To cope with seasonal poverty and unexpected shocks such as floods or illnesses, rural residents in poor agricultural communities in Bangladesh often share resources with each other or migrate to urban areas in search of work. A new study led by Yale economists explores how these coping strategies are related, and how encouraging more migration affects the entire community’s welfare.
For the study, the authors combined an experiment in which some community members were provided a subsidy to cover the cost of travel with a model of the complex interactions between informal insurance networks and migration choices. They found that the distribution of migration subsidies to some individuals increased informal risk-sharing (i.e. sharing money, food, or other resources with community members in times of need) in villages, and had positive spillover effects on other members of the community.
The study was co-authored by Yale economists Costas Meghir and Mushfiq Mobarak, as well as Corina Mommaerts and Melanie Morten, Yale Ph.D. graduates who are now professors at the University of Wisconsin and Stanford, respectively.
Nearly 3.8 billion people around the world live in rural areas and rely on agriculture as their primary source of income, according to the United Nations. The economics of that sector are very risky, due to weather fluctuations, uncertain harvests, and changes in agricultural commodity prices. There is also a persistent threat of poverty and hunger during the “lean season” — the period between planting and harvesting when agricultural jobs are scarce and wages fall. If rural residents don’t find a way to supplement their incomes during these periods, they can suffer from malnutrition and starvation.
“Formal financial instruments like bank loans could help smooth out that income variability, but in many low-income countries that formal market isn’t present,” explained Morten ’13 Ph.D. “As a result, there’s a really rich set of informal institutions that people use to plug the gap.”
Many households send members to work in cities to cope with these uncertainties. This migration can strengthen risk-sharing networks by providing supplemental income that can be shared by their home community. However, it can also undermine these networks if migrants learn that, by working in cities, they can go at it alone and keep all of the benefits of migration for themselves. Likewise, when migration is perceived as very risky, potential migrants may be more likely to participate in informal insurance networks to hedge against the chance of failure. But if migration is seen as safe, these same potential migrants might feel less of a need to participate in those informal networks.
In the Bangladesh experiment, rural residents of the Rangpur region in northwestern Bangladesh were offered a one-time subsidy of 800 taka (enough for round-trip bus fare and several meals) if they migrated to a nearby city. During the year the subsidy was introduced, migration increased by 22% and consumption grew by 30%. The subsidies also appeared to benefit the migrants’ home community, where the link between households’ own incomes and their own consumption weakened by 40%, suggesting increased risk-sharing. The researchers concluded that accounting for these community benefits more than tripled the estimated long-term welfare gains from the subsidies (from a 3.4% to a 12.9% increase in consumption).
Having refined their hybrid model with experimental data, the researchers used it to explore the potential effects of two hypothetical subsidy policies.
In the first scenario, in which the subsidy was made permanent, the model predicted a significant reduction in the costs of migration but lower participation in risk-sharing networks, resulting in decreased long-term welfare.
“If your policy is to introduce people to migration by a one-off subsidy, insurance allows members of the community to take advantage of the opportunity while mitigating the risk associated with temporary migration,” said Meghir, the Douglas A. Warner III Professor of Economics at Yale. “A long-term subsidy to migration can however undermine the implicit insurance by making it more tempting to go it alone and keep all the migration benefits for themselves.”
In a second scenario, in which financial assistance was provided with no strings attached (an “unconditional cash transfer,” rather than a subsidy that requires recipients to migrate), the model predicted little effect on migration and only marginally improved risk-sharing, with a negligible net effect on welfare.
Such large differences in the researchers’ findings underscore the importance of taking local context into account when designing policies to help rural communities cope with seasonal poverty. In particular, understanding the potential positive and negative spillover effects that policy interventions can have on broader communities is critical.
“When you are thinking about a policy and its effects, you cannot just focus on the people you are working with directly,” said Mobarak, professor of economics and director of the Yale Research Initiative on Innovation and Scale (Y-RISE). “You have to think seriously and carefully about the various markets where those beneficiaries may interact with others. You have to think about both the direct and indirect effects.”
A detailed summary of the findings can be found on the Yale Economic Growth Center website.
Written by Shawn Thacker (2023), a global affairs major in Yale College and intern at the Economic Growth Center.