International remittances and household welfare in vietnam from VHLSS 2006 to VHLSS 2008

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HUGE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROJECT FOR M.A IN DEVELOPMENT ECONOMICS INTERNATIONAL REMITTANCES AND HOUSEHOLD WELFARE IN VIETNAM FROM VHLSS 2006 AND VHLSS 2008 “This paper was submitted in partial fulfillment of the requirements for the Masters of Development Economics (MDE) degree at the Vietnam - The Netherlands Programme (VNP), August/2012” BY NGUYEN VAN PHUC Ho Chi Minh City, August 2012 ABSTRACT International remittances has more important role in progress of economy and society in Vietnam With US$ billions in 2011, Vietnam is one of 10 top countries received the remittances in the world This paper examines the impact of international remittances, which increases over time, on the household welfare of receiving households in Vietnam The thesis has combined the propensity score matching and difference-in-differences methods with panel data taken from Vietnam Household Living Standard Surveys 2006 and 2008 It is found that international remittances increases income and expenditures for recipients, but the effect of remittances on expenses of healthcare and education is not statistically significant although the expenses also rise over time When studying separately for urban and rural areas, the thesis found that the impact of international remittance on income and expenditures are positive and statistically significant for rural areas and positive and insignificant for urban areas; meanwhile, the paper has not detected the affects of foreign remittances on education and healthcare in urban or rural areas Key words: international remittances, household welfare, household surveys, Vietnam TABLE OF CONTENTS ABSTRACT i TABLE OF CONTENTS ii CHAPTER 1: INTRODUCTION 04 1.1 Problem statement 1.2 Research objectives 1.3 Research question 1.4 Thesis structure ………………………………………………………………… CHAPTER 2: LITERATURE REVIEW .08 2.1 The key concepts 2.2 Empirical literature 2.3 Empirical framework 2.4 Overview of theory on impact evaluation 2.5 Summary of PSM and DD methods 2.5.1 Propensity Score Matching (PSM) 2.5.2 Difference-in-difference (DD) CHAPTER 3: METHODOLOGY AND DATA 22 3.1 The research model 3.2 Variable introduction 3.3 Data … 3.4 Estimation Strategy CHAPTER 4: INTERNATIONAL REMITTANCES IN VIETNAM 33 4.1 General view of migration remittances in Vietnam ………….………………… 4.2 Role of international remittances on economy…………………………………… 4.3 International remittances and household welfare in Vietnam…………………… CHAPTER 5: EMPIRICAL ANALYSIS………………… 42 5.1 Data description 5.2 Estimation results 5.3 Interpretation of results CHAPTER 6: CONCLUSIONS AND RECOMMENDATIONS 55 6.1 Conclusions 6.2 Recommendations 6.3 Limitations of the paper REFERENCES APPENDIX CHAPTER 1: INTRODUCTION 1.1 Problem statement After foreign direct investment (FDI), remittances by international migrants to their home countries contribute the largest source of external finance to developing countries, around $300 billion/year in stage of 1995-2005 The funds are used for consumption and investment in migrants’ home countries Remittances are found to give significant impacts on receiving households, especially on low-income families It may help households to establish or expand their small business (Woodruff and Zenteno, 2007 and Amuedo-Dorantes and Pozo, 2006), increase of expenditures in family (Ahmed and et al 2010), or reduction on poverty (Adams, 1991 and Lopez-Cordova, 2005) Some other studies examine the impact of remittances on household welfare, such as savings, consumption, health care and education However, the empirical studies exposed the different results about the impact of remittances on household welfare For instance, Adams (2005), Adams and Cuecuecha (2010) found that the remittances has positive impacts on health-care and educational expenditures in Guatemala Ahmed and et al (2010) showed the significant impacts of remittances on food, education, clothing and recreation in Pakistan Conversely, in the study of McKenzie and Rapoport (2006), the negative impact of migration detected on schooling ratio of children; or Hildebrandt and McKenzie (2005) uncovered that the preventative health-care of children in receipt households lower than in non-receipt households in Mexico According to Vietnamese Oversea Committee (2009), there are about millions Vietnamese living, working and studying permanently in 102 nations and territories in the world The international remittances have been rising over time in Vietnam The average of remittances from oversea Vietnamese sent to the home country in 2008-2010 by formal channel is bigger than $7 billion/year, which accounts more 7% of GDP in that period So the fact indicates the important of international remittances on economic progress in general and improve the living standard of receiving households in particular There are many studies on the impact of migration in Vietnam, such as Dang (2001), Djamba and et al (1999), Andrew T Pham (2010) Nonetheless, there are only a few of studies that examined the impact of international remittances on household welfare in Vietnam, such as the studies of Pfau and Long (2008) and Nguyen (2009) Pfau and Long (2008) studied the impact of international remittances on household welfare in term of economic inequality and poverty By using the Vietnam (Household) Living Standards Survey in 1992/93, 1997/98, 2002 and 2004, this study found that foreign remittances reduce inequality and poverty in Vietnam with regards to per-capita household expenditures and income Nguyen (2009) examined the impact of international and internal remittances on welfare of receiving households By using the panel data from VHLSS 2002 and VHLSS 2004, he concluded that the international remittances have positive and significant impacts on income, expenditures of non-food consumption (excluding healthcare and educational spending); but not significant impacts on expenditures of food, healthcare and education He also showed the effect of remittances in urban area is much more than in rural area Differently from the paper of Nguyen (2009), the thesis of Toan (2010) and Ha (2010) showed that the foreign remittances have positive and significant impacts on healthcare and educational expenditures, but not significant between urban and rural areas through using data from VHLSS 2006 Therefore, the objective of the paper is to re-examine the impact of international remittances on the welfare of receiving household in Vietnam by some reasons The first, the last studies used the series of data only until 2004, for instant in the period 2002-2004 the average of international remittances is about more US$ 2.8 billion per year However, in our paper, we use the data from VHLSS 2006 and 2008 with the average of foreign remittances is double more to US$ 5.8 billon per year in 2006-2008 compared to the period of 2002-2004 The increasing trend of remittances over time, which may be change the relationship between remittances and household welfare, compared the last studies The second reason is the results of Toan (2010) and Ha (2010), based on VHLSS 2006, about the impact of international remittances, which is difference from Nguyen (2009)’s results The last reason, the result of empirical studies is important referential sources for policy-makers on building suitable policies with different stages, because of the implementation of non-suitable policy may lead to waste social resources Relying on that, the thesis is to contribute some new findings to the debate about relationships between international remittances and household welfare in Vietnam and suggest some suitable policies for the government to explore efficiently international remittances on improving the household welfare in Vietnam 1.2 Research objectives The thesis has three objectives: 1) To determine whether international remittances significantly influence the household welfare in Vietnam through total income, total expenditures, healthcare expenditures and education expenditures 2) To examine whether there is the differential impact of remittances on household welfare between urban and rural area 3) To make recommendations to policy-makers for efficiently exploiting remittances, this improves the household welfare 1.3 Research question To meet the objectives, the study has three research questions: 1) Does international remittance significantly influence on the household welfare in Vietnam? 2) Is there the differential impact of international remittances on household welfare between urban and rural area? 3) What are the recommendations could help the policy-makers to explore efficiently remittances on improving the household welfare 1.4 Thesis structure The thesis consists of six chapters The first chapter presents the research issues, research objectives and research questions, the thesis structure The second chapter describes the basic concepts, the results of empirical studies, and summarizes the methods of impact evaluation The third chapter presents the research model, describes the variables and the dataset, and estimation strategy The fourth chapter illustrates an overview of international remittances in Vietnam, the role of the remittance for the economy in general and statistical descriptions of the relationship between the remittance and household welfare in particular The fifth chapter shows statistical description of the variables, the results of difference-in-difference (DD) regression with propensity score matching (PSM), and interpretation of researching results The last chapter presents a summary of main findings, policy recommendations and the limitation of the thesis CHAPTER 2: LITERATURE REVIEW 2.1 The key concepts International Monetary Fund defined the economic concept of remittances as follows: “Remittances represent household income from foreign economies arising mainly from the temporary or permanent movement of people to those economies Remittances include cash and non-cash items that flow through formal channels, such as across electric wire, or through informal channels, such money or goods carried across borders They largely consist of funds and non-cash items sent or given by individuals who have migrated to a new economy and become residents there, and the net compensation of border, seasonal, or other short-term workers who are temporarily employed in an economy in which they are not resident” (Appendix on remittances to the “Balance of Payments and Investment Position Manual” (2008) In this research, we only examine international remittances by formal channels For informal channels, it is very difficult to define how flows in amount of informal remittances and what the effects on the economy are It needs further deeply studies, which is excluded in the research Welfare is physical and mental health and happiness, especially of a person It relates to the income and consumption of a person Household is a group of people, often a family, who live together (Cambridge Advanced Learner's Dictionary) However, the economic concept of the household-welfare is very complex and wide In this paper, we only to analyze the impacts of international remittances on household welfare by examining the impact on indicators of household welfare: income and expenditures of the receipt households 2.2 Empirical literature There are many researches, which describe the role of remittances in the economic progress of the nations The motivations of overseas migrants are altruism (Lucas and Stark, 1985), helping family members to improve their house’s infrastructure (Duryea et al 2005), financing for household business (Woodruff and Zenteno 2007, and Amuedo Dorantes and Pozo 2006), covering medical expenses (Amuedo Dorantes and Pozo, 2006), and contributing in education investment of children (Edward and Ureta, 2003) Many empirical studies explore the impact of international remittances on welfare of receiving households, such as Quartey (2006) in Ghana, Soraya (2007) in Philippines, Subedi (2009) in Nepal, Adams and Cuecuecha (2010) in Guatemala, Ahmed and et al in Pakistan (2010) and Raihan (2009) in Bangladesh Quartey (2006) used Ghana Living Standards Survey (GLSS) to examine the impact of international remittances on household welfare in Ghana He concluded that international remittances is the important sources of income for consumption smoothing, improving household welfare and decreasing negative effects of economic shocks, and households which own land can withstand economic shocks and have better welfare than those without land Soraya (2009) found the positive and significant impact of international remittances on education and recreation expenditures in Philippines By using Nepal Living Standards Survey (NLSS) for analyzing in Nepal, Subedi (2009) realized that remittances from India increase income and decrease inequality on receiving households At the micro-level, Nepal reached a significant reduction in poverty over the period of 1996-2006 (from 42% in 1995-1996 to 2003-2204), despite a low economic growth and political instability in that period Therefore, the remittance is one of key factors for declining the poverty in Nepal Meanwhile, Raihan et al (2009) carried out the examining effects of international remittances on household consumption and poverty at macro and household levels in Bangladesh, where the remittances accounted 10% GDP in 2008 At macro level, Raihan found the positive impact of foreign remittances on economy and reducing poverty At micro level, he discovered the different effects of remittances on indicators of household welfare: positive and significant impact on food and housing, positive but insignificant on education and health-care, and negative and significant on durable good The positive and statistically significant impacts on health-care of remittances also were found in Guatemala (Adams and Cuecuecha, A 2010) In Pakistan, Ahmed and et al (2010) showed the significant impacts of remittances on food, education, clothing and recreation In Vietnam, by using the Vietnam (Household) Living Standards Survey in 1992/93, 1997/98, 2002 and 2004, Pfau and Long (2008) included that foreign remittances come from 67 (2.2) Equation (5.2) – Restricted model Linear regression * To Test for multicollinearity vif Since VIF < 10, so there is not multicollinearity in the model 68 (3.1) Equation (5.3) – Full model Linear regression * To test for dropping out variables: gender, pcannuland, pcwatersuface, reg_2, reg_3 test ( ( ( ( ( 1) 2) 3) 4) 5) pcannuland pcforexland pcwatersuface reg_2 reg_3 pcannuland = pcforexland = pcwatersuface = reg_2 = o.reg_3 Constraint dropped F( 4, Prob > F = Test: Ho: = ß1 = ß2 = ß3 = ß4 = ß5 = H1: at least one ß =0 At significant level 5%, P-value (Prob) = 39.83%, so it can not reject Ho (3.2) Equation (5.3) – Restricted model Linear regression Robust ln_edu i in l h he c t sec high c pcpe 69 * To Test for multicollinearity vif *** Test for dropping out of variables: hhsize and hhsiz2 test ( 1) hhsize hhsize = F( 1, test hhsize2 ( 1) hhsize2 = F( 1, At significant level 5%, P-value (Prob) = 0.00 %, so it can reject Ho or can not reject variables of hhsize and hhsiz2 (4.1) Equation (5.4) – Full model Linear regression ln_healthc~ inrem yea interac lorem hhsiz hhsize headag gende child1 elde techni secondar highschoo colleg pcannulan pcperelan pcforexlan pcwatersuf~ reg_ reg_ reg_ reg_ reg_ reg_ reg_ reg_ urba _con * To test for dropping out variables: hhsize2 ,headage ,highschool, secondary, technic, pcannuland, pcwatersuface, pcforexland, reg_2, reg_3 70 test ( ( ( ( ( ( ( ( ( (10) 1) 2) 3) 4) 5) 6) 7) 8) 9) hhsize2 headage technic highschool secondary pcannuland pcforexland pcwaters hhsize2 = headage = technic = highschool = secondary = pcannuland = pcforexland = pcwatersuface = reg_2 = o.reg_3 = Constraint 10 dropped F( 9, 5449) Prob > F Test: Ho: ß1 = ß2 = ß3 = ß4 = ß5 = ß6 = ß7 = ß8 = ß9 = ß10 = H1: at least one ß =0 At significant level 5%, P-value (Prob) = 67.74%, so it can not reject Ho (4.2) Equation (5.4) – Restricted model Linear regression ln_healthc~ inrem yea interac lorem hhsiz gende elde child1 colleg pcperelan reg_ reg_ reg_ reg_ reg_ reg_ urba _con ** To Test for multicolinearity Since Mean VIF < 10, so there is not multicolinearity in the model 71 Appendix 5.3 Summary of results of DD regression for the whole country Variables International remittances (inremit) Time effect (dummy 2008) (year) Interaction term (interact=inremit*year) Constant Local remittances (loremit) Household size (hhsize) Household size squared (hhsize2) Age of household head (headage) Gender of household head (gender) Ratio of members younger than 16 (child16) Ratio of the old -male>60, female>55 (elder) Ratio of members with technical degree (technic) Ratio of members with secondary (secondary) Ratio of members with highschool (highschool) Ratio of members with college (college) Annual crop land per capita (m2) (pcannuland) Perennial crop land per capita (m2) (pcpereland) Forestry land per capita (m2) (pcforexland) Aquaculture water surface per capita (m2) (pcwatersuface) Red River Delta (reg_1) North East (reg_2) North West (reg_3) North Central Coast (reg_4) South Central Coast (reg_5) Central Highlands (reg_6) South East (reg_7) Mekong River Delta (reg_8) Urban (dummy) (urban) Observations R-squared Note: (1) Basis model, (2) Full model, (2) Restricted model Robust standard errors in parentheses *** significant at 1% level; ** significant at 5% level; * significant at 10% level) Source: Author's estimation from panel data of VHLSS 2006-2008 72 Variables International remittances (inremit) Time effect (dummy 2008) (year) Interaction term (interact=inremit*year) Constant Local remittances (loremit) Household size (hhsize) Household size squared (hhsize2) Age of household head (headage) Gender of household head (gender) Ratio of members younger than 16 (child16) Ratio of the old -male>60, female>55 (elder) Ratio of members with technical degree (technic) Ratio of members with secondary (secondary) Ratio of members with highschool (highschool) Ratio of members with college (college) Annual crop land per capita (m2) (pcannuland) Perennial crop land per capita (m2) (pcpereland) Forestry land per capita (m2) (pcforexland) Aquaculture water surface per capita (m2) (pcwatersuface) Red River Delta (reg_1) North East (reg_2) North West (reg_3) North Central Coast (reg_4) South Central Coast (reg_5) Central Highlands (reg_6) South East (reg_7) Mekong River Delta (reg_8) Urban (dummy) (urban) Observations R-squared Note: (1) Basis model, (2) Full model, (2) Restricted model Robust standard errors in parentheses *** significant at 1% level; ** significant at 5% level; * significant at 10% level) Source: Author's estimation from panel data of VHLSS 2006-2008 73 Appendix 5.4A Results of DD Regression with PSM for Urban only Variables Inremit Year Interact=inremit*year Loremit Hhsize Hhsize2 Headage Gender Child16 Elder Technic Secondary Highschool College Pcannuland Pcpereland Pcforexland Pcwatersuface Reg_1 Reg_2 Reg_3 Reg_4 Reg_5 Reg_6 Reg_7 Reg_8 Constant Observations R-squared Note: (1) Full model, (2) Restricted model Robust standard errors in parentheses *** significant at 1% level; ** significant at 5% level; * significant at 10% level) Source: Author's estimation from panel data of VHLSS 2006-2008 74 Appendix 5.4B Results of DD Regression with PSM for Rural only Variables Inremit Year Interact=inremit*year Loremit Hhsize Hhsize2 Headage Gender Child16 Elder Technic Secondary Highschool College Pcannuland Pcpereland Pcforexland Pcwatersuface Reg_1 Reg_2 Reg_3 Reg_4 Reg_5 Reg_6 Reg_7 Reg_8 Constant Observations R-squared Note: (1) Full model, (2) Restricted model Robust standard errors in parentheses *** significant at 1% level; ** significant at 5% level; * significant at 10% level) Source: Author's estimation from panel data of VHLSS 2006-2008 75 ... in Appendix 4.1.) 4.3 International remittances and household welfare in Vietnam In order to understand clearer the relationship between international remittances and the living standard of households... equals if households received foreign remittance and examined in 2008, and equals in remaining cases The information of householder’s characteristics is obtained from section in VHLSS 2006, 2008 The... section In order to eliminating the inflation effect, the data of income and expenditures in 2006 are adjusted to the price in 2008 (2) Independent variables Remittances specified in VHLSS surveys including