Remittances as a Shield to Vulnerable Households in Macedonia: The Case When the Instrument is Not Strictly Exogenous
| Author | Marjan Petreski,Blagica Petreski,Despina Tumanoska |
| DOI | http://doi.org/10.1111/imig.12279 |
| Published date | 01 February 2017 |
| Date | 01 February 2017 |
Remittances as a Shield to Vulnerable
Households in Macedonia: The Case When
the Instrument is Not Strictly Exogenous
Marjan Petreski*, Blagica Petreski** and Despina Tumanoska**
ABSTRACT
The objective of this article is to investigate whether remittances sent to Macedonia have a
role to play for shielding vulnerable households, by highlighting the importance of a strictly
exogenous instrument in an IV context. Results suggest that remittance-receiving households
have, on average, a 20.1 per cent lower vulnerability than non-receiving ones. However, if one
has a reasonable belief that vulnerability and the instrument are determined simultaneously, or
are directly correlated due to the existence of a third unobservable factor, then the shielding
effect of remittances for vulnerable households remains up to the ninth percentage of direct
influence and with a reducing magnitude, and then disappears.
INTRODUCTION
Macedonia receives about 20 per cent of its GDP in private transfers per year, out of which it is
estimated that at least half are pure cash remittances directly contributing to the livelihoods of
(poor) households of Macedonian citizens (Petreski & Jovanovic, 2013). On the other hand, the
economy is still diving into major unemployment of 26 per cent and a 22 per cent poverty rate in
2015. Only 9 per cent of households receive formal social assistance from the government, and this
assistance only reduces the incidence of poverty by 3 percentage points. However, the figures
reflecting facets of economic development do not take into account the effect of remittances; they
are not a part of the official regular surveys and policies. They are frequently channelled through
unofficial-unregistered channels (at least half of them; Petreski and Jovnanovic, 2013). Hence, the
bold question emerging is the extent to which remittances serve as informal social protection in
handling social risks (Dercon, 2002) and potentially prevent social unrest.
The theory behind the role of remittances and migration as informal social protection for recei-
vers dates back to the new economics of labour migration (Stark, 1978, 1991). This strand of theo-
retical underpinnings links the causes and consequences of migration explicitly, such that both
positive and negative development effects are possible. In particular, this strand of literature consid-
ers the household, not the individual, as the decision-making unit with regard to the migration deci-
sions (Taylor, 1999). Hence, if the household is exposed to social risks and income shocks, it will
opt for diversification of its labour resources so as to minimize these risks (Stark and Levhari,
1982). This is done by sending a migrant abroad, so that the incidence of income shocks and hence
falling into poverty is minimized by diversification of income sources while remittances serve as
* University American College Skopje, Macedonia
** “Finance Think”- The Economic Research and Policy Institute, Skopje, Macedonia
doi: 10.1111/imig.12279
©2016 The Authors
International Migration ©2016 IOM
International Migration Vol. 55 (1) 2017
ISS N 00 20- 7985 Published by John Wiley & Sons Ltd.
(informal) social insurance at origin (Lucas and Stark, 1985). Therefore, this approach adds the
household-level decisions to the individual-level decisions, as the latter are mainly driven by the
self-interest, i.e. the objective to maximize personal income.
On the empirical front, the consumption and welfare effects of remittances have been widely
investigated: some papers date back to 1986, like Russel, while others are quite recent, e.g. Javid
et al. (2012), suggesting that the topic of remittances has not lost its appeal over the decades.
Although most international remittances do not flow directly to the poorest people, they often make
up an important share of the income of poor communities, hence alleviating their vulnerabilities. In
parallel with the importance of the official international remittances, relatively rich literature exists
on their effects on poverty alleviation in developing countries. Some more recent contributions
include: Acosta et al. (2007; 2008); Adams and Cuecuecha (2008); Adams and Page (2005); Banga
and Sahu (2010); Javid et al. (2012); Jongwanish (2007); Munzele-Maimbo and Ratha (2005);
Nwosu (2009); Siddiqui and Kemal (2006); Spatafora (2005), all of whom document remittances
as significantly reducing the level, depth and severity of poverty, i.e. international migration of
labour has substantial potential benefits for poor people.
However, the potential of remittances to act as informal social protection and insurance mecha-
nisms in a broader sense has rarely been investigated (Sabates-Wheeler and Waite, 2003). Essen-
tially, the bulk of the literature relates migration, formal social protection, and the protection
options they have in different stages of the migration process, only from the migrants’perspective.
On the other hand, as Sabates-Wheeler and Waite (2003) clearly point out (p.17), migration and
hence remittances only have an informal protective role for migrant’s family at origin, if not framed
by the government in a specific policy. This is also highlighted in De la Briere et al.’s (2002)
models of remittances’role: “...migration may be conceptualized as an informal preventive social
protection strategy used by migrant households for insurance and risk diversification”(Sabates-
Wheeler and Waite, 2003, p.19).
The literature on the development effects of remittances in the Western Balkan countries, includ-
ing Macedonia, is scarce but emerging. Petreski and Jovanovic (2016); Petreski and Mojsoska-Bla-
zevski (2015); Petreski and Petreski (2015); Dietz (2010) document prevalent positive roles of
remittances for various facets of the development in Macedonia; Narazani (2013); Dermendzieva
(2010); Braga (2009); Kule et al. (2002) in Albania; Vladisavljevic et al. (2016) in Serbia; Havolli
(2009) in Kosovo; Oru
c (2011) in Bosnia-Herzegovina. Petreski and Jovanovic, eds. (2013)
and Petreski and Petreski, eds. (2016) offer extensive overviews of remittances and their socially-
protective roles and effects on vulnerability and poverty in the Western Balkan countries.
The objective of this article is to investigate whether remittances sent to Macedonia have a role
to play in shielding vulnerable households, by highlighting the importance of a strictly exogenous
instrument in an IV context. To that end, we devise a vulnerability index including income poverty,
unemployment of both spouses, single parent status, as well as conditions of impaired health,
undernourishment, inadequate housing, material deprivation and insufficient clothing, so as to cap-
ture non-income vulnerability conditions. Factor analysis is used to determine the weights of the
different components in the overall index. We regress the index on a standard set of household and
community characteristics, ad ding an indicator of whether the household is a recipient of remit-
tances. As remittances are probably endogenous to vulnerability, we use an instrumental variable
approach. An indicator of a noneconomic motive to migrate is proposed as an instrument, as it is
probably correlated with remittances, since any migrant is likely to send remittances irrespective of
his migration motive; meanwhile this is probably uncorrelated to the shocks on vulnerability. We
use the 2012 Remittances Survey and a conditional mixed process (CMP) estimator. However, one
could marry a foreigner (migrate for non-economic motive) if the household enters into poverty; or
be a non-economic emigrant if any political/military crisis made households economically vulnera-
ble; or depart to study abroad through a scholarship scheme without any intention to return to a
vulnerable context of living. Any proposed instrument for remittances (e.g. those summarized in
Remittances as a Shield to Vulnerable Households in Macedonia 21
©2016 The Authors. International Migration ©2016 IOM
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