Migration and Aid:Investigating the Welfare Effect of Remittances and

The inflow of remittances and foreign aid can play an important role in improving the welfare of the Latin American and Caribbean people. Both flows were of equal amount in 1980, but where the inflow of remittances surged ahead from then on, aid increased only slightly. The goal of this study is to estimate the effect of remittances and foreign aid on poverty, inequality, life expectancy, and infant mortality over the period 1980-2006. Remittances are found to reduce poverty and infant mortality and to increase life expectancy, where it leaves inequality unaffected. Foreign aid reduces inequality and infant mortality, but has no influence on poverty and life expectancy. Remittances and foreign aid must be seen as complementary and both have a welfare-increasing effect. To increase this effect in the future several measures must be taken. Lowering the transaction costs of sending remittances is the most important one. The effect of aid will be increased when it is allocated to the poorest countries with the relative best policy environment. It is therefore important for Latin America and the Caribbean to improve their policy environment and to spend aid in those sectors which improve welfare the most.