WPS4972 d e z ri o h ut A e Policy Research Working Paper 4972 r u s o cl s Di c bli u P d e z ri o h ut A e Remittances and Natural Disasters r u s o cl s Di c Ex-post Response and Contribution bli u P to Ex-ante Preparedness ed Sanket Mohapatra z ori George Joseph h ut A Dilip Ratha e r u s o cl s Di c bli u P d e z ri o h ut A e r u s o cl s Di c The World Bank bli Sustainable Development Network Vice Presidency u P Global Facility for Disaster Reduction and Recovery Unit & Development Prospects Group Migration and Remittances Team June 2009 Policy Research Working Paper 4972 Abstract Macro- and micro-economic evidence suggests a international remittances seem to rely more on cash positive role of remittances in preparing households reserves and less on selling household assets or livestock against natural disasters and in coping with the loss to cope with drought. In Burkina Faso and Ghana, afterwards. Analysis of cross-country macroeconomic international remittance-receiving households, especially data shows that remittances increase in the aftermath of those receiving remittances from high-income developed natural disasters in countries that have a larger number countries, tend to have housing built of concrete of migrants abroad. Analysis of household survey data rather than mud and greater access to communication in Bangladesh shows that per capita consumption was equipment, suggesting that they are better prepared higher in remittance-receiving households than in others against natural disasters. after the 1998 flood. Ethiopian households that receive This paper—a joint product of the Global Facility for Disaster Reduction and Recovery (GFDRR) Unit, Sustainable Development Network Vice Presidency, and the Migration and Remittances Team of the Development Prospects Group, Development Economics Vice Presidency—is part of a larger effort of the GFDRR unit to disseminate the emerging findings of the forthcoming joint World Bank-UN Assessment of the Economics of Disaster Risk Reduction. Thanks to Antonio C. David for his contribution to the macroeconomic analysis when he was at the Development Prospects Group in early 2008. We are grateful to the reviewer, Dean Yang, for his advice and suggestions, and to Saroj Kumar Jha, Mirafe Marcos , S. Ramachandran, Apurva Sanghi and participants at a workshop at the World Bank for their constructive comments. Ani Rudra Silwal provided excellent research assistance. Policy Research Working Papers are also posted on the Web at http:// econ.worldbank.org. The GFDRR team leader Apurva Sanghi can be contacted at [email protected]. Correspondence regarding the paper should be addressed to Sanket Mohapatra at [email protected]. The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. Produced by the Research Support Team Remittances and Natural Disasters: Ex-post Response and Contribution to Ex-ante Preparedness Sanket Mohapatra, George Joseph and Dilip Ratha World Bank 1818 H Street, NW Washington DC 20433 USA Working paper version updated: October 2011 Forthcoming in Journal of Environment, Development and Sustainability Keywords: Natural disasters, migration, remittances, poverty, coping strategies, insurance, development finance ______________________________________________________________________________ * This paper—a joint product of the Global Facility for Disaster Reduction and Recovery (GFDRR) Unit, Sustainable Development Network Vice Presidency, and the Migration and Remittances Team of the Development Prospects Group, Development Economics Vice Presidency—is part of a larger effort of the GFDRR unit to disseminate the findings a World Bank-UN Assessment of the Economics of Disaster Risk Reduction titled ―Natural Hazards, UnNatural Disasters‖. Thanks to Antonio C. David for his contribution to the macroeconomic analysis in the first part of the paper. We are grateful to Apurva Sanghi, Dean Yang, Saroj Kumar Jha, Mirafe Marcos, S. Ramachandran for their constructive comments and suggestions. Ani Rudra Silwal provided excellent research assistance. Correspondence regarding the paper should be addressed to Sanket Mohapatra at [email protected]. Remittances and Natural Disasters: Ex-post Response and Contribution to Ex-ante Preparedness 1. Introduction The literature suggests that migrant remittance flows increase in the aftermath of natural disasters, macroeconomic or financial crises, and act as a safety net for households that have migrants abroad (World Bank 2006).1 While there is anecdotal evidence and a number of case studies on this phenomenon, there is little empirical evaluation of the relationship between remittances and natural disasters (see next section for literature survey). In this paper we examine three inter-related questions: (1) How do remittances respond ex-post to natural disasters? (2) Do remittances help recipient households to maintain consumption expenditure in the aftermath of disasters? (3) Are remittance- receiving households ex-ante better prepared for disasters such as earthquakes and floods? We use cross-country macroeconomic data to examine the ex-post response of migrant remittances to natural disasters for a large sample of developing countries, income groups and geographical regions to examine the hypothesis that remittances respond in a countercyclical (compensatory) manner to natural disasters in the recipient economies. This paper also relies on micro-level household survey data for several developing countries (Bangladesh, Burkina Faso, Ethiopia and Ghana) to understand how remittances sent by migrants residing in high-income and developing countries contribute to ex-post disaster relief for the affected households, and to ex-ante preparedness against future natural disasters. To briefly summarize the results based on the different hypotheses tested for the cross-country data and the household surveys from four countries, we find the following. First, remittances increase in response to natural disasters in countries that have a larger emigrant stock as a share of the home country population. Second, in the period after a flood in Bangladesh in 1998, per capita household consumption was higher for households that receive remittances, even after controlling for the possibility that these households may be self-selected. Third, international remittance-receiving households in Burkina Faso and Ghana, especially those that receive remittances from high-income 1 There are about 200 million international migrants. A large share of these international migrants or about 156 million people are from developing countries (Ratha and Shaw 2007). Migrants from developing countries sent home an estimated $305 billion in officially recorded remittances in 2008, with these flows larger than official aid and foreign direct investment in many developing countries. 2 OECD countries, have housing built of concrete rather than mud and have greater access to communications, which can help in coping during natural disasters. Finally, Ethiopian households that receive international remittances tend to rely more on their own cash reserves during shocks to food security, and less on selling productive assets such as household assets or livestock. The rest of the paper is organized as follows. The next section reviews the literature on natural disasters, migration and remittances. Section 3 presents cross-country analysis on the ex-post response of remittances to natural disasters. In section 4, we explore using household survey data to analyze ex-post responses and ex-ante preparedness. Section 4.1 considers how remittances to Bangladesh helped households in maintaining consumption after a severe flood (a rapid-onset but predictable disaster) in 1998. Section 4.2 considers for Burkina Faso and Ghana whether remittance-receiving households are ex-ante better prepared for disasters such as earthquakes and landslides. This section provides an analysis of how recipient households often use remittances for investment in stronger housing and improving access to communication, which can help in reducing vulnerability to natural disasters.2 Section 4.3 explores the coping strategies used by remittance-recipient and non-recipient households in Burkina Faso with predictable and recurrent droughts. Section 5 concludes. 2. Natural disasters, migration and remittances: Review of the literature This section provides a review of the response of remittances to natural disasters drawing on the macro economic literature and household level studies. Anecdotal and case study evidence seem to suggest that contrary to private international capital flows (which are usually procyclical), remittance flows increase or remain stable after the onset of large shocks such as natural disasters, macroeconomic or financial crises and armed conflicts (Clarke and Wallsten, 2004, World Bank, 2005 and Weiss Fagen and Bump, 2005). Yang (2007) provides cross-country evidence on the response of international flows to hurricanes, and concludes that for poorer countries, increased hurricane exposure is associated with greater remittance flows. In addition, it is estimated that in the Caribbean, a 1 percent decrease in real gross domestic product (GDP) is associated with a 3 percent increase in migrant remittances with a two-year lag (Mishra 2005). Figure 1 and Figure 2 provide certain instances of the response of remittances to large natural disaster in selected countries. These indicate substantial variation in the increase in remittances 2 Such income shocks may be factored in the inter-temporal consumption and remitting decisions. 3 during and after natural disasters, with a substantial increase in remittances after the disaster in about half of those countries. Furthermore, there is an emerging consensus in the literature that migration and remittances are part of an overall livelihood strategy by which households try to insure against shocks in disaster prone regions. Migration flows increased in the aftermath of disasters as in Jamaica in 1989 after hurricane Gilbert and in Central America in 1998 after hurricane Mitch (Wisner, 2003). In El Salvador, an agricultural shock increases the probability of migration of a household member to the United States by 24.3 percent (Halliday 2006).3 Increased migration can lead to an increase in remittance transfers to the households after disaster events, but with a lag (Attzs, 2008), although figures 1 and 2 suggest that it is not necessary that there would be an unambiguous increase in remittances in all countries after natural disasters.4 Figure 1: Increase in remittances after large natural disasters (disaster costs in constant 2000 US dollars) Remittance as % of GDP Year before 0.04 Disaster year 0.035 Year after 0.03 0.025 0.02 0.015 0.01 0.005 0 India 1992 Bangladesh China 1999 Mexico 2005 1998 * These represent the years in which developing countries experienced the highest damages from natural disasters in constant 2000 US$. Estimated damages due to natural disasters were $9.4 billion in India in 1992, $4.5 billion in Bangladesh in 1998, $10.4 billion in China in 1999, $6.9 billion in Mexico in 2005. Damages are in constant 2000 US dollars. Source: Authors’ calculations using International Emergency Disasters Database (EM-DAT) and World Development Indicators (WDI), World Bank. 3 However, Yang (2007) shows for El Salvador that idiosyncratic shocks to the household such as death of a household member increase the likelihood of emigration, while covariate shocks such as earthquakes, where the entire population is affected, can even reduce emigration. 4 Furthermore, if migration and remittance decisions are undertaken as a part of the overall coping strategy by households in disaster prone regions, we may not necessarily observe a marked increase in remittances in the wake of slow onset disaster event such as drought since remittances are factored into the inter- temporal consumption decisions and will not change much unless there is an idiosyncratic shock. 4 Figure 2: Increase in remittances after large natural disasters (disaster costs as share of GDP) Remittance as % of GDP 0.28 Year before Disaster year 0.23 Year after 0.18 0.13 0.08 0.03 -0.02 El Salvador 1986 Honduras 1998 Guyana 2004 Jamaica 2004 * These represent the years in which developing countries experienced the high damages as a share of GDP from natural disasters. Damages due to natural disasters were 0.04 percent of GDP in El Salvador in 1986, 0.08 percent of GDP in Honduras in 1998, 0.01 percent of GDP in Guyana in 2004 and 0.01 percent of GDP in Jamaica in 2004. Source: Authors’ calculations using International Emergency Disasters Database (EM-DAT) and World Development Indicators (WDI), World Bank. Migrant remittances have an important consumption-smoothing effect and can contribute to financing household investment in concrete housing and communication equipment to increase ex-ante preparedness and to mitigate the impact of disasters in disaster prone areas. Several country studies using household survey data confirm the consumption smoothing role played by remittances in recipient households (see Quartey and Blankson 2004). Yang and Choi (2006) show for the Philippines that remittances help to compensate for nearly 65 percent of the loss in income due to rainfall shocks.5 Evidence from small-scale surveys conducted after disasters suggest that migrant remittances may have helped recipient households. A survey of households in four villages in Pakistan after a devastating earthquake in 2005 reveals that migrant remittances were important factors in disaster recovery and reconstruction (Suleri and Savage, 2006). The authors suggest quickly restoring banking and financial services to facilitate remittance flows. Remittance-receiving households in the Aceh region of Indonesia were found to have recovered faster from the 2004 Tsunami though because of immediate relief provided by migrant remittances, although remittance transfers were adversely affected due to the disruption of financial services and informal remittance transfer channels (Wu 2006). 5 However, it is possible that the loss of the most able household members who migrate may make it difficult for the remaining household members to cope with shocks including natural disasters. 5 In Gonavies, the largest city in Haiti, in-kind transfers from friends and relatives abroad, especially in the United States, after the cyclone Jeane in 2004 played an important role in relieving the immediate distress from the devastation caused by the cyclone (Fagan 2006).6 There was a 15 percent increase in remittances to Granada after hurricane Ivan in 2005, which helped the households to recover from the disaster (Harvey and Savage 2007). Increased remittances helped to smooth household consumption and compensate for the loss of assets after an earthquake in El Salvador in 2001 (Halliday 2006). There is increasing emphasis in the policy debates on measures that can reduce the ex-ante vulnerability to natural disasters.7 In disaster prone regions or countries, ex- ante actions taken by households with migrants (community and the government) in preparation for a possible disaster can substantially reduce the loss of human life and vulnerability in the aftermath of the disaster. For example, programs to reduce the impact on livelihoods have been introduced in countries such as Jamaica that face recurrent devastating cyclones.8 However, although there is substantial evidence of how remittances sent by migrants abroad contribute to ex-post responses, there is little evidence of how remittances can facilitate ex-ante preparedness that reduces the extent of damages in the event of a natural disaster.9 For example, remittances can contribute to disaster preparedness by households by making resources available for investments in home improvements so as to increase their disaster resilience. Collective remittance incomes and diaspora contributions can be channelized to augment the efforts of the government and international organizations. 6 In-kind remittances, especially from domestic migrants, are important in many countries, but there is very little reliable data on these. The reported values of remittances from the household surveys include in-kind remittances to some extent. 7 The Hyogo framework (www.unisdr.org/eng/hfa/hfa.htm) recognizes the importance of integrating disaster concerns in the larger context of development and vulnerability reduction. 8 For example, these include green houses for horticulture that can be easily disassembled and reassembled before and after hurricanes (UN News Center ―To Succeed, Disaster Management Strategies Must Target, Reduce Inequalities, Vulnerabilities Faced By Poor, UN Economic and Social Council told.‖ 16 July, 2008 (http://www.un.org/News/Press/docs/2008/ecosoc6363.doc.htm)). 9 There is some evidence from a related literature on household coping strategies that receiving additional income may reduce ex-ante vulnerability. Udry (1994) finds for a sample of rural households in northern Nigeria that households facing increased weather variability deplete grain inventories at a slower rate to cope with the possibility of income shocks due to weather fluctuations. In a similar work, Paxson (1992) finds for a sample of rural farmers in Thailand that farm households experiencing rainfall shocks save a significantly larger portion of transitory agricultural income in order smooth consumption from income fluctuations. In another study, Rosenzweig and Wolpin (1993) show that farmers in India are more apt to sell bullocks when they experience income shocks. 6 3. Macroeconomic evidence of the response of remittances to natural disasters In this section, we empirically investigate the following question for a large sample of developing countries and across income groups and geographical regions: Do remittances respond in a countercyclical or compensatory manner to natural disasters in the recipient economies? The empirical exercise is undertaken primarily to understand whether remittances respond to natural disaster events in home countries. 3.1 Data The outcome variables of interest are migrant remittances to a country i in a year t. The econometric analysis is based on estimates of remittance flows to developing countries from the World Bank’s World Development Indicators (WDI). Data on GDP per capita and population comes primarily from the same source. Summary statistics of the different flows and other variables of interest are presented in table 1. Natural disaster data on the occurrence and effects of natural disasters are from Center for Research on the Epidemiology of Diseases (CRED), International Emergency Disasters Database (EM-DAT).10 CRED defines a disaster as a natural situation or event which overwhelms local capacity, necessitating a request for external assistance (Noy, 2008, EM-DAT Glossary of terms). These disasters can be grouped into several categories, of which meteorological disasters (floods, wave surges, storms, droughts, land slides and avalanches), climatological disasters (disasters caused due to long run or seasonal climatic variability such as drought, extreme temperatures and wild fire) and geophysical disasters (earthquakes, tsunamis and volcanic eruptions). Each of these categories mentioned above are not mutually exclusive and should be considered more as a typological classification. In our analysis, we focus primarily on all disaster events taken together within a country in a year rather than each of them examined separately. A reason for the focus on the total impact of all disasters in this paper is the possibility that different regions in a country can be affected by different types of disasters in a given year and since remittances data is available only at annual 10 The Center for Research on the Epidemiology of Diseases (CRED) has collected and made publically available data on the occurrence and effects of natural disasters from 1900 to the present with a worldwide coverage. The database is compiled from various sources, including UN agencies, non-governmental organizations, insurance companies, research institutions and press agencies. The EM-DAT data is publicly available on CRED's web site at: www.cred.be. 7 frequency at the country level, we would not be able to separate the response of remittances for a specific disaster. Table 1: Summary statistics for developing countries Variable Standard Obs. Mean deviation Remittance as a share of GDP 3,974 3.4% 7.9% Private debt as a share of GDP 3,976 0.7% 2.6% Portfolio equity as a share of GDP 3,661 0.1% 0.5% Emigrants as a share of origin country population 4,995 9.2% 12.1% Per capita GDP (constant 2000 US$) 4,035 1,469 1,530 Number of people affected per 100,000 population 2,142 4,148 12,295 Disaster damage as a percentage of GDP 898 0.004% 0.02% Source: Authors’ calculations using International Emergency Disasters Database (EM-DAT) and World Development Indicators (WDI), World Bank. We utilize reported measures of the total amount of direct damage (DDAMAGE) and the total number of people affected (DAFFECTED) for the years 1970- 2006 for all countries on which data is reported in EM-DAT. The literature on the macroeconomic impact of natural disasters has used similarly aggregated variables (see Noy 2008). 3.2 Empirical strategy and estimation This section will attempt to provide more systematic cross-country evidence using data on all available countries on the possible existence of this ―countercyclical‖ or compensatory effect of remittance flows in the context of natural disasters at the aggregate level. The cross-country regression is estimated for the following specification: Y = α + β*Y + γ1*Disaster variable + γ2*Disaster variable i,t i,t-1 i,t-1 i,t-1 + δ1*Disaster variable *Emigrantstock i,t-1 i + δ2*Disaster variable *Emigrantstock i,t-1 i + Region dummies + Time trend + error i i,t where Y is the remittances as a share of GDP. The disaster variable is disaster cost as it share of GDP in the previous year, or people affected as share of population in the previous year. We include an interaction term for the stock of emigrants and the disaster variable in a country in a given year. Other controls include per capita GDP, region fixed effects and time trend. We introduce lagged remittances as an additional explanatory variable to account for the observed persistence of remittance flows over time. 8