector, as in the pessimistic scenario, production per capita in migrant-source areas could decrease with migration. If some migrants come from the poorest households, or if local institutions redistribute the higher per capita production in favor of the poor, rural-to-urban migration may help alleviate rural poverty.

The impact of migration on rural poverty is sometimes contradictory. For example, some studies suggest that the loss of family labor to migration has a negative effect on agricultural production, in the short run at least. However, if the loss of workers to migration drives up wages for those left behind, nonmigrant workers may benefit. If these workers are poor, rural poverty may decrease. But if migrants take capital with them, or if the loss of labor to migration causes total output to fall, the rural poor may be negatively affected.

If migrant remittances favor poor households, they may alleviate poverty both directly and indirectly. Directly they provide income and increased consumption. Indirectly they loosen liquidity and possibly risk constraints on production by the poor, creating new sources of local income for these households, and thus not negatively affecting production. It appears that rural migrants do not come disproportionately from the poorest households, who lack the assets needed to increase production. They are more likely to come from the middle of village income distributions (Taylor, et al., 1996). Poor rural households may be willing to sacrifice production temporarily, in order to obtain remittances to invest in new technologies or production activities. Or they may be willing to sacrifice production permanently, if they expect the family migrant’s remittances to exceed the income s/he could contribute by working on the farm.

Finally, if any households curtail production after sending family members off as migrants, this might adversely affect poor households, who could find the demand for their labor services fall or suffer income losses through various other local market linkages.

Although migration research has not focused explicitly on poverty, a number of researchers have examined the distributional effects of migrant remittances. The empirical link between inequality and poverty is tenuous. For example, remittances may decrease poverty if some remittances flow to poor households while increasing inequality if most remittances flow to rich households. If remittances flow to middle-income households, they may decrease inequality without ameliorating poverty.

Remittances and Inequality

Studies offer contradictory findings about the effect of remittances on income inequality. In some cases, remittances have the direct effect of decreasing inequality in the size distribution of income. In others, remittances increase inequality. There may be a theoretical explanation for these conflicting findings. Rural out-migration, like the adoption of new technology, initially entails high costs and risks. They are likely to be particularly high in international migration. Because of this, early migrants tend to come from better off households, and the income they send home in the form of remittances is therefore likely to widen income inequalities. This initial unequalizing effect of remittances may change over time as access to migrant labor markets becomes more widely available through the development of migrant networks. A study from the state of Michoacán, Mexico, found that migrant remittances increased income inequality in a village that had only recently begun to send migrants to the United States. In a village with a long history of Mexico-to-U.S. migration migrant remittances had an equalizing effect on income distribution (Stark, Taylor and Yitzhaki, 1986). Taylor (1992) found that negative lost labor effects of migration made the impact of remittances less unequalizing in the short run. However, this study also found that the positive indirect effects of migration on household income in poorer families (achieved by loosening constraints on local production) made migration more of an income equalizer in the long run.

Over time, the indirect effects of migration on both income and inequality become increasing important. Poor households have the largest capital and risk constraints on investing in local income-generating activities. If the Stark-Taylor-Yitzhaki hypothesis is correct, then we would expect poor households to have the largest incentives to send family members off as migrants in an effort to overcome these constraints. Initially, however, the high costs and uncertainty, especially of international migration, serve to discourage poor households from migration.

Taylor (1992), using data from central Mexico, extended this analysis by taking into account the indirect effects of international migration on income and asset accumulation over time. It provides longitudinal evidence in support of the Stark-Taylor-Yitzhaki hypothesis. Lost labor effects tend to dampen the unequalizing effects of remittances in the short run, but the positive indirect effects of migration on household income in poorer families (achieved by loosening capital and risk constraints on local production) make migration more of an income equalizer in the long run.

Economic Linkages

Even if remittances do not flow directly into poor households, the local income multipliers may benefit the poor and reduce inequality. Taylor et al. (1996) found that on a national level in Mexico, remittances have indirect, multiplier effects that favor the poor. Even though the very poorest rural households may not be able to send migrants, nationwide most remittances flow into lower or lower-middle income households. Expenditure linkages transmit many of the benefits of these remittances to households other than the ones that receive them, including poor rural households.

For example, Mexico-to-U.S. migrant remittances in excess of $6 billion annually, most of which flow into rural Mexico, increase rural households’ demand for both food and manufactured goods. In this way, they generate demand linkages that may stimulate rural production activities and also incomes and employment in urban areas. Increases in urban incomes, in turn, increase the demand for food and other goods produced in rural areas.

In general, it appears that migration is likely to have the largest economic impacts on migrant-sending economies when the following conditions are met:

  1. negative lost-labor effects of migration on production activities are small
  2. remittances are significant
  3. remittances loosen capital and risk constraints on local production activities
  4. remittances, and the production they stimulate, increase expenditures that stimulate growth and create local or regional income multipliers

However, as Fletcher (1999) found in Central Mexico, the ways in which remittances impact a community are complex and at times contradictory. While remittances provide a way for some landless and impoverished families to obtain income, thus reducing overall poverty, remittances also allowed wealthy landholders to buy up the limited available land and invest in livestock, thus consolidating their already advantaged class position. Remittances seem to have aggravated growing inequality within the village while at the same time lowering poverty.

Public Controversy and Research Priorities

Impacts of remittances on development are controversial because both researchers and public officials differ in their answers to a series of fundamental questions: What factors trigger migration and motivate migrants to remit? How does migration affect productivity in agriculture and in nonagricultural rural activities? Do remittances from migrants exacerbate or compensate for the labor leaving rural communities? How do local market imperfections shape both migration incentives and the influence of remittances in local economies? Answers to these questions are critical for identifying the role that remittances plays, and may potentially play, Mexico’s and Central America’s development. Yet most economic models implicitly rule out impacts of migration and remittances on production activities in migrant-source areas.

The impact of remittances on rural development is not the same across locales. A fundamental question in remittance research is not whether remittances do or do not promote economic development, but rather, why they appear to promote development in some cases but not in others.

The new economics of migration research offers some clues to why the impacts of remittances on development are uneven. One implication of the NELM is that a missing rural capital or insurance market may result in “too much” out-migration, as families send migrants abroad or to the cities in an effort to obtain liquidity and income security. Moreover, the development potential of remittances is limited by local market imperfections, for example, the absence of an efficient rural credit market to channel savings to the most productive investments. Without the ability to borrow (e.g., from families with remittances) or lend (e.g., to families without remittances), households have to perform the dual role of migrating (to obtain remittances) and investing the remittances.

There is a potential contradiction in this strategy. In order to obtain remittances, the household must sacrifice (sometimes relatively skilled) family labor to migration, but the loss of this labor may make it difficult to productively invest remittances in the community of origin. An efficient rural credit market that channeled savings from households with remittances to those most efficient at investing these savings in production could reduce or eliminate this tradeoff. That is, some families could “specialize” in migrating, while others specialize in production, investing remittance-induced savings in the rural economy—with local credit markets linking the two groups of households together.

Some progress has been made in recent years towards using new and more appropriate techniques to explore the complex interactions among migration, remittances, and economic changes in migrant-source economies. However, this new genre of migration research is only beginning, and considerable work remains to be done. Very little effort has been made to collect the data from household surveys needed to explore remittance-development interactions. In Mexico, the empirical record rests almost entirely on a few surveys covering a small number of migrant-sending communities at best. It is not possible to generalize findings from those surveys to other parts of Mexico. Future research and data collection must explicitly recognize the multiple causality shaping migration-development outcomes.


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