International the existence of market failures and

International migration, an integral part of our increasingly globalized world, serves as a key source of income for people in developing countries. In 2014, migrants sent over $436 billion back to their home countries in the form of remittances (United Nations, 2015, p. 2). Many factors drive people to leave their home countries, but migrating for economic reasons remains at the forefront in our highly divided world. One of many theories of international migration, the new economics of migration explains why families and households send members abroad to earn income, given the existence of market failures and risks to income in developing countries. The money migrants send back, remittances, not only help the households that receive them, but have developmental implications for these migrant-sending countries.  The theory of the new economics of migration assumes the family or household to be the unit of analysis in understanding international migration. It sees migration as a decision to not only maximize expected income, as the neoclassical theory proposes, but a way to minimize the risks to income and effects of market failure (Massey et al., 1993). Given the relatively weak or non-existent safety nets in developing countries, such as crop insurance, unemployment insurance, and futures markets, it makes sense for households to split their members between the domestic and international economy (Massey et al., 1993). In the event of a poor agricultural season in the domestic economy or if a primary income provider falls sick and is unable to work, households can rely on migrant remittances—assuming that in the destination area, “wages and employment conditions are negatively correlated or weakly correlated with those in the local area” (Massey et al., 1993, p. 436). Thus, migrant remittances become the safety net for these households.Since the 1990s, remittances have actually outnumbered development assistance and portfolio investment in developing countries (Yang, 2011, p. 129). Unlike other programs dedicated to targeting poverty without necessarily understanding the population’s direct needs, remittances are transfers of money that enable recipients to use them at their discretion. In addition, remittances actually increase during economic downturns, as migrants abroad work to send more money to support their families. This is unlike private capital flows, like foreign direct investment—which dropped 39.7% during the 2008-2009 financial crisis (Yang, 2011, p. 129). To transfer remittances, both formal and informal channels exist. Formal channels include banks, credit unions, and companies like MoneyGram and Western Union, while informal channels can include systems operated out of both the sending and receiving countries by nonfinancial firms or brokers (Yang, 2011, p. 132). In 2010, the top three countries receiving the most in remittances were India, China, Mexico, at $55 billion, $51 billion, and $22.6 billion, respectively (Yang, 2011, p. 134). However, when displayed as a percentage of a country’s GDP, remittances are shown to be heavily relied upon in smaller economies, like Lesotho, Honduras, and Jordan, at 25%, 19%, and 16%, respectively (Yang, 2011, p. 134). To those receiving them, remittances present an advantage. They do not have to be paid back, like a microcredit loan, and there is no worry over exorbitant interest rates, as is the case with informal money lending. However, the volume of remittances migrants—specifically skilled migrants—send home tends to wane after increasing for a period of around five years (Cohen, 2011, p. 105). This can attributed to severed ties between the migrant and his or her family, or the possibility of reunification of the migrant and the rest of the family in the destination country, since migration facilitates networks (Cohen, 2011, p. 105). Although, this is not always the case, as some second and third generation migrants still send remittances as a way to preserve cultural ties. The amount of remittances migrants send and what share of migrants’ income they make up varies from country to country. Migrants from Senegal working in Spain send a remarkable 49.9% of their annual income in the form of remittances, while Turkish migrants working in Germany remit only 2.14% (Yang, 2011, p. 135). Regardless of the amount, this is still money flowing to migrant-sending countries and becomes put to use in one way or the other. At first glance, it would seem that remittances automatically help reduce or alleviate poverty, but it is typically not the poorest people who migrate, nor the poorest countries that send out migrants. Migration is a costly and uncertain practice, leading those at the upper end of the income distribution in a community to usually initiate it. Remittances then—especially if they are significant—can negatively alter the income distribution by making these upper-income households even richer (Stark, 1986, p. 723). However, according to network theory, migration leads to declining costs and risks, creating links that allow non-migrants to leave much more easily than the initial migrants did and smoothing out the income distribution (Massey et al., 1993, p. 449).  The most obvious developmental effect of remittances is increased consumption, specifically for households starting with very low consumption levels. It has been argued that remittances, like cash transfers, support “conspicuous consumption” or “temptation goods,” like alcohol or drugs, but this is a misbelief. Typically, recipients of remittances spend them on foodstuffs and healthcare. This general aversion to increased consumption—even when it is on welfare enhancing goods—is grounded in a way of looking at development in a purely monetary sense; that an increase in income is the end and not a means to an end. Expenditure on “housing, sanitation, health care, food and schooling” has the power to improve people’s well-being and productivity, or in Amartya Sen’s words, their “capabilities” (De Haas, 2005, p. 1274) Remittances have been shown to increase the likelihood of children receiving an education, with evidence from Mexico that children of remittance-receiving households complete .7 to 1.6 years more of schooling (Brown, 2006, p. 62). There has been much talk over remittances as a “development mantra” in the potential they hold for investment in migrant-sending countries (De Haas, 2005, p. 1276). In fact, it has been shown from evidence from the Philippines and Mexico that remittances expand investment in farming equipment and increase small businesses investments (Ratha et al., 2010). However, much of the potential for investment has yet to be unlocked due to policies in the receiving countries, as well as economic and political environments in sending countries that are unconducive to investment. These factors prevent migrants with the potential and freedom to invest in their home countries from actually doing so. In the Netherlands, for example, politicians viewed investment into home countries by migrants as a waste of income and a lack of integration into the Dutch economy on the part of these migrants (De Haas, 2005). In 2004, they proposed abolishing dual-nationality for third-generation immigrants, further ingraining this false notion that migrants investing in their home countries are unintegrated in the economy they work in (De Haas, 2005, p. 1276). Restrictive immigration policies in receiving countries make migrants more likely to settle in these countries and possibly bring their families to live with them out of fear of the inability to return to their home countries. This was the case with Turkish and Moroccan migrants in Europe following the immigration policies in the aftermath of the 1973 oil crisis (De Haas, 2005, p. 1278). Furthermore, the environment and policies in sending countries can inhibit the likelihood of investment. Such environments unconducive to investment could be riddled with red tape, political instability, market failures, poor public goods, and trade barriers, for example (De Haas, 2005). Transaction costs—the source of profit for banks and companies funneling remittances—and the taxation of remittances also inhibit the full developmental potential of remittances. However, there have been some measures taken by migrant-sending countries to put remittances to good use. In Mexico, the government matches every one dollar in remittances raised by Hometown Associations, or immigrant alliances, with two or three dollars of their own to support development and infrastructure projects (Brown, 2006, p. 66). Korea has required that a certain amount of remittances be funneled into a national fund for development (De Haas, 2005). However, such an idea has not worked in all countries, such as Pakistan, Bangladesh, and Thailand. Pakistan and India have actually adopted and encouraged tax-free foreign exchange accounts for remittances (Brown, 2006, p. 66). Nevertheless, these examples highlight the key role the government needs to play in supporting the developmental potential of remittances.In talking about the developmental effects of migration in general, the idea of “brain drain” frequently comes up. Brain drain is defined as the loss of highly skilled or talented workers from migrant-sending countries. According to the theory of cumulative causation, because migration to certain countries signals high returns to greater education and skill, more skilled people are typically the ones who migrate (Massey et al., 1993). This leads to a depletion of human capital in migrant-sending countries, but this is only true in certain countries, as most migrants are not highly skilled. In a study done on 33 labor-exporting countries, less than 10% of migrants in two-thirds of these countries were found to be highly-skilled (De Haas, 2005, p. 1272). However, given that a high return to their skills incentivizes more educated people to migrate, there must be an investment in education in the migrant-sending countries in the first place. If this education is publicly financed, future remittances could be able to cover the undertaken costs. However, if skilled migration doesn’t generate enough remittances, governments may find it in their interest to cut funding for education (Brown, 2006). The excessive focus on brain drain overlooks the possibility of brain gain, the positive effects of such migration. For one, if highly skilled workers are migrating, they will likely be making more money in their destination country, and then be able to remit more—or at least initially. It may be more of a use of their productivity as well, given that there is high unemployment of and lower returns to skilled labor in developing countries. In addition, these migrants may bring back new ideas, attitudes, and information from the destination country that can alter the sociopolitical climate of their home countries in the long run, through reforming domestic policies (De Haas, 2005). In order to tap into the developmental potential of returning migrants with increased knowledge, migrant-sending countries should not adopt policies that alienate these migrants, like refusing to let them take certain jobs. Likewise, migrant-receiving countries should not interpret migrants’ dedication to their home countries as a lack of integration in their society. Instead, they should support circular migration, through easier access to re-entry visas and allowing for dual-nationality, for example. Remittances have not only served as a source of income for people in developing countries, but have developmental implications for the countries they live in. With hundreds of billions of dollars being sent back to home countries each year, migrants, at the most basic level, allow their families to increase consumption on foodstuffs, healthcare, and education and improve well-being and productivity. On a more advanced level, migrants can finance investments in agricultural equipment and business investments. However, the scope for investment is limited by the policies in migrant-receiving and -sending areas, as well as the economic and political environments of migrant-receiving countries. Such policies that discourage circular migration inhibit migrants’ abilities to invest in their countries of origin and encourage settlement in destination countries. On the other side of the spectrum, environments unconducive to investment in migrant-sending countries will also discourage migrants from investing. This brings to light the active role governments must play in creating policies that support the developmental potential of remittances—and migration in general—in both the sending and receiving countries. Quite paradoxically, however, if remittances have an increased effect on the development of migrant-sending countries in the future, they may eventually undermine the need for them in the first place.