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The Most Effective Development Intervention We Have Evidence For?

David McKenzie's picture

Ask most people to name the most effective means of raising incomes of people in poor countries, and what would they say?

Microfinance? Perhaps not after the recent experimental assessments.

Deworming? It increased primary school participation and improved health, but in the short-term at least seems unlikely to raise household income.

Conditional cash transfers? This might be a popular answer, with evidence from a number of countries that they have increased household expenditure , schooling, and health outcomes. But even though Governments devote significant resources to such programs, the absolute annual increases in household income and expenditure are still at most US$20-40 per capita for participating households.

I bet that facilitating international migration is not very high up the list of interventions people think of. But it should be. In a new working paper, John Gibson and I evaluate the development impacts of New Zealand’s new seasonal worker program, the RSE. The figure below compares the per-capita income gain we estimate to those from microfinance, CCTs, and from my previous research giving grants of $100-200 to microenterprises. It is simply no contest!

In addition to estimating per-capita income gains of 30-40%, we find that participating in the RSE leads to greater subjective well-being, more durable asset purchases, housing improvements, and in Tonga, a large increase in secondary schooling. Moreover, as a recent evaluation by New Zealand’s labor department found, these gains came with minimal displacement of native workers, and overstay rates of less than 1%.

However, despite the vast gaps in income between developed and developing countries, such gains do not come automatically. The latest Nobel prize in economics was for work on the process of job search and matching in labor markets. While these are difficult enough for workers in the same economy, matching the supply of willing workers to the demands of employers becomes even more difficult when the process takes place across borders. There is thus an important role for Governments and international organizations in initiating, catalyzing, and promoting these new labor markets, as I discuss in our latest Finance & PSD Impact note.  

Such programs are likely to be particularly important in thinking about development strategies for small island nations, in which the scope for large scale industrial development is very limited. There certainly seems scope for thinking about how to apply such programs to more countries.

Further reading:

A friendly summary of the paper is contained in this Vox posting.

The full working paper is now available in the World Bank Policy Research Working Paper series.

Spurring Development through a Seasonal Migration program, Finance & PSD Impact Note No. 12

Comments

Submitted by Asif Dowla on
You wrote "facilitating international migration is not very high up the list of interventions people think of. But it should be." But it would not be. Because there is no political support. People (Dani Rodrik, Alan Walters) suggested this idea before on theoretical grounds. Alan Walters proposed "Doha Visa"-- encouraging short term migration. This type of research grabs the headline and useful for discussion, but in the real world of development intervention, it is rather unfair to compare the other interventions that are really happening and on a much larger scale to one episode in New Zealand. I agree with the research and I am beneficiary of international migration. But that is an option not available to a client of a microfinance institution in Bangladesh.

Thanks David, this is a great and thought-provoking comparison of the gains to migration and the gains to various development interventions. In the following World Bank working paper a couple of years ago, Lant Pritchett, Claudio Montenegro, and I do a similar exercise, comparing the gains from migration to the gains from microcredit and deworming: http://go.worldbank.org/TBSFGS99L0 See Table 8 on page 39.

Submitted by DMcKenzie on
Thanks Asif and Michael. Michael's table is a good one, this table is not in all versions of his paper, so definitely worth looking at. Asif, the New Zealand case is notable because it allows us to measure rigorously the development impacts of such programs. But they are of course widespread, with most OECD countries having some form of a temporary worker program, and with the GCC countries in particular having a lot of them, which Bangladeshis do participate in - there is certainly pent up demand in Bangladesh for international migration opportunities (as seen by Bangladesh supplying 7 million applicants to the recent US Diversity Visa lottery, almost half of all applicants worldwide). So the question is what can be done in Bangladesh to better allow willing migrants to participate in such opportunities - I believe there is a large role for both public and private facilitators in this regard - and in fact one could imagine even an important role for MFIs in providing financing for migration (Musfiq Mobarak's recent work in Bangladesh also shows important gains to facilitating INTERNAL seasonal migration there).

Submitted by Asif Dowla on
Thank David for the response. I have seen Mobarak's work. Actually, Grameen Bank had a program in the areas where seasonal hunger (also know as Monga in the Char areas of Rangpur) is widespread to stem the out migration. Informal evidences suggest that loan from MFIs are used to fund to buy work visa for a family member to work in the Middle East. I do not think the comparison of New Zealand program with GCC is correct. Bangladeshi's go to these countries to work in the construction and service industry. It is a private sector program instead of a govt program sponsored by the GCC. Because of the high transaction cost, fraud, and corruption, some of these temporary migration leads to debt and further impoverishment. I agree, there is a definite role for public, private and international human rights association to guarantee that the migrants can benefit.

Submitted by jason on
Thank you for the references and insight. Might anyone cite other related papers that have examined this phenomenon from the perspective of the migrants' home country, for example India, Bangladesh, Pakistan, Indonesia, Mexico? I am particularly interested in comparing gains from vocational training to migration. Thank you, Jason Anderson

I think that the core thesis of the paper that the improvements in the functioning of labour markets particularly those with the highest gains from trade is incontestable and perhaps even self-evident. And it is heartening to see that this thesis finds strong support in the data. Even in countries such as India in my view there are substantive gains to be had from migration – the key question is how one ensures that this happens at a faster pace. Where I differ with the authors is in their understanding of the role of financial services. I feel that in comparing financial services with interventions such as cash transfers or deworming they make a fundamental error. Financial services in my view merely facilitate the transfer of the households own resources from one period to the next (savings and loans) and from one state of the world to another (insurance and investments). Good access to financial services allows people to take their current income as close to their permanent income as possible and allows them to benefit from income enhancing opportunities such as education and migration thus effecting, over very long periods of time, sometimes even across several generations, a gradual improvement in household welfare. The other interventions referred to in the paper all involve augmenting the current income of the household through transfers of one kind of another or effecting an immediate improvement in its stock of human capital, and may have very different multipliers but are all fundamentally different in character from financial services. The analysis the paper presents is an ex-post one -- in which the after the search process was completed the outcomes are being evaluated. The role of financial services in lowering risks faced by households by allowing them to save or borrow money to pay for a visa; pay for temporary housing in their destination; ensure financial security for those that they leave behind; so that they may more aggressively participate (ex-ante -- without necessarily knowing the outcomes before hand) in such search / risk taking processes needs to be borne in mind as well before dismissing the relative impact of financial access relative to migration. Maybe good financial services access is indeed the “key of keys” needed to unlock the potential of migration and not a substitute as the authors suggest. In my view the microfinance impact studies the authors refer to were evaluations of specific very narrow designs of financial products and these studies I hope will eventually throw some light on which designs fit most closely with which types of households. And, while it may be fair to conclude that they found that in a year and a half mechanically and uniformly offered Grameen style microloans do not seem, on average, to have had a direct impact on incomes of borrowers over this very short period of time, in my view it is incorrect to jump from that to state that comprehensive access to high quality financial services does not reduce poverty. The spill-over effects of financial access are very high (the rich man taking a loan to build a large factory that employs a number of people is doing a lot to reduce the poverty of those people even when they did not themselves borrow any money) and the transmission paths are very long. The natural experiments type evaluations carried out Pande and Burgess (2005) and other cross-country studies linking financial and economic development are, in my view, far more accurate empirical tests of the links between Arrow-Debreu complete financial markets and welfare. It is also important to note that in countries such as India provision of financial services does not involve the investment of public resources and banks and non-bank financial institutions (including those that just focus on making Grameen style microloans) are very profitable institutions that attract good amounts of both commercial equity capital and debt financing. However facilitating access does require good regulation, innovations on the part of the financial system, competitive market conditions and facilitative infrastructure such as broadband access and currency chests (which too are profitable interventions on a stand-alone basis). A blog post from IFMR Trust (www.ifmr.co.in): http://ifmrblog.com/2010/12/22/missing-links-in-financial-inclusion/ discusses this point in some detail. And, in my view even where facilitating such access may have involved the use of public resources, such as in Africa, as development interventions they should be viewed more as complements rather than as substitutes of the other interventions that the paper refers to.

Submitted by Glyn Baker on
I completely disagree. My view on foreign policy, is from a Nationalist perspective, not a Globalist one. In my view, it isn't a sovereign nation's governmental responsibility to be representing the needs of citizens in other countries. My own government is supposed to represent the needs of it's tax payers, and is supposed to follow it's own constitution. Where does it say in my own countries constitution that the my Government must provide aid to other countries? (it doesn't). My own country (Australia) should stop meddling in the affairs of other countries, stop policing the world, pull troops out of Iraq/Afghanistan/East Timor, stop providing aid, and stop offering asylum to refugees (all illegal refugees that enter Australian territory should be shipped back to their home country, persecution or not). If you offer asylum, you get more refugees coming here, and thus erode the property rights of Australian's. If we keep policing the world, the citizens we police will idolise their occupiers, and make the decision to come here. Why do you think Australia got so many Vietnamese refugees during the Vietnam war, and so many Iraqis refugees at the moment? (because Australia occupied their countries). If you allow temporary migrants to come here, where do you think they will spend their money? Not in Australia, they will send it back overseas, when they leave. This concept is an Altruistic one (aka "doormat syndrome"), which doesn't represent the national interests of my own country, nor any other coutry that is foolish enough to misrepresent it's own citizens by agreeing to do something like this. The blog entry is completely one-sided, and doesn't hardly discuss any of the negative consequences, for citizens of countries that are expected to provide this unconstitutional service. My view, is that if Australian's choose to provide aid to other countries, then it should be through private means, and not public government means. Look at the private donations made when major catastrophes occur, and you will see citizens in developed countries are quite capable of making private donations, without the need for government's intervention.

Submitted by Ken Wilson on
Should anyone wish to learn how the developmental work research project from which the RSE scheme emerged was negotiated, funded and actioned, we would be happy to explain. It would be a signal failure to focus upon the economic and social outcomes. To do so would be to miss entirely the profound innovation that resulted in the RSE scheme. Our view is that the measurables are all very well, but that the really hard bit is how did we make that happen and could we do it again? Have we created a research-based method by which intractable policy conundrums between government and enterprises can be resolved? Yep, we think so.

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