Welfare Effect of Foreign Migration and Remittances in Kosovo Sachiko Miyata, World Bank Irina Shaorshadze, Cambridge University

Outline 1. Snapshot of Socio-Economic Indicators of Kosovo 2. Data Description 3. Methodology 4. Results 5. Conclusions and Policy Implications

1. Socio-Economic Indicators of Kosovo

Socio-Economic Indicators of Kosovo Poorest economy in Europe, GDP per capita 1,759 Euro (2008) 45% of households live in Poverty, 15% live in Extreme Poverty Remittances are the second largest source of income (15.1% of GDP) Ranks #11 in the world in terms of share of remittances to GDP 30% of households have migrant relations abroad Over 20% of households receive remittances Population is approximately 2.2 million, although no census conducted since % Ethnic Albanian, 5.3% Serbian, 2.7 Other Minorities.

2. Data Description

Data Description Household Budget Survey and Migration Survey of 2009 ◦ Stratified by Regions and Urban/Rural Areas, Ethnic composition Migration drawn from same master frame as HBS and has 60% overlap (1,717 Households) HBS took place over 12 months Migration Survey conducted over 3 months period (April, May, June), based on recall of past 12 months

Welfare and Poverty Indicators Main welfare indicator is consumption per household (Does not include own consumption) Poverty measure is based on cost to meet basic needs per adult equivalent, which in 2002 prices is set at 43 Euros per month Headcount Poverty Rate (Share of Households bellow poverty line corresponding to their size and composition)

Descriptive Statistics by Presence of Migrants and Remittances

3. Methodology

Welfare Effect of Migration and Remittances ◦a) Consumption Effect of 1) Remittances 2) Migration ◦b) Poverty Effect of: 1) Remittances 2) Migration ◦c) Inequality Effect of Remittances

Welfare Effect of Migration and Remittances – Methodology Motivation ◦Analyze effect of Migration and Remittances separately  Migrant and remittances recipient households not overlapping groups  Migrant relations may affect welfare through means other than remittances – business connection, knowhow, etc. ◦But…

Welfare Effect of Migration and Remittances – Methodology Motivation ◦Analyze effect of Migration and Remittances separately  Migrant and remittances recipient households not overlapping groups  Migrant relations may affect welfare through means other than remittances – business connection, knowhow, etc. ◦Migrant households may be selected non-randomly from the population

Welfare Effect of Migration and Remittances – Methodology Motivation ◦Analyze effect of Migration and Remittances separately  Migrant and remittances recipient households not overlapping groups  Migrant relations may affect welfare through means other than remittances – business connection, knowhow, etc. ◦Migrant households may be selected non-randomly from the population ◦Remittances recipient households maybe selected non-randomly from migrant households

Welfare Effect of Migration and Remittances – Methodology Motivation ◦Analyze effect of Migration and Remittances separately  Migrant and remittances recipient households not overlapping groups  Migrant relations may affect welfare through means other than remittances – business connection, knowhow, etc. ◦Migrant households may be selected non-randomly from the population ◦Remittances recipient households maybe selected non-randomly from migrant households ◦If we do not correct for selection, estimates for the effect of remittances and migration will be biased.

Welfare Effect of Migration and Remittances – methodology motivation ◦Analyze effect of Migration and Remittances separately  Migrant and remittances recipient households not overlapping groups  Migrant relations may affect welfare through means other than remittances – business connection, knowhow, etc. ◦Migrant households may be selected non-randomly from the population ◦Remittances recipient households maybe selected non-randomly from migrant households ◦If we do not correct for selection, estimates for the effect of remittances and migration will be biased.  Estimate Treatment Effect Model to control for selection  Bivariate Probit

a. Consumption

Impact of REMITTANCES On Consumption Per Capita C – Log Consumption Per Capita T* - Latent Variable that measures propensity to receive REMITTANCES 1)Two Stage Treatment Effect Model 2)Full Information Maximum Likelihood

Impact of MIGRATION On Consumption Per Capita C – Log Consumption Per Capita M* - Latent Variable that measures propensity to Have MIGRANT Relations 1)Two Stage Treatment Effect Model 2)Full Information Maximum Likelihood

b. Poverty

Poverty Impact of Migration and Remittances Remittances: P* - Latent Variable measuring propensity to be Poor Bivariate Probit Migration:

Exclusion Restriction ◦Share of households in the Strata that have migrant relationship in 2005 (lagged migration network)  Migrant networks lower the costs of migration ◦Providing information on job opportunities outside Kosovo ◦Ensure the smooth transition to the migration destination. ◦Supply credit ◦Cover reallocation expenses

Exclusion Restriction - Caveat We assume lagged migrant network affect consumption only through increased likelihood of having migrants and receiving remittances  Migrant networks may affect local infrastructure, raise capital stock, etc  This may improve welfare of households with and without remittances  This would lead to downward bias on our estimate of affect of remittances on welfare

c. Inequality

Effect of Remittances on Inequality Inequality Measure is Variance of Log Consumption Per Capita Use variance decomposition methodology developed by Fields (2004), extended by Silber, Hanchane and Dumas (2010) Divide households into groups that receive and do not receive transfers Between Group variance Within Group Variance

Effect of Remittances on Inequality Contribution to Contribution to Between Group Within Group Variance Variance Effect of Remittances on Inequality Contribution to Contribution to Between Group Within Group Variance Variance Explanatory Variables Mills ratio Residual Transfers------

4. Empirical Results

a. Consumption

Consumption Effect of Remittances and Migration (FIML)

Consumption Effect of Remittances and Migration (Two Step)

b. Poverty

Poverty Effect of Remittances and Migration

c. Inequality

Decomposition of Overall Consumption Variance (Groups Receiving and Not Receiving Transfers)

Contribution of Variables to Between and Within Group Variance

5. Conclusions and Policy Implications

Conclusions ◦Remittances are important deprivation-coping mechanism for vulnerable population. ◦There is selection into migration by households with genuinely low welfare and human capital endowment. ◦Among households with migrants, there is no evidence that transfers are targeting households of lower welfare. ◦Remittances do not have significant effect on aggregate inequality. ◦Aggregate inequality is driven primarily by unobserved heterogeneity.

Policy Implications ◦Any drastic reduction in current migrant flows has potential to increase poverty rate ◦Public poverty reduction schemes have to take into account that households with lower welfare select into receiving remittances ◦ If Public transfers crowd out Private transfers, the former may have limited effect ◦Need to gradually transition out of high dependence on remittances ◦ In medium term, need to harness remittances by encouraging their use for investment rather than consumption

Thank You