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Micro-credit, risk coping and the incidence of rural-to-urban migration

  • Ahsan, Quamrul
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    The focus of this paper is on the rural poor of south Asia and their struggle to cope with the seasonal risk of unemployment and the ensuing income risks. In the absence of formal credit or insurance markets the rural poor typically resort to, among other options, the following informal strategies to cope with seasonal income risks: (i) seasonal rural-to-urban migration, and (ii) mutual (ex-post) transfers between families of friends and relatives. Access to credit through a microfinance institution could also provide a competing source of insurance. The question raised in this paper is how the access to credit may affect the more traditional/time honoured means of risk coping, such as seasonal migration. Given that credit, i.e., a creditfinanced activity, is potentially a substitute for seasonal migration, it is reasonable to argue that easy access to credit (or high return on credit) will lower the incidence of migration. However, there also exists a potential complementarity between the two activities (if implemented jointly) in terms of gains due to diversification of income risks. That is, given that income from migration is not typically subject to the same shocks as income generated by a credit-financed activity, a joint adoption of both activities creates opportunities for diversification of risk in the family incomes portfolio. If the diversification gains are large enough then the adoption of both activities jointly will be preferred to adopting either of the activities individually. In that event, introduction of microfinance in rural societies may result in raising the incidence of migration. The joint adoption case for rural households is modelled using a choice theoretic framework, and exact conditions are derived for when joint adoption is preferable to adoption of a single project. The model of joint adoption is estimated by applying a Bivariate Probit regression model on a single cross-section of household survey data from rural Bangladesh. Our preliminary results show that indeed the probability of participation in migration by household members is positively related to the probability of the household being a credit recipient.

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    Paper provided by Verein für Socialpolitik, Research Committee Development Economics in its series Proceedings of the German Development Economics Conference, Kiel 2005 with number 2.

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    Date of creation: 2005
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    Handle: RePEc:zbw:gdec05:3475
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    1. Hoddinott, John, 1994. "A Model of Migration and Remittances Applied to Western Kenya," Oxford Economic Papers, Oxford University Press, vol. 46(3), pages 459-76, July.
    2. Rosenzweig, Mark R, 1988. "Risk, Implicit Contracts and the Family in Rural Areas of Low-income Countries," Economic Journal, Royal Economic Society, vol. 98(393), pages 1148-70, December.
    3. Ben Rogaly & Daniel Coppard & Abdur Safique & Kumar Rana & Amrita Sengupta & Jhuma Biswas, 2002. "Seasonal Migration and Welfare/Illfare in Eastern India: A Social Analysis," Journal of Development Studies, Taylor & Francis Journals, vol. 38(5), pages 89-114.
    4. Stark, Oded & Levhari, David, 1982. "On Migration and Risk in LDCs," Economic Development and Cultural Change, University of Chicago Press, vol. 31(1), pages 191-96, October.
    5. Katz, Eliakim & Stark, Oded, 1986. "Labor Migration and Risk Aversion in Less Developed Countries," Journal of Labor Economics, University of Chicago Press, vol. 4(1), pages 134-49, January.
    6. Stark, Oded & Lucas, Robert E B, 1988. "Migration, Remittances, and the Family," Economic Development and Cultural Change, University of Chicago Press, vol. 36(3), pages 465-81, April.
    7. Lucas, Robert E B & Stark, Oded, 1985. "Motivations to Remit: Evidence from Botswana," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 901-18, October.
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