Remittances and Risk Diversification in Developing Country Context Evidence from Sri Lanka

Abstract

International labour migration has been increasing in the recent past. As a result, a large flow of remittances circulate among emigrating and immigrating countries. Currently, remittances have become the second largest flow of foreign resources which is more stable than other foreign resources flowing to developing countries. Hence, it has been getting the attraction of policy makers and development agencies. Theory of New Economics of Labour Migration (NELM) hypothesize that remittances help the receiving households to diversify the risk they face specially in the developing country context where the credit market is rather imperfect. However, risk diversification hypothesis lacks sufficient empirical evidence from labour sending developing country context. This study intend to address this gap by empirically examining the risk diversification hypothesis of NELM theory based on a case study carried out in Sri Lanka, one of the main labour sending, developing countries in South Asia. Main objective of the study is to examine the role of remittances in enhancing and diversifying the household income of the remittance receivers that allow them to diversify their risk. Study uses survey data on migration and remittances collected from 750 remittance receiving and non-receiving households in Sri Lanka. Descriptive statistics and Propensity Score matching analysis are used to analyze data. Comparison of income profiles and other descriptive statistics between two groups of households provide evidence for risk diversification of remittance receivers. Remittance receiving households receive income from diversified sources that support them to diversify the risk they face in the local context. Further, it was found that remittances uplift the remittance receivers in the income hierarchy.