Question

Using the NPV of migration model; explain why migration can be seen as an investment in human capital? Is there a positive correlation between migration, remittances and poverty reduction?

Answer 1

WHY INVESTMENT IN HUMAN CAPITAL :

The reason for investing in human capital:

It Increases Overall Employee Satisfaction:

• Choosing to invest in the professional development of your employees will lead to more job satisfaction. When you offer your staff opportunities to grow professionally, you show you care about their careers and that they are more to you than just employees who have daily tasks to complete. This way, your workers will be more satisfied with their job.

It Improves Your Company’s Retention Rates:

• Another reason why you should invest in professional development programs for your staff is that it will help you improve your company’s retention rates. According to a recent study, 54% of employees stated that having opportunities to advance in their career is more important than the salary. Plus, 44% of workers say that the lack of professional development opportunities is a top source of stress at work. These numbers really highlight the importance of career growth for your workers.
• If you invest in professional development for your employees, they are less likely to seek other opportunities of employment. Therefore, you will improve the retention rate in your company and help grow employees that will bring value to your firm.
• If you have hired Millennials in key job positions at your office, you need to know the opportunities to develop are especially important for them. People from this generation are more likely to leave a current position if the company will not offer this kind of support to them. If you manage a company, you probably already know that to replace a salaried employee actually costs 6-9 monthly salaries and this makes your workers even more valuable. Investing in their development will help you improve the workforce in your firm and also keep employees happy.

It Develops Engagement Through Your Workers:

• Why is increasing engagement through your workers a priority for your company? Well, because engaged employees will be more productive and more loyal - two very valuable assets you want to have in your company. Stats show that only 32% of people feel engaged at work which is a very low percentage. Keeping your people engaged will help you solve problems better and faster and it will contribute to the overall well-being of the company as well.
• So, how can you grow the engagement of your employees? Well, the simple trick is to invest in their professional development again! If your employees have career advancement opportunities and can grow professionally, they will definitely be more engaged at work and do a better job too.

It Develops Engagement With Clients:

• Happy employees will be more productive employees that will give 100% at their job. While they are the face of your company, your workers will probably make a better impression to your clients when they are satisfied with their work and feel valued at the office. When clients interact with engaged and satisfied employees, they will likely have a positive experience and take a good impression of the company. Therefore, if you invest in your crew and help them grow professionally and become more engaged, they will bring value to your company and your clients will be happier and more satisfied.

It Improves ROI:

• Return on investment is what any manager wants out of his investments in the company. Every month, every trimester, every year, you, as a manager, invest in human capital whether you realize it or not. Your staff’s salary package and benefits are the investments you make.

REMITTANCES, GROWTH AND POVERTY:

• There is little agreement and scant information in the literature concerning the impact of international migration and remittances on economic growth. Workers’ remittances can positively affect growth through a number of channels.
• Firstly, remittances may reduce credit constraint of household receipts so that entrepreneurial activity and private investment could increase (Yang, 2004; Woodruff and Zenteno, 2004). Households in developing countries confront much less efficient credit and financial markets so that access to credit markets seems to be their biggest concerns. Remittance inflows could help households to set up their entrepreneurial activity.
• Over and above physical investment, remittances could also help to finance education and health, which are also key variables in promoting (long-term) economic growth. Secondly, remittances could improve a country’s creditworthiness and thereby enhance its access to international capital markets. World Bank (2006) points out that the calculation of country credit ratings by major international also depends on its magnitude of remittance flows.
• The higher the magnitude of remittance flows the better the credit rating rank the country could reach. This is another way to increase both physical and human capital investment, thereby enhancing economic growth.1 Thirdly, remittance inflows could generate positive effects to economic growth through multiplier-effect mechanisms. While there are backward and forward linkages in investment activities, an increase in investment of one household could generate an increase in income to other household. In the context of increasing returns, the expansion of one sector could increase the optimal size of other sectors.
• Many studies point out the positive relationship between household investment and workers’ remittances in developing countries. For example, Brown (1994) investigates the relationship between remittances, savings and investment in Tonga and Samoa basing on micro-level analysis of the use of remittances by households. It is found that remittances make a significant contribution to savings and investment in the island economies.
• Mesnard (2004) examines impacts of remittances on Tunisia using a life-cycle model and finds that workers who have limited access to the financial market tend to use such remittances to invest. Yang (2004) shows that remittances lead to improved child schooling, reduce child labour, increased education expenditure, and facilitate investment. Stark and Lucas (1988); Taylor (1992); and Faini (2002) find the positive relationship between remittances and economic growth. However, there are some concerns whether remittances could have significant and positive impact on economic growth. Firstly, a number of studies (Stark and Levhari, 1982; Ahlburg, 1991) point out that primary use of remittances has been for consumption with the reminder being used for house construction, debt repayment and the financing of future migration.
• According to this view, remittances have raised levels of consumption without creating a firm basis within the domestic economy. Even though remittances may increase investment, insurance provided by distant migrants tends to allow source households to engage in riskier income-generating investment activities (Stark and Levhari, 1982). The lack of investment in productive activities casts doubt on the role of remittances in generating economic growth.
• Secondly, remittances could also indirectly affect labour supply by encouraging some remittance-recipient households to work less. This could reduce labour supply and reduce economic growth. Remittance transfers take place under conditions of asymmetric information in which the remitter and recipient of the transfer are separated by long distances. This could lead to significant moral hazard problems where the latter is likely to be reluctant in participating in labour market, limiting their job search, and reducing labour effort (Chami et al., 2003)
• Thirdly, large and sustained remittance inflows could cause an appreciation of the real exchange rate and make the production of tradable goods sector less profitable (or the so called ‘Dutch Disease’ problem). Amuedo-dorants and Pozo (2004) test the impact of workers’ remittances on the real exchange rate using a panel of 13 Latin American and Caribbean countries.
• The analysis reveals that workers’ remittances have the potential to inflict economic costs on the export sectors of receiving countries by reducing their international competitiveness. In terms of poverty, remittances could directly reduce poverty by increasing income of the recipients. Such increased income could play a significant role in increasing and smoothing consumption of the poor.
• Thus, regardless its impact on economic growth, such increased and smoothed consumption could raise poor households’ standard of living and alleviate poverty. In addition, while remittances could relax working capital constraints so that both physical and human capital investment of the poor could increase. Adams and Page (2005) examine impacts of remittances on poverty in 71 developing countries.
• The results show that both international migration and remittances significantly reduce the level, depth and severity of poverty in these countries. However, there are some concerns that remittances would not benefit to the poor. In particular, Stahl (1982) argues that because the international migration can be an expensive venture, it is going to be the better-off households who will be more capable of producing migration and sending remittances. While poor households would not get the benefit from such remittance flows, they tend to generate inequality so that poverty tends to eventually increase

EMPIRICAL MODEL:

POVERTY:

• There is not much guidance available from theory regarding the appropriate specification for the poverty determinants. However, basing on recent cross-country empirical works on poverty (Dollar and Kraay, 2002 and Berg and Krueger, 2003), we postulate a poverty equation as follows:
• pov _{it =} β₀ + β₁ g _it + β₂ ln_it + β₃ remit_it + β₄ x_it +η_i+ ε_it
• where Pov is the poverty measure, g is the economic growth, In is the inequality, Remit is remittances and X is the control variables. The control variables (X) include human capital (H), inflation (Inf), and openness (Open). As mentioned in the previous section, β3 could be both positive and negative and we are interested in testing whether the impact of remittances on poverty reduction is statistically significant. For other control variables, the negative coefficient of β1 is expected while income of the poor tends to grow proportionally with per capita growth.
• The worsen income distribution and an increase in inflation tend to have a negative impact on poverty reduction so that their coefficients are expected to be positive. While an increase in human capital factor increases opportunity of the poor to generate income, the coefficients associated with these variables are expected to be positive. The coefficient associated with trade openness to poverty reduction is ambiguous (Berg and Krueger, 2003).
• On the one hand, trade liberalization could benefit the poor at least as much as the average person. Trade liberalization could increase the relative wage of low-skilled workers and reduce monopoly rents and the value of connections to bureaucratic and political power.
• On the other hand, trade liberalization might also worsen the income distribution, particularly by encouraging the adoption of skill-biased technical change in response to increased foreign competition.
• Thus, if trade liberalization worsens the income distribution enough, particularly by making the poor poorer, then it is possible that it is not after all good for poverty reduction, despite its positive overall growth effects. A number of empirical studies using panel and cross-section data (e.g. Edwards, 1997; Ghura et al., 2002; Dollar and Kraay, 2004) found no link between openness and the well-being of the poor beyond those associated with higher average per capita income growth.

Growth, Investment, Human Capital, Poverty and Remittances, 1993-2003:

Growth (g) Investment (I) Human capital (H) Poverty (Pov)

Initial income   -0.58   0.06   

(Yi,t-1) (2.52)* (9.93)*

Growth (g) 2.73 -3.16

(2.77)* (-2.09)**

Human capital (H)   2.56   -7.64

(1.82)**   (-3.05)*

Investment (I)   0.19

  (1.26)***

Lag investment 0.74

(It-1) (7.27)*

Openness (Open) 0.10 0.17   

   (1.20)*** (1.96)*

Government -0.23

consumption    (-2.31)*

(Gov)

Inflation (Inf) -0.67 0.25 3.33

  (-2.13)**   (0.79) (2.67)*

Remittances   -0.01    0.03 0.008 -0.28

(Remit) (-0.24) (1.20)*** (6.47)* (-3.16)*

Inequality (In) 1.05

(4.73)*