UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS IMPACT OF REMITTANCES ON THE HOUSEHOLD’S EXPENDITURE STRUCTURE IN VIETNAM BY LE THI NHU AN MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, DECEMBER, 2015 HO CHI MINH CITY UNIVERSITY OF ECONOMICS VIETNAM THE HAGUE THE NETHERLANDS INSTITUTE OF SOCIAL STUDIES VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS IMPACT OF REMITTANCES ON THE HOUSEHOLD’S EXPENDITURE STRUCTURE IN VIETNAM A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By LE THI NHU AN Academic Supervisor: Dr Nguyen Ngoc Thuy HO CHI MINH CITY, DECEMBER, 2015 ABSTRACT Since the Vietnamese economic reform called “Doi Moi” in 1986, Vietnam has witnessed a blooming in economy as well as the huge remittances flow from the internal and external migrants Many researches choose the remittances behavior for their study Learning from the way people send back their income and the way people in the homeland use this source of financial support is not only support the valuable theory about remittances, but also bring out a practical experiment for one of the developing economy, Vietnam Using the VHLSS 2012 data, this study explore the relationship between remittances and the six categories of household expenditure These categories are food product, non-food (consider for the consumer goods), medical services, education payment, housing facilities payment, durable goods The method using is Tobit regression for the education factor, and OLS for the other Our results show that overall, remittances have statistically significantly impact for food, housing, durable and the medical expenditure Meanwhile, consumption of remittance recipient households is not different from non-recipient households TABLE OF CONTENT CHAPER 1: INTRODUCTION 1.1 The problem statement -1.2 Research objective -1.3 Thesis structure -1.4 Scope of supply - CHAPTER 2: LITERATURE REVIEW -2.1 Household utility and expenditure theory - 2.2 Review of empirical studies International studies - Related studies in Vietnam - CHAPTER 3: PATTERNS OF MIGRATION AND REMITTANCE FLOWS IN VIETNAM 3.1 Overview of Vietnamese remittances - 3.2 International remittances - 3.3 Internal remittances - CHAPTER 4: RESEARCH METHODOLOGY 4.1 Analytical framework - 4.2 Econometric model 4.3 Description of variables 4.4 Data sources CHAPTER 5: EMPIRICAL RESULTS 5.1 Statistical result from VHLSS data - 5.2 Estimation results 5.3 Interpretation of the results CHAPTER 6: CONCLUSION & POLICIES IMPLICATIONS - Page LIST OF TABLES AND FIGURES List of figures Figure 1: Top ten remittances countries -2 List of tables: Table 1: Possible Positive and Negative Impacts of Remittances Table 2: Ratio of immigration and migration in 1999 and 2009 -Table 3: Remittances and household expenditure Table 4: Details of dependent variables -Table 5: Dependent variables -Table 6: Independent variables -Table 7: Number of recipient household -Table 8: Sources of remittances -Table 9: Non-parametric analysis -Table 10: Impact of some household characteristic on the total expenditure -Table 11: Preliminary regression model of remittances impact variables Table 12: Regression results CHAPTER 1: INTRODUCTION 1.1 THE PROBLEM STATEMENT Nowadays, with the explosion of economic transaction between country and region, the numbers of people go to another place different from the birthplace for earning the living has been dramatically increased This migration human resource flow certainly leads to one of the most important monetary flow- remittance Remittances are the money and goods that called internal remittance if migrants living in the city bring back a part of their income to their families in rural area, and external remittance if migrants living abroad send to their families in the mother countries Whether these funds come from internal or external, they can involve a change in consumption patterns of the migrants' households back home Remittances are one of two sources (along with inflows of direct investment FDI) shown in the balance of international payments as funds transfers (net), and represent for more than 10 percent of gross domestic product According to World Bank statistic represented on April 2015, the total remittances flow in all developing countries over the world was 351 billion USD in 2011, reach 436 billion USD in 2014 During these period (2011-2014), all developing regions except for regions in Europe and central Asia- due to the Russia weak economy status and the depreciation of rupee, have been recorded positive growth on the remittance flow Early this year, 2015, economics have expected the total remittance flow in developing countries will have a moderate increase to 440$ billion as the result of the strengthening US dollar and tightening immigration policy Remittance flows are expected to recover in 2016 to reach $479 billion by 2017, in line with the more positive global economic outlook For both estimation of remittance from developing and developed countries, the total remittances transfer will reach to 586$ billion in 2015 and 636$ billion in 2016, according to the report of World Bank Also, according to this report, five largest destinations for migrant are as follow: United State, Saudi Arabia, Germany, Russia and the United Arab Emirate Remittances nowadays play an important role and increase significantly during recent decades In developing countries, remittances is not only the source of income, it is also has a more important role than foreign direct investment Remittances are associated with the significant development impacts At the macro point, remittance has several impacts on the financial system of country and the economy They are considered one of the sources of national income, foreign currency exchange together with the FDI They have a dominant impact on providing financial support on the remittances recipient Orozco, et.al 2005 have made an empirical study and lead to the conclusion that, remittances have lift people out of the poverty and tend to have more savings than those who not receive remittances One side of remittances impact is for the global financial crisis During the recession, remittances to have positive impact on economy, unlike the capital flows or FDI, tends to fall during the downturn period Another saying, remittances are much more stable than many kinds of financial flow The explanation for this stability is that, remittances are migrant-to-family monetary support flow, targeted to help their family- recipient remittances household have a better life At the household level, remittances lead to a higher income that recipient can consume, save or invest Secondly, they help diversify the sources of income depending on the usage of remittances For the developing countries, they are one of the important sources of income for necessary need such as consumption goods, health care, education, ect and reduce poverty With the up-level households, they can use remittance as a source of capital for small businesses and entrepreneurial activities Thirdly, at the micro level, have important implications and financial stability, especially for the international remittance Especially during hard time or in recession period, migrant tend to send more and more remittances to support their family and friends Transparently, remittances directly help to reduce the poverty, increase the welfare of the recipient household Remittances are also used to settle small business, create job for many people The important question is whether the remittances impact on the structure of expenditure of each recipient household or not? If the answer is yes then remittance promotes or inhibits the expenditure and how it affects to consumption section Studying this impact of remittance flows on recipient households has important implications Understanding the impact of remittance flows to expenditure will help raise awareness about the positive as well as the negative that we can promote appropriate policy 1.2 RESEARCH OBJECTIVES The major objective of this study is to identify the impacts of remittances on the expenditure structure of Vietnamese recipient households The study also aims at offering policy recommendations regarding foreign employment and an effective use of remittances Base on the question, we will focus on the two hypotheses tested by the OLS and Tobit regression - Remittances significant improve the likelihood of spending on the six categories of household expenditure - The impact of remittances on the household spending after adding the control variables 1.3 SCOPE OF STUDY As introduced above, this thesis mainly focus on the household expenditure structure affected by the remittances, which can be increase or decrease, or even unchanged according to the fluctuation of remittances receipt To examine at the household level, we use the VHLSS – Vietnam Household Living Standard Survey conducted by The General Statistics Office (GSO) of Vietnam every two year In the thesis, we will use the most updated VHLSS data published in 2012 The study is narrow to the spending of the household, classified into two groups, receive or not receive the remittances Source of remittance are come from the international migrants and the internal remittances from domestic migrants The expenditure structure is classify to six main categories include food consumption, consumer goods, education, health, housing facilities and durable goods 1.4 STRUCTURE OF THIS THESIS The paper is structured in chapters and each chapter will cover the following content Chapter gives the introduction about the research topic including the overall information of remittances and theirs effects; the research objectives to find out what should be focused on this paper Chapter briefly introduces the migration patterns and remittances in Vietnam, Chapter is some literature review covered the impact of remittances on the household consumption structure from the previous researchers Next, Chapter aims at explaining the methodology of research Chapter5 is the statistical models to discuss about the empirical analysis and present regression results and detailed explanation Finally, chapter gives a conclusion for what has been found and some policies recommended based on these finding CHAPTER LITERATURE REVIEW 2.1 HOUSEHOLD UTILITY AND EXPENDITURE THEORY The methodology of this paper is conducted base on the Engel curves Ernest Engel (1821-1896) firstly introduced in his study published in 1857 for the basic theory between food consumption and the income of household He stated that, the spending on food would decline when the household income increase The relation between household expenditure and household income are mathematized as follow: Ci=fi(X,Y,Z,U) (1) where, Ci: expenditure on category i; X: total expenditure; Z: household characteristic; Y: Income of household; u: unobservable variation It represents the relationship between the household bud get shares changed by the specific types of good to total household expenditure Using this model, the difference in consumption between households with different income can be observed To apply this function to this study, income here can be understood by the remittances definition Based on the Engel curve, several functional forms have been proposed for the remittances variable For example, Deaton and Muellbauer (1980) used the Engel curves to exploit the relationship between remittances and spending; they found when income increases, spending for food decrease, spending for clothing, fuel, lightning fee remain the same, whereas the share of luxury goods increase One of the most famous practical studies using the Engel curve, Working-Leser (Working, 1943, Leser, 1963) represented the model which is used as a foundation econometric model of this study The model describes the linearly relationship between the budget shares of one certain expenditure category to the logarithm of the total household spending: (2) schooling_primary schooling_avarage prob_adult _cons N t statistics in parentheses ="* p