Temporary Migration and the Flow of Savings to the Source Country

• Author: Slobodan Djajić
• DOI: http://doi.org/10.1111/rode.12076
• Published date: 01 February 2014
• Date: 01 February 2014

Temporary Migration and the Flow of Savings to the

Source Country

Slobodan Djajic´*

Abstract

The saving behavior of temporary migrants when the duration of their stay abroad is set by the immigration

policy of the host country is studied in this paper. The focus is on the implied flow of savings back to the

source country and how it depends on migration costs, duration of the work permit, and international wage,

interest and price-level differentials. The amount of time that migrants are allowed to work in the host

country is shown to be a key policy variable that affects the flow of savings repatriated to the source

country.

1. Introduction

International migration is an important source of income and foreign exchange for a

large number of economies. Migrants’ remittances and repatriated savings add up to

at least 10% of gross national product (GNP) for dozens of developing countries

(Lueth and Ruiz-Arranz, 2006). In the case of Tajikistan, Uzbekistan, Moldova,

Lesotho, Honduras, Lebanon, Guyana, Jordan and a number of island nations in the

Caribbean and the Pacific, remittances account for more than a fifth of their GNP.

For the large “labor exporters”, such as India, China, Mexico, Pakistan, the Philip-

pines, Poland, Nigeria and Bangladesh, they represent a smaller fraction of total

income, but add, nonetheless, billions and even tens of billions of dollars every year in

support of consumption and investment expenditures of their residents.

Remittances play a very important role in these economies, both at the household

and macro levels (Lucas, 2005). They improve the standard of living, reduce the inci-

dence of poverty1and have a positive effect on investment in education and health

within the migrants’ households.2Savings of returnees facilitate the creation and

expansion of small businesses and help generate employment opportunities for the

non-emigrants.3At the macro level, remittances are a relatively stable source of

foreign exchange that helps sustain economic activity and balance-of-payments equi-

librium. Given the significance of remittances in relation to national income of many

developing countries and the growing interest among the advanced countries in

employing foreign low-skilled workers only on a temporary basis, it is important to

examine how the structure of a guest-worker program and the market conditions in

the host and source countries affect the flow of remittances and repatriated savings

back home.

The theoretical literature on the consumption-saving behavior of temporary

migrants is quite extensive. Analysis has been conducted both in the context of

regimes where the duration of foreign stay is a migrant’s choice variable4and in the

context of more rigid arrangements that require workers to return to their country of

* Djajic´: The Graduate Institute, 132 rue de Lausanne, CH-1211 Geneva, Switzerland. Tel: +41-22-908-

5934; Fax: +41-22-733-3049; E-mail: slobodandjajic@yahoo.com

Review of Development Economics, 18(1), 162–176, 2014

DOI:10.1111/rode.12076

© 2014 John Wiley & Sons Ltd