| Abstract: |
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. |