The value of remittances

When it comes to doing development properly, the role of remittances in helping the poorest in other nations plays a pivotal role and yet is considered by many to be a cost to the UK economy – a resource that would otherwise have been spent in the UK, being diverted elsewhere. The efficacy of remittances is also questioned: developing countries have been receiving remittances for years, and what do they have to show for it?

These are all false questions and positions.

First, the net cost of remittances to the UK is negligible. In 2013, remittances from people in the UK to people outside of it totalled $2.2bn (outflows). Inflows (remittances into the UK from people outside of the UK) totalled $1.7bn. The net impact on the UK from remittances is $510m, which represents 0.0195% of the UK’s nominal GDP in the same year. Hence, the impact of belonging to a world where remittances are possible, and belonging to one where remittances are condemned, is “negligible” by my reading.

Bearing in mind it is low-cost to us, the only other plausible objection is that it doesn’t do any good. One example of how this criticism is levelled is when it is argued that all remittances do is increase consumption amongst recipients, and is not invested in such a way as to create long-term opportunities for growth.

It’s not clear to me that this is a proper criticism. For one, increasing the amount of resource that is available to an otherwise poor family may result in more consumption, and potentially better consumption. Imagine if the consumption takes the form of food stuffs: although the immediate effect of remittances is on non-investment purposes, these can be seen as an investment in the individuals’ long-term health. And, ultimately, a world in which people eat until they are full rather than going to bed hungry is a better world to live in. But lots of other types of consumption are also effective at improving people’s quality of life – for example, if a family has more resources with which to buy more sources of light, they may be able to work longer in the day and avoid health risks associated with working in more dangerous (i.e. unlit) conditions. Even if there are no such gains, increased consumption is associated with increased welfare – which is in itself good, particularly since the welfare gain is enjoyed by people on the lower end of the income spectrum. It’s not evident a priori that spending remittances on consumption is a bad thing.

But the evidence indicates that remittances have significant supply-side effects, and aren’t solely consumption-affecting. A study in Ghana found that remittances were spent in the same way as any other income – split between investment and consumption, rather than focused on consumption. In Mexico, households without healthcare insurance spend on average 10% of remittances on healthcare. Remittances substantially lower the likelihood that children in El Salvador do not enroll into school at all, or leave before the 6th grade. A study of 11 Latin American nations showed that in households with relatively low levels of schooling and healthcare, households receiving remittances had higher health outcomes and were more likely to keep their children in schools.

When it comes to poverty reduction, current studies may, in fact, overplay the impact. The study of Latin American nations argues that many research papers assume a higher impact on poverty than is really plausible, because they do not factor in the fact that the emigrant who is sending their remittances back to the home country would likely have been working had they not left. Nevertheless, even when controlling for this, they find a modest positive effect of remittances on poverty reduction.

The fact that remittances cost the UK relatively little in net terms, combined with the improvements in lifestyle metrics in recipient nations, is a convincing case for them. If we want to do good for those in need, on a global level, we must be committed to permitting remittances and avoid the rhetoric that posits them as being ‘bad’ for the UK. They enable us, as the source nation, to benefit from the skills of the migrants coming to the UK to work, whilst providing welfare and investment opportunities elsewhere. Remittances earn developing nations three times as much as they are sent in aid – rather than forcing transfers via tax, they enable workers to make their own spending decisions with their own earnings from their own labour.

Why do rich parents give birth to rich kids?

The kids and grandkids of the wealthy tend to be wealthy.

Well: that’s not quite true. Kids of American football players and lottery winners and those who get wealthy through luck often squander their inheritance. And while giving your kids money makes them richer, it doesn’t tend to make their kids (i.e. your grandkids) richer.

This little paradox has driven researchers to wonder why wealth is persistent, if it’s not purely handing down the cash. Traditionally, scholars have divided into two camps: nature and nurture.

Families stay rich because they have prudent genes that stop their ancestors from squandering their fortunes, and because they have genes that make them good at earning more money. Or families stay rich because they give their kids skills through schooling, speaking lots of words at home, having books around for them to read, pushing them into high prestige careers, and linking them up with connections.

Lots of research points in the direction of genetics, finding that genetics explains about 50% of every important human trait, while the other 50% is largely down to ‘nonshared environment’—rather than ‘shared environment’ (i.e. family upbringing).

For example, the gold standard meta-analysis, recently published in Nature, one of the three premier journals in the science world, looked at 17,804 traits over 2,784 publications studying 14,558,903 twin pairs, and found that the average genetic contribution to a trait was 49%.

This extends to complex facts about a person, like lifetime income and wealth. For example, among Swedish twins wealth was found to be about 20-40% heritable (i.e. down to genetic factors), while 20-year average income in men was about 60% heritable.

But comparing identical and non-identical twins isn’t the only valid study design for dissecting the differing impacts of nurture and nature (though it is valid). You can also look at twins reared apart and you can look what happens when a child is adopted into another family—do they end up looking like their biological or adoptive parents?

We know that adoption can temporarily boost IQ but other evidence suggests this may be driven by non-randomness in the study design or peter out once the child leaves the family environment. What’s more the gains might boost measured IQ but not intelligence.

But a new study suggests that adoptive parents are the main drivers of children’s wealth, with biological parents unimportant by comparison. However, this new study finds that the result is not through transmitting human capital down the line or even through children earning higher income, but simply through transferring cash or learned prudence—i.e. kids investing better.

The paper (pdf), from Sandra E. Black, Paul J. Devereux, Petter Lundborg, Kaveh Majlesi, looks at a sample of 2,519 Swedish adoptees born between 1950 and 1970, and finds that the rank of a child’s wealth is correlated 0.23 with their adoptive parents’ wealth (and 0.65 when bequests are taken into account). By contrast it correlates only 0.12 with the rank of their biological parents. The results for levels of wealth, rather than ranks in the wealth distribution, are very similar.

So does this tell us that the rich buy private school, tutor their kids, make them learn violin, and help them with connections and so on? No! The authors rule out this possibility, and suggest only two possible options: financial gifts (which they cannot track) and learned prudence (which they provide evidence for in another paper).

I work for a think tank so I think about policy conclusions and I think this fits pretty nicely with Adam Smith Institute ideas. What can you do to raise people’s wealth? None of the things that pushy parents do seem to help their kids be rich except two: give them cash, and teach them to save more and save better.

The latter seems a bit more politically practicable, but the problem is that most financial education schemes seem to have no impact. Maybe the only way you can teach this stuff is something as long-lasting and comprehensive as being adopted. (I’m open to being wrong here—it would be great if there were doable financial literacy interventions that had lasting impacts.)

But we can give people cash. And funnily enough that is ASI house policy.

Nudging people to do what they want to do

Not all of us in the Adam Smith Institute agree on everything all the time.  Life would be duller if we did.  One topic that divides some of us is the notion of ‘nudge.’  Thaler and Sunstein wrote a book under that name in 2008, describing ways of “changing the choice architecture” so that people find it easier to do what they want to do, but fail, perhaps because of inertia, to follow through upon.

Two thirds approve in polls of organ donation after death, but less than 30% were completing the form.  The US driver’s licence application gave applicants the choice, and they had to choose yes or no.  The number volunteering as organ donors shot up to the two-thirds who approved of it.  The choice to volunteer had been made easier.  Other countries have followed suit with similar results.  Some add a third option: “I do not wish to make a choice at this time.”

The BBC news magazine’s Home Editor, Mark Easton, has described some successes by the No. 10 Behavioural Insights team, colloquially known as the Nudge Unit.  They boosted job applications by unemployed people by personalizing the invitation.  A simple request to turn up for potential jobs at a supermarket saw 11% come forward.  When the person’s name was added to the request (“Hi, Sam…”), it rose to 15%.  When the JobCentre adviser signed it at the bottom (“Good luck, Michael.”) the proportion turning up rose to 27%.

The team managed to boost black and ethnic minority (BME) applications to become police officers by adding the words “Congratulations! ” and telling applicants they had been “selected to participate in the next stage of the assessment process.”  It added “What is it about being a police officer that means the most to you and your community?”

Whereas previously the situational judgement test had been successfully completed by 60% of white applicants but only 40% of BME candidates, the revised wording saw the BME percentage rise to more than match the success rate of white applicants.

Some in the ASI are suspicious of this approach, partly because it involves a decision about what should be nudged, meaning about behaviour that should be encouraged, and partly from a fear that the technique could easily be abused to promote behaviour that people don’t want to do.  These should certainly be watched, but if the technique uses polling to ascertain what people would like to do but find difficult, then it can be helpful.

The technique has been used to help people pay their tax arrears more promptly, and to encourage people to put more aside into their pension funds.  Many countries are now adopting these techniques, and the Nudge Unit sells its services to other governments.  Whatever else can be said, to libertarians ‘nudge’ is better than compulsion.

To put minds at rest: Australia is not going to be the new Greece

Sadly, some seem not to have grasped the specific problem that is powering the Greek nightmare. Given this failure to understand the underlying cause, we get predictions like this:

Commodities crash could turn Australia into a new Greece

In more detail:

The respected Australian economist Stephen Koukoulas recently wrote of the dangers that escalating levels of foreign debt could present for future generations. Could a prolonged period of depressed commodity prices even turn Australia into Asia’s version of Greece, with China being its banker of last resort instead of the European Union.

No, simply no.

It’s true that the Lucky Country has been very lucky, being the major commodity supplier into China as that nation actually built a nation. And that growth is slowing, the prices of those commodities are falling and so the terms of trade that Oz faces are deteriorating. But this will not, cannot, turn that country into another basket case like Greece.

For Australia has its own currency: the one thing that Greece does not have an which is causing that economic grief.

So, imagine that commodities, the major exports, do decline in price, and stay down in price. Yes, Australia as a whole is thus somewhat poorer. And it’s likely that Australian wages relative to the rest of the world will therefore need to decline. Greece had to do this by making sure that 50% of young people, 25% of all people, were thrown out of work so that wages would indeed decline. Both Keynes and Friedman were adamant on this point, that nominal wages are sticky downwards and when those two agree you’d better pay attention. Australia, of course, does not need to do that. They can, as Friedman pointed out was the sensible way to do this, depreciate the currency instead. Relative wages change but no one has to be thrown on the scrapheap to achieve it. Indeed, as the value of those export commodities declines the currency will fall quite naturally, causing our price change without any action at all.

That is, Australia simply will not be the new Greece because Australia has its own currency. As Greece, obviously, does not.

The “Helpless” Poor

In 1985, Bob Geldof, struck by the poverty in Africa, produced ‘Live Aid’, an artistic extravaganza designed to invoke compassion, charity and pity for African people living in dire conditions. It branded an entire continent with a single image of pervasive and inescapable poverty created by poor geographical factors, that could be addressed if only the rich Western world wrote a large enough cheque. It may have started with Live Aid but as we saw with Band Aid 30 last year, there is no tragedy that people on the African continent can suffer with dignity.

Some musicians dropped out of the Band Aid 30 Ebola single. Fuse ODG wrote that the Africa which Bono invoked in his lyrics “did not reflect what Africa is truly about”.

These philanthropic efforts have shaped how we perceive the Global South today. In 2001, 16 years after Live Aid, a survey by VSO demonstrated that 80% of British people “strongly associate[d] the developing world with doom-laden images of famine, disaster and Western aid”. 74% of people believed that the developing world depended on the Western world to progress. Live Aid was for Ethiopia, and Band Aid 30 for fighting Ebola, and yet the brand that these efforts used was ‘Africa’ and to consumers, this became ‘the developing countries’.

What impact has this had on the attitude people harbour towards the developing world? According to Shah, Hall and Carr (2014):

“A side effect of this effort, however, is the perpetuation of long-held views of “the developing” as helpless and trapped, awaiting rescue that justify more and better interventions on their behalf.”

This ‘helpless’ poor narrative is wrong, and it’s harmful.

In ‘The Beautiful Tree’, James Tooley writes of his experiences in researching private (fee-paying) schools used by the poor in India and some African countries. Tooley finds that the poor in many nations rebuff the government-run, free, public schools, where teachers often did not turn up to class. International organisations either ignore or dismiss these schools (they are not ‘pro-poor’ and ‘exploit’ the poor, say some). He writes:

“It appeared that these private schools, while operating as businesses, also provided philanthropy to their communities. The owners were explicit about this. They were business people, true, but they also wanted to be viewed as “social workers”, giving something back to their communities. They wanted to be respected as well as successful. A major motivation – many of the owners had a similar story – was their status in society. Khurrum told me: “I have an ambition of running a school, of giving good knowledge, and of building good character, good citizens, good people. We have status, as leaders of schools, people respect us, and we respect ourselves.”

This is aspiration and self-respect – both attributes sorely missing in the current narrative. He gives the example of these private schools offering scholarships as examples of the ‘poor subsidising the poorest’. These are not people waiting for rescue. These are people who work to ensure their children do better – living proof that the ‘helpless’ rhetoric is misguided, at best.

The problem isn’t just the misrepresentation of large swathes of the global population. It’s that this mischaracterisation of the countries is harmful to the countries affected. As Fuse OBG points out, many people who are willing to pay £2 to raise funds for a killer disease will, nevertheless, not visit Africa on holiday. Why? Because we have internalised this image of Africa as dirty, poor, dangerous. It means Africa, as a continent, doesn’t receive as much investment, which is one of the tools by which countries can improve their lot.

In the case of Live Aid, the consequences were more pernicious. By framing the Ethiopian famine as one of geography and lack of Western political will, the real perpetrators of the continued famine went unchecked. According to de Waal (2008):

“The fact that the famine was a crime perpetrated by the Ethiopian government under President Mengistu Haile Mariam, and that relief agencies could become accomplices to that crime, were swept aside in a simplistic rush. The Ethiopian rebels, who ultimately won the civil war in 1991, estimate that the indiscriminate supply of humanitarian aid to the Mengistu government prolonged the war by at least a year.”

Yesterday, the third Financing for Development summit started. I wrote about some of the recent literature that supports moving away from development aid. But the other problem plaguing our discussion of development is, simply, the language we use. Sensationalist chat might get the dollars rolling in, but it does nothing for the long-term growth and dignity of the countries we’re talking about.