CHAPTER ONE
INTRODUCTION
1.1 Background Information
Remittances have been defined as the proportion of migrants’ earnings sent from their destination of employment to their origin or communities (Samal, 2006). As financial flows that do not require a quid pro quo in economic value, they can be termed transfer payment in Balance of Payment Accounting. Remittances are considered as compensation (brain gain) for the loss of human capital (brain drain) by a net labour exporting country (Ratha & Xu, 2006). Relevant classification of remittances include: monetary versus non-monetary remittances; domestic versus international remittances, and inward versus outward remittances. The principal concern in this research is monetary- international-inward remittances to Nigeria. Domestic remittances will also be important elements of analyses.
Remittances are normal concomitant to migration which has been an integral part of human history. For example, Italy enacted a law to protect her remittance inflows in 1901 and remittances were also vital in her post-1945 development (Miluka, Carletto, Davis & Zezza, 2007). In Spain, rural banks and credit unions were formed after the second World War to receive much-needed foreign currency sent home by migrants working in the US and South America (Miluka et al, 2007). In recent history, declining wages, increasing unemployment and underemployment motivated further migrations of skilled and unskilled labour from the agrarian sector of the developing countries to the advanced world.
Globalization, accentuated by economic integration, collapse of many international trade barriers with a somewhat relapse of tight immigration laws made migration even more pronounced with a commensurate growth in remittances. Given their fast growths in the last 2 decades, remittances are now recognised as the foremost benefits of migration. They have also attracted attention in empirical studies with some concentration on their determinants and developmental impacts (Adenutsi, 2010). Also, a few multilateral, bilateral and governmental initiatives on remittances are emerging. Some of them are discussed in chapter 2.
Developing countries as a whole have consistently been the largest recipient of international remittances in the world. Formal remittance flows to this region is twice as large as Official Development Assistance (ODA) and nearly two-third of Foreign Direct Investment (FDI). Between 1995 and 2005 the total amount of official migrant remittances received by developing countries increased by more than 300% (Adenutsi, 2010). Remittances to developing economies reach US$338 billion in 2008, higher than its estimated value of US$328 billion (World Bank, 2009). The actual total amount of migrant remittances received by developing countries is much higher. It is probably 2.5 times the amount of official flows since a significant amount of these transfers is likely sent through the informal channels (World Bank, n.d. as cited in Mutume, 2005).
Nigeria received US$1.92 billion as remittances in 1997, a value that is incomparable with the US$20 million received 20 years earlier (1977) (IFAD, 2006). The country received 65 per cent of remittances to Sub Saharan Africa in 2000 (World Bank, 2002 in: Orozco, 2005), with most migrants sending between 2000 and 3000 US$ (20 and 30 per cent of their earnings) per year (Ruiz-Arren, 2006). Annual estimates exceeded $1.3 billion, ranking second only to oil exports as a source of foreign exchange earnings for the country in 1997 (Mutume, 2005). Nigeria was the sixth highest destination of remittances from citizens of developing nations in the diaspora (Mobile Money Africa, 2009). The nation received $3.3billion in remittances which accounted for 3.4 per cent of the GDP and seven times the value of ODA to the country in 2005 (IFAD, 2006). Nigeria ranked third largest recipient in Africa in 2006, receiving US$ 5.397 billion (36 percent of total remittances to the continent) (Ruiz & Vargas-Saliva, 2009).
Approximately 55 percent of total remittance flows to Nigeria come from the United States and 10 percent from the United Kingdom. Significant inflows also arise from Germany, Greece, Italy, Netherlands, Spain, South Africa and Ghana (Hernandez-Coss & Bun, 2007). The relative participation of Money Transfer Operators (MTOs) in the Nigerian remittance market include: Western Union (47 percent), Moneygram (35 percent) and Coinstar (17 percent) (IFAD, 2009). Eighty one percent of formal remittances coming into Nigeria are transferred through banks (IFAD, 2009). This creates incentive for savings by the unbanked remittance recipients. Bank bound remittances are also beneficial to the recipient households in terms of creditworthiness. Moreover, it places capital at investors’ disposal thereby contributing to national development.
Chami et al (2005) found that most migrants send money home for family maintenance based on altruistic motives; making family ties important motivations for remitting funds from abroad (as cited in Mallick, 2008). In contrast, migrants who invest the remittances on real estate or physical capital, do so with profit motive, and conform to the self-interest theory of remittances. Other variant theories of motivation to remit include: implicit family agreement (co-insurance and loan), migrant’s saving target and portfolio management decisions.
Remittances have been found to be a more reliable and less variable source of funds from year to year than ODA and FDI (Ross, Forsyth & Hug, 2009 in Abdih et al, 2008). They provide a bottom-up approach to delivering resources to those who actually use them, and by-pass costly bureaucratic and administrative procedures associated with most development assistance. They are person-to-person flows, well targeted to the needs of the recipients, who are often poor. This makes remittances very important source of finance for the rural households traditionally known for high level of poverty and low access to foreign aid, government grants or bank loans. Remittances to rural areas are significant and predominantly related to intraregional migration in Africa. Two-third of Nigerians and other West African migrants in Ghana, for example, remit to the rural areas of their countries of origin (IFAD, 2010).
As Lennart Bage, the president of IFAD would say, “remittances represent a lifeline to struggling economies,” during an economic downturn in the home country, increased remittances, an equivalent of a private “welfare payment” are sent from abroad to help smoothen consumption of the recipients (Martin, 2005). Welfare in this context represents wellbeing of remittance receiving households, measurable in terms of the total households’ consumption expenditure (Duong, 2003). Another definition of welfare which may be considered as a function of sustainability is relative poverty (Foster, Seth, Lokshin & Sajaia 2013). In this research, relative poverty was analysed from the perspective of consumption distribution.
It has been reported that remittances stimulate consumption and investment notably in sub-Saharan Africa and South Asia, as well as contribute to households’ welfare (Osili, 2007 & Siddiqui, 2008). Precisely 5.5% of the average household income in Nigeria was from remittances. And recipient households seem to have better access to food and nutrition than non-recipients households (Oseni & Winter, 2009 as cited in Babatunde & Martinetti , 2010). Also, 61 percent of a group of Nigerians in diaspora remit for sustenance of those at home (DFID, 2005), implying that remittances could alleviate food insecurity thereby enhancing the welfare of the households. This view is further warranted given that international remittances had ameliorative effects on rural poverty in Western Nigeria (Olowa & Olowa, 2008); and decreased income inequality in rural Nigeria (Babatunde, 2008). This is corroborated by World Bank (2009) claim that meeting consumption needs including health care and education constitutes 80-90 per cent of remittance spending.
In spite of the fact that only 10 to 20 percent of remittance spending constitutes savings and investments whereas a whopping 80 – 90 percent goes for consumption spending (World Bank, 2009), remittance spent on consumption cannot be classified as unproductive. This is because remittance pushed consumption still leads to economic growth as consumption creates investment demand through its multiplier effect. Buttressing this fact are significant empirical evidences pointing out that remittances lead to positive economic growth, be it through increased consumption, savings or investment (Mallick, 2008). At the microeconomic level, for example, increased household spending on consumption in form of healthcare, schooling and housing can have important favourable effects on human capital and productivity. This implies higher labour efficiency and greater outputs for remittance receiving farming households. Positive multiplier effects will also help to spread the benefits to non-migrants’ households. These ripple effects that impact the extended family and community beyond the receiving households, is due in part to the increased consumption. The combined effects of remittances on investment and consumption can further increase output and growth. They can boost aggregate demand and therefore output and income with a multiplier effect as high as 1: 3 or even more (Van Doorn, 2003 as cited in Thao, 2009). Remittances can therefore be associated with better development outcomes.
Remittances also contribute to development by providing a stable flow of funds that are often counter-cyclical (i.e. they increase during times of economic downturn). They help poor families deal with negative economic shocks (World Bank, 2009). Remittances enable the hitherto risk averse farming households insured by remittances, to shift their portfolios towards riskier investments (Paulson & Miler, 2000 as cited in Chukwuone et al, 2007). By diversifying risk and relaxing liquidity and credit constraints through remittances, migration can be seen as part of a household strategy to overcome these restrictions, thus inducing productive investments (Miluka et al, 2007). Remittances are therefore an important informal insurance strategy.
Gender mainstreaming of remittances could have significant impact on the households as well as on the macro economy. IFAD (2007) found that slightly more women than men receive remittances, whereas average volume of remittances received was higher for men than women. Women spend most of their remittances on their families’ basic needs while men spend more on non-necessities (IFAD, 2007). However, if women succeed to cover basic consumption needs, education and health, they invest in building project or in land for agriculture (UN-INSTRAW, 2009). Nigerian evidence shows that although women may neither save nor invest remittance income as much as men, they use the funds to realise the welfare goals of the households than men. In a study of US-Nigeria remittance corridor, it was found that if the sender is a spouse of the recipient, the amount sent is on average 2.2 percent higher than the amounts sent by other family members and friends, with wives sending slightly more home than husbands (Orozco & Millis, 2007). Also poorer origin-families (often headed by women) in Nigeria received larger transfers (Osili, 2006). Gender interactions are hence, a vital force in the concurrent realisation of the welfare and developmental goals of remittances in the agrarian economy.
Considering its beneficial impact on poverty and gender, remittances can foster the realisation of MDGs 1 and 3: to eradicate poverty and hunger; and to promote gender equality and empower women. Although, remittances would not replace aids or credit schemes, they could be included in future NEEDS and SEEDS which are medium-term economic strategies for tackling Nigeria’s economic and structural problems and reduce poverty. In line with this idea, NEEDS document states that “if appropriate incentives are in place, the brain drain of Nigerians could be turned into a brain gain through increased remittances (Nigerian National Planning Commission, 2004). The lofty prospects enumerated about remittances can be brought to fore by policies that ensure the sustainability of its inflows. Sustainability here does not only mean stability of remittance flows, it also entails the inequality reducing effect and the spread of remittance outcomes beyond the recipients’ households thereby guaranteeing long-run impact”.
Sustainability of remittance flows will depend on the consideration of opportunities such as: strengthening the financial sector, banking in the rural areas, deregulating the remittance market (increase competition and lower costs), disseminating technology (SMS and Internet) to the rural remittance recipients, and leveraging the informal remittance transfer mechanism (Hanson, 2008). The informal systems of remittance transfer currently work efficiently and reliably, particularly for small transfers to the rural areas. Developing or integrating this system with the formal transfer mechanism will further promote remittance flows to the rural areas. There is need for greater involvement of credit unions, micro-finance institutions and migrant associations in leveraging remittances for development. Importantly, the preceding step will be to evaluate the present and potential welfare effects of remittances to assure us that these lofty policies are warranted. This research is therefore meant to begin the process.
1.2 Problem Statement.
Osili, (2007) found that households domiciled in the Nigerian rural sector received significantly less remittances than their urban counterpart from the U.S. More revealing is the fact that, only between 30 and 40 per cent of all remittances are destined to rural areas (Africa-Focus, 2010), whereas the greater per cent of the population dwell there. Such disparity in remittances distribution among household categories makes the effect of remittance on welfare inequality uncertain. Another issue is that women headed households do not always benefit substantially from the results of migration because newly created jobs stemming from remittances are often primarily for men, while women tend to be stuck in traditional forms of employment (Georges, 1990 as cited in Vargas-Lundius, 2004). Meanwhile, gender-based studies showed that the incidence of female-headed households was much higher in migrant families than among families without migrants (Torres, 2000 as cited Vargas-Lundius, 2004).
Therefore, skewedness of remittance distribution in favour of certain categories of households is a key challenge to the widespread of the effect of remittances. Hence, this research attempted to find out if skewedness actually existed in remittance distribution among Nigerian farm household categories with a view to addressing it.
Comparatively small consideration has been given to the question of how remittances are used by the households and the impact of the remitted money on the livelihoods of the migrants’ origin families. Particularly, the optimists’ philosophy about remittance impact may not hold in the agrarian sector because negative lost-labour effects of migration are likely to be concentrated in this sector, where most migrants are employed prior to migration (Lindley, 2008). This could be associated with the fact that positive remittance effects may manifest themselves in other sectors, where the returns from investing may be high and family labour demands low relative to agriculture. However, remittance effects on household welfare remained a speculation in the rural Nigerian context.
Remittance effects remained a speculation because minimal research attention has been devoted to the welfare effects of remittance income in developing countries (e.g. works of Adams & Page, 2005; Adams, 2004, Guptal et.al, 2009), including Nigeria. Issues relating to remittances and welfare in Nigeria have been addressed to some extent by a few research works. Almost all of such works were enclave and do not clearly reflect the Nigerian situation. Examples are works of: Olowa & Olowa (2008), Osili (2007), Babatunde & Martinetti (2010) and those of Nwaru, Iheke & Onyeweaku (2011). Chukwuoene, Amaechina, Iyoko, Enebeli-Uzor & Okpukpara (2012) did a comprehensive study covering Nigeria but it needs to be validated by a more recent study considering that data were derived in 2004. This study employed data from the
General Household Survey conducted in 2010/2011 in addition to the 2004 data.
Banks are the main entities allowed to perform remittance transfers in Nigeria. But the banks effectiveness in remittance distribution was questioned given itslow capitalization, inefficient management, and poor internal governance systems prior to 2005. Meanwhile, the effectiveness ofNigerian banking sector consolidation in 2005 which led to merger, recapitalisation and increased bank branches across the country in 2007 remained in doubt. Specifically, one of the key questions answered in this research was how has the role of remittances in welfare enhancement fared after the Nigerian banking sector policy of 2005?
Given the pooled sample of 24,009 households only 123 (0.5%) received international remittances and only 10 % (123) of the (1228) subsampled households were international remittance recipients. Analysis by other researchers in Nigeria and elsewhere present similar findings. For example, out of his sub-sample of 7931 households, only 0.37% (29) reported international remittances. Also, Ghanaian Living Standard Surveys showed that, 7.9%, 8.8%, 6.1% and 8.1% received international remittances in the period 1987/88, 1988/89, 1991/92 and 1998/99 respectively (Quartey, 2006). These statistics imply that relatively small proportions of populations receive remittances from abroad. Consequently, the main policy concern was “to what extent the huge sum received by few hands leads to increased welfare for the few recipients’ farm households as well as the mass of non-recipients farm households”. In other words “do the welfare effects of remittances (if any) spread beyond the remittance recipients farm households?” Interestingly, in contrast to this one, earlier works in Nigeria have not factored impact of international remittances on non-recipients households into their study of recipient households.
Although several studies as reviewed in chapter two portray that remittances reduce inequality of welfare, a few researchers including Adams (1991) and Taylor et al (2005) as cited in Quartey (2006) affirmed that remittances have positive effects on inequality. As a result, this study also attempted to answer the question, “do remittances reduce or enhance welfare inequality among farm households in Nigeria?”In an effort to answer this question Olowa & Olowa (2008) used Gini coefficient decomposition of inequality. However, Gini coefficient with an appeal for subgroup inequality decomposition at a medium level does not provide sufficient answer to the preceding research question. This work employed Theil Index with perfect decomposability which provided a clearer analysis of the inequality effects of remittances.
Finally, many researchers have a narrow definition of welfare and this misrepresents the results of most researches on welfare, this work adopts a broad-brush approach in the conceptualisation of welfare. It measured welfare by household per capita consumption; a sum of expenditure on households’ nutrition, health, housing, schooling, utilities, etc divided by the household size.
1.3 Research objectives
This study analysed the effects of migrant remittances on the welfare of farm household in Nigeria. In doing so, it:
- compared volumes of remittances received by farm household categories;
- analysed the effects of migrant remittances on farm households consumption;
- established changes in farm household’s consumption due to remittances after Nigeria’s bank consolidation policy;
- estimated the effects of increased consumption spending by farm households who receive remittances on incomes of those who did not receive;
- evaluated the effects of remittances on consumption inequality;
1.4 Research hypotheses
The overall hypothesis examined in this study is that migrant remittances do not significantly influence farming household welfare in Nigeria. To achieve this, the following null hypotheses were tested:
- volumes of remittances received are not significantly different in households categories compared
- farming households consumption is not significantly influenced by remittances received
- consumption of households due to remittances from abroad has not changed significantly after Nigeria’s Bank Consolidation
- consumption spending by remittance recipientfarm households have no significant effect on non-remittance recipients farm households’ income.
- remittances have no significant effect on inequality of consumption among the farm households.
1.5 Justification of the Study
World Bank (2008) submitted that Nigeria was the highest receiver of remittances in Africa and the thirteenth in the World. With US$3.329 billion remittances in 2005, Nigeria alone accounted for about 31% of total remittance flows to Sub-Saharan Africa. In 2006, Nigeria was the 3rd largest single recipient of remittances (US$ 5.397 billion) in Africa, with most migrants sending between 2000 and 3000 US$ (20 and 30 per cent of their earnings) per year (Ruiz-Arren, 2006). Remittances accounted for 3.4 per cent of the nation’s GDP and 7 times ODA in 2005 (IFAD, 2006). Nigeria received US$1.92 billion as remittances in 1997, a value that is incomparable with the US$20 million received 20 years earlier (1977) (IFAD, 2006). Consequently, studies analysing the welfare effects of these huge funds flow in the hitherto poor Nigerian agrarian populace is justifiable.
This study constitutes a building block to filling the research gap on the effects of remittances on household welfare in rural Nigeria. Importantly, the study derived policy implication of its findings and it is being made accessible to policy makers in conferences and scholarly journals. This work when published is meant to generate facts that will translate actions of policy makers from that of speculation that of decision making. It is meant to provide them insight on appropriate course of action with respect to harnessing remittances for development. Governmental initiatives on remittances in Nigeria may learn from the policy implications of the results of this research. The research findings could be adopted during the revision of policy documents such National, State and Local Economic Empowerment and Development Strategies (NEEDS, SEEDS and LEEDS). National Poverty Eradication Programme; National Agricultural and Rural Development Bank; and Small and Medium Enterprises Development Agency could leverage on the research findings to broaden their programme for the poor.
Desiring Non-Governmental Organisations, including Nigerian Diaspora Associations could garner understanding of the remittance mechanism from this work. In doing so, it will enable them channel their developmental contributions properly. Bilateral agencies collaborating with Nigeria in harnessing remittance for development will make reference to this study for an explicit idea on impact of remittances on Nigerian rural households. Multilateral donor agencies such as World Bank, IMF, IFAD, UNDP, USAID, DFID, etc, will have additions to their information bank from these research findings. It will provide room for similar studies so as to compare or validate results before applying them in remittances linked programmes.
Empirical evidences provided by this study lay bare areas needing further analyses by development, financial, welfare and agricultural economists. Stakeholders and the academia will have opportunity to read, listen to and discuss the outcomes of this research in its oral defence, academic conferences and workshops. Key aspects of the final work will be published in scholarly journals with copies made available to the university as reference material for research purposes.
1.6 Limitations of the study
This research proposed to draw data from the Harmonised Nigerian Living Standard Survey (HNLSS) 2009/2010 because of it was the most recent national survey and sampled large cross section agrarian households across the nation. However, data from this survey was unavailable during the data collection phase of this research because of its prolonged data cleaning process by the Nigerian Bureau of Statistics. As way of handling this limitation a pooled cross sectional data were therefore drawn from two alternatives: the Nigerian General Household Survey-Panel conducted in 2010/2011 and the Nigerian Living Standard Survey done in 2003/2004.Pooling these two cross sections reduced the problem of limited data volume that using only one of them could have caused.
However, a challenge of pooled cross sections drawn at different time periods were issues of multicolinearity and autocorrelation but these was handled by the fact that the two surveys were conducted independently, making the pooled data an ideal cross section. Analysing pooled data of two time periods often create bias with respect to monetary values. In order to handle this limitation all monetary values (per capita remittances, per capita consumption and per capita and per capita income) were converted into their real values using 2005 price index. Accounting for remittance effects is often constrained by the problem of endogeneity and selectivity. Therefore, the nearest neighbour matching was adopted in selection of the comparative group, the non-remittance recipient households