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Understanding the Impact of Remittances on Consumption Patterns and Savings in Rural China

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Yu Zhu (University of Kent, CEE) …

Yu Zhu (University of Kent, CEE)
Zhongmin Wu (Nottingham Trent University)
Liquan Peng, Laiyun Sheng (National Bureau of Statistics of China)
Meiyan Wang, Yang Du, Fang Cai (Chinese Academy of Social Sciences)
Part of the Institute of Development Studies' China and Development Seminar Series presented at the Institute of Development Studies, January 15th 2009

Published in: Education, Travel, Business

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  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Yu Zhu - University of Kent
  • Transcript

    • 1. Understanding the Impact of Remittances on Consumption Patterns and Savings in Rural China Yu Zhu (University of Kent, CEE) Zhongmin Wu (Nottingham Trent University) Liquan Peng, Laiyun Sheng (National Bureau of Statistics of China) Meiyan Wang, Yang Du, Fang Cai (Chinese Academy of Social Sciences) Institute of Development Studies, January 15 th 2009 Acknowledgement : We are grateful to the British Academy for funding this research.
    • 2. Outline
      • The background: the greatest migration in human history
      • Literature review
        • Neo-classical economics of migration
        • New Economics of Labour Migration
        • The role of social networks
        • Remittances
      • Data: RHS, NCMS and the 2000 Census
      • Stylized facts and model specifications
      • Empirical Results
        • Impact on Consumption Patterns
        • Impact on Savings
      • Concluding remarks and further research
      31/07/09 Yu Zhu - University of Kent
    • 3. Preview
      • Mainly based on the large Rural Household Survey by NBS in 2001/4 and a cross-sectional survey by CASS in China in 2006
      • Focus on impact of remittances on consumption and savings
      • Naïve OLS suggest mpc ( mps) out of remittances close to zero(unity), implying large positive impact of migration on sustainable rural development
      • However, the results no longer hold once we allow for endogeneity, measurement error, censoring of remittances as well as heterogeneity across counties and household types
        • County-level FEIV and HH-level 2SLS using only nuclear families in NBS data show that remittances are largely used for consumption
        • 2SLS and Tobit two-stage estimates using CASS data suggest that migrants indeed save less than non-migrants, at given level of household income
        • No evidence of any direct effect of remittances on either capital input or gross product of farming
      • Rural-urban migration less conducive to financial capital accumulation than what the government has been hoping for
      31/07/09 Yu Zhu - University of Kent
    • 4. 1. The Background
      • Unprecedented economic growth over the past 3 decades: real GDP increases by 9.7% (per capita GDP by 8.5%) per annum during 1978-2006
      • However growing income gap between the urban and the rural areas since the 1980s
      • Causing serious concerns
      • Some sign of a policy shift by the new leadership (“Harmonious Socialist Society” by 2020)
      • Source: SYC 2006/7
      31/07/09 Yu Zhu - University of Kent Year Urban Engel coeff Rural Engel coeff Urban-rural income ratio 1978 57.5 67.7 2.57 1980 56.9 61.8 2.34 1985 53.3 57.8 1.86 1990 54.2 58.8 2.20 1995 50.1 58.6 2.71 2000 39.4 49.1 2.79 2005 36.7 45.5 3.23
    • 5. The Greatest Migration in Human History
      • Massive rural-urban migration in China since early 1980s
        • Recent stock measure: ca. 150 million (200 million cross-border migrants worldwide)
        • A net flow of 9.84 million p.a. during 2000-2004
        • Current economic downturn: 20+ million returning home?
        • Plays a vital role in urbanization and industrialization
          • Urbanization rate increased to 41.8% in 2005 (17.4% in 1978)
          • Share of primary sector of industry reduced from 27.9% in 1978 to 12.6% in 2005
      • Institutional settings important
        • The Hukou (Household Registration) system
        • The collective land tenure system (land leased out to all HHs within the village on a formula basis)
        • A “cradle to grave” welfare system for urbanites
        • Farmers left on their own (apart from their piece of land)
      31/07/09 Yu Zhu - University of Kent
    • 6. 2. Literature Review
      • Consensus on the role of rural-urban migration in growth (Naughton 2007, Knight & Song 2005, Fan 2008)
      • Neo-classical economics of migration (NCEM)
        • assumes migrant maximizes earnings (and seeks permanent settlement) as an individual
        • emphasize the “push and pull” factors
        • general consensus that migration is driven by:
          • increased demand in urban (mainly coastal) areas and widening income differentials across regions and between rural and urban areas (Zhang & Song 2003, Wu & Zhu 2004, Knight & Song 2005, Yang 1999, Zhao 1999)
          • Rising rural labor surplus (Zhao 1999)
      31/07/09 Yu Zhu - University of Kent
    • 7. New Economics of Labor Migration (NELM)
      • New Economics of Labor Migration (NELM) takes the household perspective
        • Mincer 1978, Katz & Stark 1986
      • Wish to diversify risks, credit constraint (MOL 1994, KS Chap 8)
        • 70.4% of HHs agree that “HHs should have various sources of income”, because of:
          • Higher income: 79.4%
          • Less risk: 19.0%
        • 66.1% of HHs agree that “non-farm income of HH too low”, due to
          • Lack of capital: 59.8%
          • Lack of opportunities:15.4%
          • Lack of skills: 14.8%
          • Lack of social contacts: 5.7%
      31/07/09 Yu Zhu - University of Kent
    • 8. Role of Social Networks
      • Fan (2008) and Knight & Song (2005) highlight the importance of social networks in migration and job search
      • Imperfect labour market in China
        • High degree of wage segmentation across sectors and regions
        • Job search costly (no UI)
        • Job-specific information more valuable
          • Most migrants had come to the city with specific information about jobs (Handan Survey of Rural-Urban Migrants 1992)
          • Lack of contacts/information top two barriers (60%) to increasing migration (MOL 1994)
          • Two-thirds of migrants got jobs through friends/relatives in 2004 (Zhu et al. 2008)
      31/07/09 Yu Zhu - University of Kent
    • 9. Remittances
      • Motivations of remittances:
        • Consumption vs. savings?
      • Impact of remittances not well understood
        • Positive effect on poverty reduction, although the poorest benefit less (Ravallion and Chen 2004, Du et al. 2005, Zhu & Luo 2008)
        • Only a small negative effect on agricultural production (low marginal product of labour + offsetting effect of remittances through loosening credit constraints), Rozelle et al. 1999
        • No link between migration and productive investment (de Brauw & Rozelle 2008)
      31/07/09 Yu Zhu - University of Kent
    • 10. This Project
      • Focus on the impact of remittances on consumption/savings in rural China
      • Motivated by NELM and literature on intra-household allocation
        • Standard theory suggest that source of income does not matter
        • However, overwhelming rejection of the unitary model of household behaviour (Lundberg et al. 1997, Kooreman 2000, Edmonds 2002, Duflo 2000, Knox 1996, Argys et al. 1998)
        • Compelling evidence of positive relationship between (cross-border) return migration and non-farm self-employment (Dustmann & Kirchkamp 2002, Mesnard 2004, McCormick & Wahba 2004)
      • Findings have important policy implications:
        • Potential of rural-urban migration to foster self-employment (and rural development) on a large scale through financial capital accumulation
      31/07/09 Yu Zhu - University of Kent
    • 11. 3. Data
      • Exploits data from 3 different sources:
        • The large Rural Household Survey by NBS contains detailed information on HH expenditure, ideal for studying the impact of remittances on consumption patterns
        • The more recent NCMS sample smaller, but with information on capital input and gross output of farming, as well as time use. Ideal for studying the impact of remittances on savings.
        • The 2000 Census of Population can be matched at the county-level
    • 12. NBS Data
      • A large sample of rural households from the provinces of Jiangsu, Anhui and Sichuan surveyed in 2001 and 2004
      • Representing the Eastern (coastal), Central and Western Region of China
      • Per capita rural net income in 2004:
        • 4754 yuan in Jiangsu (2 nd richest province)
        • 2499 yuan in Anhui
        • 2519 yuan in Sichuan
        • 2936 yuan for China as a whole
      • 10k+ HHs with 40k+ individuals in each year
      • Panel at the county level
      • Exclude HHs who have migrated as a whole (21% in 2004)
      • Migrant: someone whose main place of employment is out of the xiang (township) of the hukou registration
      • Remittance: net of transport costs and living expenses away from home
      31/07/09 Yu Zhu - University of Kent
    • 13. CASS Data
      • A survey of 1500 rural households from Anhui and Jiangsu, by CASS in 2006
      • Working sample: 1251 HHs (exclude 2 counties with high net inflow of migrants, HHs with only non-permanent residents, HoHs with non-local hukou, -ve annual net income, top and bottom 2.5% of the income distribution, missing values)
      • Saving measured as annual net income less non-housing expenditure
      • Migrant: one who has been away from home for 6+ months during past year (in line with the 2000 Census of Population definition)
      • Migrant households: 30% in Jiangsu and 43% in Anhui
      • Remittance: income received by migrants (def. as above) net of transport costs & living expenses away from home
      31/07/09 Yu Zhu - University of Kent
    • 14. Map 31/07/09 Yu Zhu - University of Kent
    • 15. 4. Stylized Facts and Model Specifications
      • A rural household in China today has to decide whether to engage in migrant labour (Knight and Song 2005) :
        • Non-migration:
          • Farming (traditional): land fixed, MPL extremely low
          • Local non-farm employment (TVEs and local gov./non-gov. organizations): appear to be rationed, at least in part, by capital market imperfections
        • Migration for work away from home (mostly inter-county): strong growth in demand
        • Marginal returns to different labour activities tend to be equalized under competitive labour (credit) market, but there are
          • Compensating wage differentials for the risks and the psychic costs
          • Transaction costs
          • Imperfect information
      31/07/09 Yu Zhu - University of Kent
    • 16. Migration Patterns in 2004
      • Source: Rural Household Survey 2004 (Number of HHs=10.5k)
      • 36% of the rural labor force have participated in migration during the survey year
      • Of these, 90% have previous migration experience
      • Two thirds of all migrants are male
      • Only 27% of migrants have formal employment contracts with their employers, of which half are covered by labor insurance.
      • Job-search channels
        • 66.4% of migrants get their jobs through friends and relatives
        • 18.8% through job agencies
        • only a tiny 1.4% through government channels
      • Temporary and circular migration (migrants spend an average of 8.8 months in migrant work and 2.7 months in agricultural work at home)
      • Over half of annual gross earnings are remitted! (4071.3/7741.5 yuan)
    • 17. Empirical Specification & Key Issues
      • In empirical analysis, we will decompose total HH net income into 3(2) components:
        • remittances (i.e. migrant earnings less expenses), x
        • non-migrant earnings , y
        • other income (predominantly from farming), z
      • Assuming f i (x h , y h , z h ) is linear and additively separable
      • Main econometric challenges:
      • Measurement error in remittances
      • Endogeneity in remittances
      • Heterogeneity across provinces and HH types
      31/07/09 Yu Zhu - University of Kent
    • 18. Identification strategies
      • Focus on consumption patterns using NBS data
        • Fixed-effects Instrumental-Variables (FEIV) estimation using balanced panel of 105 counties
        • TSLS at the household level using a homogenous subsample of couples with dependent children
          • “ Split household” strategy (Fan 2008)
        • Instrumenting using proxies for land scarcity and social networks
      • Focus on savings using CASS data
        • TSLS at the household level using % return migrants in the county and head of household’s migration history
        • Allows for censoring of remittances using Tobit 2-stage estimation
        • Indirect evidence from the effect on farm production
      31/07/09 Yu Zhu - University of Kent
    • 19. 5A. Empirical Results: Impact on Consumption
      • Employment Patterns of Rural Workforce by Province and Year
      31/07/09 Yu Zhu - University of Kent
    • 20. Sources of HH Net Income by Province and Year 31/07/09 Yu Zhu - University of Kent
    • 21. Balanced Panel of 105 Counties 31/07/09 Yu Zhu - University of Kent
    • 22. FE-IV, 1st-stage Estimates
      • Treating farming income as exogenous (H 0 not rejected in formal test)
      • Remittances identified through share of country workforce migrating
      • Non-migrant earnings identified through share of country workforce in non-migrant employment and per capita cultivated land
      • Control for proportion of labour force at various levels of education, household size, number of dependent children and boy ratio.
      31/07/09 Yu Zhu - University of Kent
    • 23. FE-IV, 2nd-stage Estimates
      • Can’t reject exogeneity of instruments in all but housing equations
      • mpc out of remittances on non-housing expenditure very high (also high on food and transport/communication)
      • Remittances part of permanent income and important for poor
      • Failure to account for endogeneity/heterogeneity lead to biased estimates: OLS (0.435); FE (0.579); IV (0.637)
      31/07/09 Yu Zhu - University of Kent
    • 24. OLS, FE and IV Results 31/07/09 Yu Zhu - University of Kent
    • 25. Household-level Analysis
      • Considerable heterogeneity wrt. to consumption patterns (and sources of income) across HH types
      • Focus on the highly homogenous subgroup of couples with dependent children and at least 2 able-bodied workers in HH-level analysis to minimize risk of functional form misspecification (two-thirds of all HHs)
      31/07/09 Yu Zhu - University of Kent
    • 26. Couples with Dependent Children
      • Migrant families have:
        • Lower income
        • Lower wealth (house values)
        • Less education
        • More children
        • However, consumption pattern remarkably similar
      31/07/09 Yu Zhu - University of Kent
    • 27. TSLS, 1 st Stage Estimates
      • Instruments proxies for social networks
      • All 3 instruments individually significant
      • Control for provinces, years and interactions, household size, number of dependent children and boy ratio, number of children in age groups 0-6, 7-15, a quadratic in age of HoH and level of education of HoH.
      31/07/09 Yu Zhu - University of Kent
    • 28. TSLS, 2 nd Stage Estimates
      • Can’t reject exogeneity of instruments in all but one equations (“other expenditures”)
      • mpc out of remittances on non-housing expenditure 0.905 (also high on food, leisure, transport/communication), note that leisure includes education expenditure
      31/07/09 Yu Zhu - University of Kent
    • 29. OLS Bias
      • TSLS estimates 5 times as large as OLS estimates for food and total non-housing expenditure, and
      • 10 times as large for health and leisure
      • Intuition: OLS over-estimates autonomous consumption and severely under-estimates the mpc (contribution of remittances)
      31/07/09 Yu Zhu - University of Kent
    • 30. Repeat Migrants Only, TSLS, 2 nd Stage
      • N=6354, of which 2624 are repeat migrants
      • Results almost identical
      31/07/09 Yu Zhu - University of Kent
    • 31. New Migrants Only, TSLS, 2 nd Stage
      • N=4208, of which 478 are new migrants
      • mpc out of remittances on non-housing expenditure 2.062 (although not very precisely determined), implying credit constraint
      31/07/09 Yu Zhu - University of Kent
    • 32. Sensitivity Analysis
      • Excluding counties with high net migration inflows
      • Instrumenting using county-level from 2000 Census
      • Types of split-households:
        • Husband migrates & Wife stays (63%)
        • Only Children migrate (18%)
        • Both husband & wife migrate (12%)
        • Wife migrates & husband stays (7%)
        • Some evidence that remittances are spent more on consumption if the migrant is the wife or an adult child
      31/07/09 Yu Zhu - University of Kent
    • 33. 5B. Empirical Results: Impact on Savings
      • CASS Data: Summary Stats by Migration Status
      31/07/09 Yu Zhu - University of Kent
    • 34. Savings and Net HH Income
      • Non-migrant HHs
      • Migrant HHs
      31/07/09 Yu Zhu - University of Kent
    • 35. Level of Highest Qualifications by HH type
      • Migrant HHs have relatively low human capital
      • Education-income profile flatter for migrant HHs,
        • consistent with the notion that migrants face discrimination
        • Could also be consistent with rationing of local non-farm jobs
      31/07/09 Yu Zhu - University of Kent
    • 36. Allocation of Labour
      • For couples with dep. children only:
      • Total number of hours work same: 17.4/day
      • Migrant HHs spend 37% of time doing migrant labour, at the cost of :
        • Less domestic work(-6%)
        • Less farming (-40%)
        • Less local off-farm activities (-59%)
      31/07/09 Yu Zhu - University of Kent
    • 37. Intra-household Time Allocation
      • More specialisation in migrant HHs (e.g. husbands focusing on migrant labour almost exclusively)
      • Off-farm local labour higher for both husbands and wives in non-migrant HHs (small amount of migrant labour by the husband)
      31/07/09 Yu Zhu - University of Kent
    • 38. Average Gross Hourly Return to Labour
      • Implies low marginal product of labour in farming
      • Grossed-up migrant wage is 6.30 (62% remitted)
      • Consistent with theory of comparative advantage
      31/07/09 Yu Zhu - University of Kent HH Type Farming & Self-employment Non-migrant Local Labour Migrant Labour Non-migrant 7.50 5.25 - Migrant 10.71 2.34 3.92
    • 39. OLS Results 31/07/09 Yu Zhu - University of Kent
    • 40. FE-IV, 1st-stage Estimates
      • Treating other income as exogenous (H 0 not rejected in formal test)
      • Remittances identified through share of return migrants in the county’s workforce and HoH’s migration experience
      • Control for household size, highest qualification of any member, and characteristics of HoH (age, marital status, gender, hukou, CCP/cadre)
      31/07/09 Yu Zhu - University of Kent
    • 41. FE-IV, 2nd-stage estimates
      • mps out of other net income remarkably stable
      • mps out of remittances lower than that out of other income in both provinces (but can’t rule out equality)
      • Migrants do not save more, at given level of HH income
      31/07/09 Yu Zhu - University of Kent
    • 42. Tobit two-stage Estimation, 1 st Stage
      • Accounting for left-censoring of remittances
      • Using Tobit two-stage (standard errors bootstrapped with 1000 rep’s)
      • Comparing to 2SLS, other net income has a much larger negative impact on remittances
      • Instruments highly relevant
      31/07/09 Yu Zhu - University of Kent
    • 43. Tobit two-stage Estimation, 2nd Stage
      • For both provinces, mps out of remittances now much lower than that out of other income
      • Difference statistically significant in all spec’s
      31/07/09 Yu Zhu - University of Kent
    • 44. Quantile Regression
      • Unobservables might be important for savings (attitudes towards risks, family background etc.)
      • mps almost monotonically increasing in Jiangsu
      • U-shaped for both income sources in Anhui
        • Target saving at the top
        • Credit constraint at the bottom
      31/07/09 Yu Zhu - University of Kent
    • 45. Remittances on Capital Input in Farming
      • Capital input: seeds, fertilisers, pesticide, fuel, labour, land rental, machinery & livestock
      • Similar control variables + log per capita land
      • Remittances and no. of migrants instrumented using county-level stats from 2000 Census
        • % hukou population migrating
        • % labour force in the primary sector
        • infant sex-ratio
      31/07/09 Yu Zhu - University of Kent Dependent variable: Capital Input of Farm Production OLS 2SLS Remittances 0.008 (0.016) 0.012 (0.151) # migrants -157 (108) -2117 (933) Household size 389 (71.2) 893 (174) Log per capita land 2006 (103) 1838 (138) Anhui Province -983 (175) -642 (262) Constant 905 (1486) -6644 (2883)
    • 46. Remittances on Gross Farm Product
      • Gross farm product: aggregating over sales values of grain and cash crops harvested over the past year
      • Same control and IVs
      • IVs pass conventional tests
      • Additional migrant modest negative effect on both capital input and farm product
      • Direct effect of remittances positive but insignificant
      • Consistent with de Brauw & Rozelle (2008)
      31/07/09 Yu Zhu - University of Kent Dependent variable: Gross Farm Product OLS 2SLS Remittances 0.006 (0.029) 0.107 (0.255) # migrants - 346 (195) -3230 (1574) Household size 624 (129) 1237 (294) Log per capita land 3712 (188) 3572 (232) Anhui Province -276 (319) 225 (442) Constant -436 (2701) -10006 ( 4864)
    • 47. Simple Calibration
      • So sending out an additional “migrant” (away for 6+ months) will
        • Generate 4609 yuan in remittances (obs. sample mean)
        • Reduce capital input in farming by 2062 (after allowing for an offsetting effect of 55 yuan induced by remittances)
        • Reduce gross farm product by 2737 yuan (after allowing for an offsetting effect of 493 yuan induced by remittances )
      • Overall, the HH will still be 3934 yuan better-off
      • However, migration opportunities are limited by:
        • Uncertainties
        • Imperfect information
        • Transaction cost
      31/07/09 Yu Zhu - University of Kent
    • 48. 6a. Conclusions: Consumption
      • FEIV estimates using county-level panel data suggest that the mpc out of remittances is very high, and is far greater than those out of non-migrant earnings or farming
      • Results also hold in instrumental-variable estimation at the household-level using a highly homogenous sample of couples with dependent children
      • Imply that rural households take remittances as permanent income by and large
      • Consistent with the prevalence of circular migration which is largely caused by the combination of the hukou system and the land tenure system in China
      31/07/09 Yu Zhu - University of Kent
    • 49. 6b. Conclusions: Savings
      • OLS based on CASS data suggests that migrant families save more, for given total family income
      • Results do not hold in instrumental-variable estimation
      • mps out of remittances well below half that out of other sources of income in preferred specification
      • No evidence of any direct effect of remittances on capital input or gross product of farming, conditional on number of migrants
      • Consistent with the companion work based on NBS data which find remittances are largely used for consumption purposes
      • Imply that increasing migration unlikely to boost savings ( capital accumulation) in rural China by much
      • Reforms needed:
        • Wider land rights for farmers (longer and more transferable leases)
        • Social security network
        • Integrating labour market
      31/07/09 Yu Zhu - University of Kent
    • 50. Further Research
      • How families strategically use migration to diversify risk given the constraints imposed by the institutions (e.g. split-household strategies)?
      • Exploit time-use information
      • Role of credit constraint
      • The impact of migration on other outcomes such as education, fertility and gender equality
      31/07/09 Yu Zhu - University of Kent