Trade liberalization, urban-rural remittances and income inequalities in Senegal: micro-foundations and empirical evidence in Computable General Equilibrium analysis

This paper aims at assessing how domestic urban-rural remittances can mitigate macroeconomic shocks in a developing country. When trade liberalization occurs, it may affect the national income structure and increase regional poverty, especially in a vulnerable economy where the volatility of prices and incomes are unavoidable. As underlined by Cox (1990, 2002), Cox and Jimenez (1998) and Morduch (1995), private transfers can significantly help households deal with exogenous risk and similar studies also find evidence of an efficient risk sharing between the poorest households thanks to private cash exchange (Deaton 1997, Townsend 1995, Jalan and Ravallion 1997). In order to deepen the theoretical foundations of micro-economic determinants of remittances, we design a single-country computable general equilibrium (CGE) to capture all the redistributive channels implied by domestic transfers. We then calibrate our CGE model on a recent social accounting matrix of Senegal dated from 2006. We base our work on three important Senegalese household surveys: ESAM I (1996), ESAM II (2002) and ESPS (2005) which provide specific data on disaggregated households such as: spending structures, income structures, and domestic transfers. To assess the mitigating impact of remittances on economic shocks we face two significant challenges: the theoretical ambiguity of remittance decision models and the credibility of transfer data. Identifying the determinants of remittances is puzzling and controversial within the theoretical literature. Numerous theoretical models have been developed based successively on “altruistic motive” (Becker, 1974; Stark, 1985) and “mutual exchange strategy” (Cox, 1987; Cox, Eiser et Jimenez 1998), the latter being especially relevant in the case of intergenerational transfers (Laferrère and Wolff, 2001). Other common models rely on “strategic game” analysis (Stark and Wang, 2002), “insurance strategy”, “moral hazard” (Stark and Levhari , 1982; Rozenzweig, 1988; Lambert, 1994) and “mixed motives” (Lucas and Stark , 1985; Andreoni, 1989; and Cox and al. ,1998). Amongst the models relying on “mixed motives”, “tempered altruism” and “enlightened self-interest” involve both altruistic considerations and mutual exchange strategies. In 2011, Aisa, Andaluz and Larramona assess the remittances’ factors using a family bairgaining model and they conclude that family transfers have non-monotonic effects. Facing these many theoretical conceptions, we choose to first test the different micro-founded specifications in our CGE model and then compare the different outputs after simulating external shocks. We study the altruism motive using a model from Stark (1995, chapter 1) assuming that altruism is mutual, that each agent’s utility is affected by the satisfaction derived from his own consumption and by the utility of the other. The amount of remittances made with altruistic motives are positively correlated with the migrant’s income and degree of altruism, but negatively correlated with the recipient’s income (Stark, 1995). We then focus on the model from Stark (1995, chapter 4) to define remittances as a result of a “strategic” motive. In this model, potential migrants are heterogeneous in skills and individual productivity is not perfectly observable in the host country labor market. Thus, workers are paid the average productivity of their migrant group. This leads to a positive migrant self-selection behavior and cooperative arrangement. Skilled workers decision to remit incorporates a desire to limit migration of less skilled workers to prevent lower skilled migrants’ income affects in the host country. We next focus on remittances as familial arrangements as access to increased income and decreased income volatility. We integrate this dimension in our model and study the case where transfers can be seen as repayments of loans from the migrant for investments in education or migration by his family (Cox and Jimenez, 1992; Cox et al, 1998). Finally, we work with a bargaining model in order to show that bargaining power is a key determinant of the level remittances. The second challenge we address is the credibility of transfer data in household surveys. Reliable national data on bilateral remittances is most often not available or inaccurate. To solve this problem, we calculate bilateral remittances from total amounts of paid and received remittances. Following Ratha and Shaw (2007), we allocate the total remittances received among other households using a weight rule, specific to each micro-founded model that is tested. We apply a three-step methodology for each model of transfers tested: the first step consists in estimating bilateral transfers among households and using transfers determinants as a distribution rule, the second step aims at implementing specific micro-foundations in our CGE model , and the third step consists of implementing different scenarios of international shocks to assess the role of domestic transfers. Applying this method for each microeconomic model, we compare the results and describe the nature of transfers in Senegal with attention to their potential for cushioning macroeconomic shocks.