Literature Review

Introduction

Remittances are transfers of money sent to home country by individuals working abroad. Remittance is mainly a household income and is sent back through formal channels such as cash or in kind and informal channels as well. Following a study carried out by Rapoport and Docquier (2006), the following reasons were found as main motivators behind the decision to remit: (a) altruism, migrant’s willingness to help family in home country, (b) insurance, whereby remittance acts as an additional source of fund in situations of adverse risks and shocks, (c) investment, whereby remittance is used for investment at home or to ensure potential family inheritance.

However, there is no consensus on the exact motive why a migrant remit. A combination of altruistic insurance and investment motives is mostly found in empirical studies. Brown and Poirine (2005) pointed out that the motivations to remit vary according to destination, gender and household composition.

Theories of International Migration

Various theoretical models based on different perspectives, levels and assumptions have been proposed to identify why an individual migrate.

1. The Neoclassical Approach

The neoclassical approach can be traced back to Smith (1776) and Ravenstein (1889). Borjas (1987c) postulated that an ‘immigrant market’ exists between countries. Potential host countries select suitable migrants through immigration policies for the human physical capital gain. In the same way, a migrant will choose to maximize his/her own utility subject to a budget constraint by seeking the country that will maximize his/her well-being. Other constraints might include immigration regulations imposed by potential country and emigration regulations by source country. The central argument is to maximize wages. This theory predicts a linear relationship between wage differentials and migration with the assumption that there is full employment. (Bauer and Zimmerman 1999; Massey et. Al. 1993; Borjas 2008) Wage differentials between regions cause the labor to shift from a low wage region to a high wage region. The larger the differential, the greater the flow will be. Hicks (1932, p.76) stated that ‘differences in net economic advantages chiefly in wages are the main causes of migration. However, subsequent studies found that it is the real expected earning gap that was the major factor in decision making and not absolute real wage differential (Todaro, 1969, 1976; Todaro and Maruszko, 1987)

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The neo classical approach has been particularly criticized for ignoring the effects of sending and host countries, markets imperfections, asymmetric information, relative deprivation, the importance of politics and policies, which are accounted as distortions and additional migration costs.