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Dean Yang works to increase the economic benefits of migrant earnings for their families in El Salvador

Professor Dean Yang

Professor Dean Yang

Thursday, September 4, 2008

Dean Yang has been an Assistant Professor at the Ford School and an Assistant Professor of Economics since 2003. His research deals with the economic problems of developing countries, including international migration, microfinance, disasters and risk, and human capital.

In 2007, Dean received a major grant from the John D. and Catherine T. MacArthur Foundation, the Inter-American Development Bank, and the Multilateral Investment Fund to design and evaluate a project titled, "Financial Innovations to Stimulate Remittances and Savings: A Field Experiment Among Migrants from El Salvador." Dean and his co-authors will conduct a follow-up survey in spring of 2009, with final results expected in the summer of 2009.

Second-year MPP student Andrew Schroeder sat down with Dean to learn more about the origins and goals of this project.

A: As I understand it, your focus right now is on the role of financial remittances in migrant communities. Why are you focusing on this particular question within the broader context of international development?

D: Remittances have gotten a lot of attention from researchers recently, mainly because it's only recently been recognized that the flows are so large in dollar terms. In 2005, for example, international remittances going from developed countries to developing countries were about 160 billion dollars, which is a huge international flow. It's about the same size as international foreign direct investment flows from rich to poor countries and it's much larger than foreign aid. Official development aid flows from rich to poor countries only amounted to about 79 billion dollars in 2005.

A: What impact do remittances have in the developing world?

D: In addition to raising consumption levels—nutrition and such—they also end up being used for long term investments like education, health and small enterprise investment. Some work that I've done in the Philippines documents that.

A: For the project you're currently working on between El Salvador and the U.S., what are your main goals?

D: What we're trying to do in this project is to give migrants the ability to control directly what fraction of the remittances are saved as they're sent back to the home country. Many migrants say they desire a facility that does this because right now their only ability to save is really sending cash back to a family member and requesting from them that some fraction of the money be saved. We're working with a large Salvadoran bank to design savings products geared towards migrants in the United States. We started with a study sample of about 1,500 migrants in DC and offered a fraction of them these new savings accounts. Basically what we're offering them is an ability to open a savings account in their own name in El Salvador and then the encouragement to use it—to deposit some fraction of their remittance flows into these savings accounts as opposed to just sending them in the form of cash to family members.

A: One thing I think is very interesting about this is that you're creating an entirely new program, something which didn't exist before the study, and then using the creation of that program as a way to study this larger problem.

D: Yes. You know, I think one thing that people should do more of is to think about innovating facilities or ideas that don't currently exist on the planet and try them out in real world settings. See if they improve peoples' lives. So in some ways that's what we're trying to do with this project.

A: How is that different from more conventional program evaluation studies?

D: It's a more difficult project and it takes longer to implement if you're actually involved in the design stage. There are inevitably delays when you're trying out new products, designing them, finding out the first way you designed the thing isn't so ideal and then having to go back to the drawing board. So it's more costly in terms of time and effort to be involved in the actual innovation process itself. But it does eventually have the benefit of bringing something new to the table, creating something that didn't exist before and demonstrating that it works.

A: How did that program design process work?

D: We approached the bank when we wanted to get the project started with a very general idea that we wanted to design new financial products for migrant families. I happen to have a connection with the CEO of the bank from a consulting project that I did in El Salvador in 2003, Banco Agricola, so I sent him an email. He was interested and he got us in touch with the individual in charge of the bank's business in the United States. We spent a lot of time working with them to understand the characteristics of the migrant population they were serving in the U.S. We used U.S. census data to try and get a sense of what the population looked like. We did interviews, focus groups and surveys of migrants in Washington DC, probably 100 or 200 migrants that we ended up interfacing with over the course of several months. On that basis we recommended these saving plans.

A: You've written elsewhere about how remittances may serve as a form of insurance for migrants. Insurance is clearly one of the things that's most often desired by poor populations, but which is simply not available to them for a whole variety of reasons. I was wondering if you might explain how remittances might work as a form of insurance.

D: Well, you're absolutely right. In some work that I've done in the Philippines I've shown that in areas that are hit by unusual drought that reduces families income from agricultural production, if a family has a migrant overseas those drought-driven declines in agricultural production tend to be compensated for by new inflows of remittances. So in that sense remittances serve as insurance against unexpected declines in income. In the families I looked at, about 60 percent of income loses were compensated for by new inflows of remittances. By contrast, there was no such informal insurance in families that didn't have migrants. So families with migrants tend to be relatively shielded from domestic income fluctuations by the income they have coming in from overseas.

A: Is there a way to build on these informal mechanisms in a more formalized way, like what you're trying to do with Salvadoran remittances?

D: Microfinance institutions have actually started offering a range of insurance products to their clients, such as health and life insurance. I think that a lot of very exciting work could be done to offer such products to migrants, to cover not only themselves but their families back home. For example, a migrant in the U.S. could purchase health insurance for her elderly parents in El Salvador.

A: Why did you select El Salvador for your current project? Was it mainly opportunistic, or was there some other methodological reason?

D: It was opportunistic given that we had a relationship with this bank already. In fact a large part of it was opportunistic in that sense. One of the hardest things to do when setting up a field experiment is finding an organization or an institution to work with which is amenable to what you want to do. But El Salvador also happens to be one of the most important countries for which to study remittances. At least one in seven Salvadorians on the planet lives in the United States based on U.S. census figures. The Salvadorians that do show up in the U.S. census earn about 13 billion dollars a year, according to the 2001 data. That is about equivalent to El Salvador's entire GDP. But in 2001 they sent back 1.9 billion dollars, which means that less than one dollar in six in migrant earnings is getting sent back to El Salvador. We think there's a lot of room for improving that figure.

A: One final question for you. In this particular study are you also working with other international development institutions, or are you acting more-or-less as an independent researcher?

D: Part of this project is funded by the Inter-American Development Bank (IADB), which is a regional development bank that focuses on Latin America and the Caribbean. They were interested in funding this work precisely because they think that it's relevant to economic development in Latin America and the role that remittances play. So we did propose the project but they funded it because it's consistent with their goals. I can't, however, claim to be at the table in terms of broad policy settings at any of these institutions. Typically, for a younger researcher like myself, I think of ideas and propose them to potential funders like the Inter-American Development Bank or the Macarthur Foundation. If they find that these are the types of things they want to support then they come up with money to support them. I imagine down the line if some of these projects work out I'll be able to be more at the table in policy terms.

For more information: http://www-personal.umich.edu/~deanyang/.