17 Nov 2015

The distributional impacts of remittances in rural China

Yeming writes*

China’s rural migrants sent home nearly US$30 billion in 2005, which is more than the amount that China or any other country in the world receives from international remittances. Clearly, this amount of money has greatly improved the incomes of rural households. Nevertheless, to understand the contributions of remittances to economic development we have to look beyond aggregate income measures to the distribution of remittances.

Although remittances have not managed to counter the increasing rural-urban income gap, there are studies that suggest that income from remittances did exert an equalizing effect within rural areas. The main reason for this is the rapid expansion of rural people’s access to wage employment that occurred as a result of emerging rural labor markets and the growth of the rural private sector. The growth of the rural private sector has been, amongst other factors, pushed forward by investments from remittances. As such, households that do not receive remittances have also benefited from migration, as a growing private sector provides them with more wage employment opportunities.

However, other studies complicate the story as they find that remittances can have a potential disequalizing effect on rural households, especially between those that are able to send migrants to urban settlements and those that are not. The main observation from researchers is that, in especially the poorer and more land-inwards provinces, it is the middle income households that send migrants, whereas the poorest households are unable to send migrants because they do not have the income to cover the initial costs of migration.

The possible exclusion of the poorest households in the poorest regions from the benefits of remittances suggests the need to improve the option of migration for these households. Simply hoping that remittances of other households spill-over to the households that do not receive remittances is too optimistic, considering the contradictory studies mentioned above. Therefore, in order to reduce rural inequalities, the Chinese government should aim to decrease the barriers for migration and increase investments in the rural private sectors, such that households have more opportunities for wage labor and are as such able to spread their earning activities over a range of on- and off-farm activities in order to minimize risk and increase their returns on labor.

Bottom Line: Although remittances increase rural household’s incomes, particular attention should be paid to the distributional effects of these remittances within rural areas. This is because it is likely that remittances increase inequalities within rural areas, due to the fact that the poorest households cannot cover the initial cost of migration.

* Please comment on these posts from my growth & development economics students, to help them with unclear analysis, other perspectives, data sources, etc.