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Supplement #1: Channeling Remittances Toward Human Capital Accumulation

a PSC Research Project

Investigator:   Dean Yang

Remittances are of great importance for the Central American region. In 2000, the amount sent to these countries (including Dominican Republic) by migrants was US$4.7 billion. Despite the decrease in the annual flows due to the economic crisis and its impact in the US economy, by 2009 the remittances received by the Central American countries had almost tripled, amounting US$13.9 billion.

A number of studies indicate that remittances improve human capital outcomes in recipient households. Cox, Edwards and Ureta (2003) estimate the probability of dropping out of school in El Salvador and find that remittances, irrespective of the amount, lower the probability of leaving school. Similarly, Acosta et al (2008) use data for several Central American countries find evidence that remittances increase children?s educational attainment, but that this impact is restricted to children with low levels of parental schooling.

However, an important challenge in this literature has to do with the difficulty in identifying a causal relationship from remittances to household wellbeing. In all likelihood, causality runs in both directions. While the cost of emigration is not trivial and therefore prevents the poorest members of society from migrating, the perceived need to improve their families? living conditions is one of the factors that drive migrants to move to another country and to send remittances back home. In addition, there may be unobserved reasons, such as pressing medical needs, why households may opt to send one of their members to work abroad or why a migrant may decide to remit some of his or her income. It follows therefore that the decision to emigrate or to remit may be heavily influenced by the living conditions of the household and that migrants and remitters do not constitute a random sample of the larger population. This presents important hurdles to empirical researchers who want to understand how remittances, and migration more broadly, affect household welfare. A strategy to deal with that problem is to find a variable that is correlated with remitting behavior, but not with the outcome of interest ? an `instrumental variable? ? in order to identify the causal impact of remittances on the outcome of interest. Unfortunately, finding such instrumental variables proves not to be trivial and much of the recent work on the subject, as with much current applied econometric work, revolves around the search for the best identification strategy.

If we acknowledge the potential that remittances have on the accumulation of human capital, one natural next question is whether there are any innovations which could encourage a greater share of remittances to be directed toward human capital.

Funding Period: 03/01/2011 to 06/30/2013

Countries of Focus: Dominican Republic, El Salvador

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