The role of loans and remittances in consumption and investment decisions in urban ethiopia
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The role of loans and remittances in Consumption and Investment decisions in Urban Ethiopia. Abbi Kedir University of Leicester, UK & Gamal Ibrahim, UNECA October, 2011. Outline of the talk . Purpose Motivation Related literature Theory Data Methodolgy

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The role of loans and remittances in Consumption and Investment decisions in Urban Ethiopia

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The role of loans and remittances in Consumption and Investment decisions in Urban Ethiopia

Abbi Kedir

University of Leicester, UK

&

Gamal Ibrahim, UNECA

October, 2011


Outline of the talk

  • Purpose

  • Motivation

  • Related literature

  • Theory

  • Data

  • Methodolgy

  • Results and discussion


Purpose

  • Do remittances and loans lead to higher/lower household asset accumulation, food and non-food consumption?

  • Do remittances and loans increase the likelihood of self-employment or entrepreneurship?


Motivation I

  • Finance and growth (macro level ‘link broken’)

  • Informal financial transfers are fundamental anchors of welfare and employment

  • Most micro level literature focuses on what determines access to credit and the motives for private transfers such remittances (Alvi and Dender, 2009).

  • Often credit and remittances are studied separately (Christensen and Pan, 2010).


Motivation II

  • There is a dearth of evidence on how access to credit and remittances affect household investment and consumption decisions in SSA ( an attempt to trace the mechanism)

  • Labour market – one mechanism to link growth and poverty (Kedir et al 2011).

  • Provide relevant policy recommendations


Literature(only micro) I

  • Alvi and Dender, 2009 : what factors significantly affect household loans and private transfers in Ethiopia.

  • Liverpool and Winter-Nelson (2010) no relationship b/n participation in microfinance programs and the use of technologies or consumption growth among the poorest households (Ethiopia).

  • For other households, microfinance has positive effects on both consumption and asset growth as well as on the use of improved technology.


Literature II

  • Adams (1998)- effect of remittances on asset accumulation in Pakistan. Household are impatient (high discount rate) and do not sacrifice present consumption for the sake of asset accumulation.


Theory I

  • Remittance flows over long distances (severe asymmetric information problem).

  • Credit need to be repaid and often provided by informal lenders (less serious asymmetric information problem)

  • Propensity to consume(invest) in the former (latter) is stronger than to invest(consume).


Theory II

  • We test the following propositions:

    &

    ;


Data and Econometric framework

  • Panel data from urban Ethi0pia (1994,1995, 1997, 2000, 2004 on 1500 households)

  • Fixed effects of consumption and asset accumulation equations (Hausman test)

  • Random effect Probit of self-employment (stability of quadrature points)


Key Results

  • Remittances are positively associated with food consumption, non-food consumption and asset (unproductive) accumulation.

  • Remittances are negatively associated with self-employment and entrepreneurship while the opposite is true for credit


Policy I

  • The need for credit access to households to create employment is obvious.

  • Self-employment in the data is characterised by low-tech and low return small/micro firm activities.

  • Hence for meaningful development volume of capital provided must be much larger than what households can get via informal networks


Policy II

  • Small/micro firms are unlikely to grow large. They simply provide subsistence for millions of unskilled workers.

  • About 800,000 urban informal sector firms (mfg, trade, services) with 1 million people employ.ed (Soderbom, 2010)


Future work and econometric issues

  • Distinguish between domestic and external remittances

  • Remittances and labour supply to explore why remittances lead to lower self-employment.

  • Endogeneity (IV) and parameter heterogeniety (quantile regression).


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