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.

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.

Moving away from aid in development

Today, world leaders are meeting in the Ethiopian capital of Addis Ababa for the third Financing for Development summit. This builds upon the work of previous summits to produce a framework for the funding of development programmes and all that entails. It's an important discussion, not least of all because after decades of hurling cash at nations, growth in recipient nations has been sub par. Clemens et al. indicate that a 1% increase in aid in one year results in a 0.1-0.2% growth in real GDP per capita on average, which emerges in the following 5-10 years from the aid increase. Previous studies have conflicted in their findings of the impact of aid on growth - this paper reconciles the various views by controlling for confounding factors and considering just those factors that tend to have a short-term impact. Such a modest increase (combined with the fact that this is an average figure - many countries would not have benefited from aid at all) indicates that the effectiveness of aid is, from a charitable perspective, suspect. In subsequent posts on this subject, I’ll write on alternatives to aid.

Development aid is often confused with humanitarian aid - and this makes it look much more appealing than it really is. Few people would advocate not donating to emergency causes in other nations to help in the aftermath of a crisis; long-term development aid doesn't have this morally glossy hue. The main reason is simply just that the evidence doesn't show it to be very effective.

The economist Dambisa Moyo has written extensively on this subject in her book, Dead Aid (2010). She puts forward the argument that aid in Africa has served only to entrench aid dependency, and result in market-distorting inefficiencies. The consequence of this approach is one in which donor nations are off the hook but none of the promised benefits have accrued to the recipients. Moyo also indicates some evidence to show that nations that didn't receive aid have done better than those that have. Her research and argument goes further than many mainstream development economists (i.e. Paul Collier, who maintains that the right kind of aid can be helpful) - for Moyo, it's not just that aid has been ineffective, but that aid has entrenched the poverty it sought to cure Africa of.

This provides great context for Lucy Martin's paper on the impact of tax compared with aid. Martin finds from experiments in Uganda that citizens are 13% more willing to punish leaders for misusing tax revenue on average - but those with most experience of taxation are 30% more likely to punish government. The theory is simple: the loss of utility is higher when, not only do you lose earned income, but that income is not put to good use to produce social goods. The fact that in many countries, poor citizens do not pay tax results in less anger and frustration at poor governance. Aid as a substitute for tax revenue hence enables this process to continue and results in less frustration - and less clamour for better governance, without which the institutions that result in development cannot develop.

In 2006, William Easterly wrote:

The evidence is stark: $568 billion spent on aid to Africa, and yet the typical African country no richer today than 40 years ago. Dozens of “structural adjustment” loans (aid loans conditional on policy reforms) made to Africa, the former Soviet Union, and Latin America, only to see the failure of both policy reform and economic growth. The evidence suggests that aid results in less democratic and honest government, not more. Yet, unchastened by this experience, we still have such absurdities as the grandiose plans by Jeffrey Sachs and the United Nations to do 449 separate interventions to reach 54 separate goals by the year 2015 (the Millennium Development Goals), accompanied by urgent pleas to double aid money.

Nothing much has changed since his time of writing, except we have committed yet more resource to an aid programme which is at best ineffective and at worst harming the prospects of the world’s poorest. The insights of extensive research and leading economists should inform us to proceed carefully and to give more weight to those areas of development that might be more fruitful. Most importantly, when the evidence suggests we might be doing enormous harm to those least able to bear it, our governments should be proceeding with humility and caution rather than hiding behind their cheque books.

Some evidence that sweatshops are good for Bangladeshi women

I recently read an interesting paper by Rachel Heath and A. Mushfiq Mobarak, of the Universities of Washington and Yale, which looks at the impact that the garment industry has on young girls and women in Bangladesh. 

The results are quite amazing. According to the study, girls in villages close to garment factories (or sweatshops, as they are sometimes called):

1. Delay marriage. On average, a young girl living near a garment factory was 28% less likely to get married in the study year than the average Bangladeshi girl. This effect was strongest among 12-18 year olds.
2. Delay childbirth. On average, a young girl living near a garment factory was 29% less likely to give birth in the study year than average. Again, this effect was strongest among 12-18 year olds.
3. Are much more likely to go to school. Exposure to garment factory jobs was associated with a 38.6% increase in school enrolment rates. Broken down, this translated into a slightly lower enrolment rate for 17-18 year old girls, who presumably were more likely to be in work, and a considerably higher enrolment rate for girls younger than that.

According to the study’s authors, these findings are probably due to some combination of wealth effects (richer families need to marry off their daughters less early, and can afford to send their daughters to school for longer) and the fact that garment factory jobs reward skills, increasing the value of education.

The paper is an important reminder that sweatshops may provide significant benefits to their employees and the places they are located. They are by no means all good, but they are not all bad either, which well-meaning campaigners against sweatshops would do well to remember. A working version of the whole paper can be accessed here.

Does speculation really harm the world's poor?

Development activist Deborah Doane said yesterday on comment is free that Goldman Sachs should admit it drives food prices up through speculation. She excoriates the finance giant for what she sees as its role in 44m across the world being in food poverty, suggesting its charitable efforts amount to little given its speculative activities. She assembles an array of sources purportedly supporting her case.

But the way Doane does this is perplexing. She implies in her first paragraph that the World Bank agrees with her conclusion, but the link she includes mentions only a UN official's opinion, making no reference to the WB. And while, apparently, more than 100 studies support her argument, her article provides no evidence this is the case. Moreover she makes no attempt to deal with the basic economic argument against her thesis.

On the one hand the most limited version of Doane's thesis—that speculation increases prices—is undeniable. When speculators buy into the market, they raise the price then. But the overall case makes little economic sense. If speculators' influence is big enough to boost prices when they buy in, it is big enough to cut prices when they sell out. That is, speculators both add to, and take away from, prices.

A speculator makes money by buying in times of relative plenty, when prices are low, and selling in time of relative scarcity. For helping society ration effectively—making sure the differing scarceness of a good is reflected in its price, thereby improving individual decision-making—the firms earn a return. If a speculator, by contrast, buys in at the top of the market, reducing supply when it is most needed, and sells at the bottom, when it is least needed (relatively) they lose money. This is how the profit and loss system, in a good institutional structure, encourages and rewards socially-minded behaviour. And speculation should smooth volatility in markets. A jump in price will encourage sales from speculators, bringing the price back down. A dip in price will encourage speculators to buy, bring the price back up. This result dates back to a 1953 paper from Milton Friedman, which is hard to find online, despite being cited 2411 times according to google scholar.

Having said all this, it's possible there are some circumstances where this simple common sense argument fails to obtain. A widely-cited 1990 paper by Andrei Shleifer, Larry Summers, Brad DeLong and Robert Waldmann finds that the way other traders buy and sell can change the way speculation works. If so-called noise traders' buy, rather than sell, when prices rises hit, i.e. their strategies include elements of positive feedback, early buying from speculation can trigger a spike. Anticipating this, speculators will have an incentive to buy extra, generating a bigger price increase and a bigger return, along with more volatility in the face of new information.

The authors look at some hugely interesting survey, experimental and real world evidence supporting the assumption that some traders might use positive-feedback strategies, and even argue that the strategy could persist in the long-run, despite its irrationality. Though on average those pursuing the strategy will be driven out of the market as they lose money, investors see different episodes differently, and some will enjoy huge returns through holding extra risk. So it is actually rational for speculators to target price movements driven by others' irrationality, rather than market fundamentals.

All this said, it's unclear this model delivers the results Doane relies on. Certainly markets working in this way would produce bigger spikes in both directions, but there's no reason to expect prices would be higher overall. If anything, the suggestion seems to be that prices would be below where fundamentals suggest in times of scarcity and above in times of relative plenty—alleviating shortages more than under the more straightforward model. The extra profits speculators make would come out of the pocket not of the poor commodity consumers, but from the noise traders, following their irrational strategies.