Human Capital Formation and Remittances in the Least Developed Countries: Altruistic Approach

by Elias Erämaja

Institution: University of Helsinki
Year: 2015
Keywords: Kansantaloustiede: Yleinen linja
Record ID: 1135635
Full text PDF: http://hdl.handle.net/10138/153737


Migration has been increasing steadily during the past decades and it has become an important phenomenon around the globe. It affects both the developed and the developing world and most of the migration still happens from a poorer country to a richer one (South-North migration). Migration can have both positive and negative effects for the source country’s economy. On one hand, the so-called “brain drain”, where the much-needed talent flows away, can be considered as a bad phenomenon. On the other hand, this negative effect can be mitigated i.e. by the resulting intra-family remittances that contribute to the economy of the source country. Nowadays, the amount of remittances is over three times the amount of the Official Development Aid (ODA). The possibility for migration could also potentially build an incentive for the source country’s individuals to gain education. The purpose of this thesis is to explain these effects in the context of the Least Developed Countries. In this thesis, a model is being built, which explains both the education investments and the remittance decision-making in among the families in the LDCs. The starting point is a two-sided altruistic OLG-model between the parent and the child. It explains the parent’s incentive to invest in her child’s education and also her child’s incentive for remitting money to his parent. The model is first derived in a closed country after which it is compared to a model that is open for migration. It is assumed that both the educated and non-educated worker’s can migrate. When the wage ratio between the educated and non-educated workers’ is smaller in the country of destination than in the source country, the educational attainment level doesn’t increase. Another important issue is the fact that the poor families are liquidity constrained. These assumptions, together with the symmetric information of the true ability of the migrants, are found to decrease the educational attainment level in the source country. Hence, migration seems to benefit the economies of the LDCs only from remittances. If the model assumes asymmetric information between the employer of the destination country and the migrant worker, it is possible to derive a result where the educational attainment level of the source country increases. This is because the workers with lower productivity can benefit from the higher output of the high-productivity workers. The effect is, however, temporary and if the workers are able to signal their true ability with low enough costs, the effect is also relatively small. Asymmetric information might, however, explain the discrimination that the higher than average ability migrants face and thus also explain the high proportion of entrepreneurs among the migrants compared to the destination country’s population. This thesis doesn’t take into account the effects of remittances to the economic growth. The results of the model, however, suggest that at least the LDCs may suffer from the migration due to the decreased attainment level of education and…