Enhancing The Role of Remittances Through Social Capital

Abstraksi

A number of studies have argued that remittances have significant impact on lowering poverty and inequality. However, these findings have not been able to describe the transmission mechanism of remittance to poverty and inequality eradication. As a result, the robustness of these studies have not yet been proven while there are also several research indicated otherwise. Therefore, the main purpose of this study is to determine whether the households receiving remittance have truly gained significant increase in their welfare in Indonesia. In doing so, we also look at other possible determining factors, in this case social capital. We argue that the presence of social capital can enhance the impact of remittances in increasing the welfare of the senders and their immediate family members. Remittance receiving households with strong and broad social capital tend to use the extra income from remittance on investment relative to consumption, thus multiply their welfare from the second round impact of investment on their total welfare. By utilizing the Indonesian Family Life Survey (IFLS) and employing panel data regression, the results confirmed our hypothesis. Thus, this study suggests the inclusion of information on social capital in the formulation of policies on labor migration and planning of activities related to management of migrant workers’ remittance. In so doing, remittances will actually contribute to sustainable economic activities at home.