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This paper considers the effect of remittances on the share of health expenditures in total household expenditure in Mexico. The main purpose of this paper is to investigate if remittances are especially targeted towards household's health expenditure in Mexico. Using IV Tobit and regression models we find a statistically significant effect of remittances on the household health expenditures shares. This effect is even more pronounced for households without access to the employment's medical insurance.
Introduction
This paper analyzes the impact of remittance transfers on health expenditure of Mexican households. Using data from the National Income Expenditure Survey of Households of Mexico (ENIGH) for the year 2004, this paper examines if remittances are intended to spend on healthcare for the migrant-sending families in Mexico. The basic idea is to test the fungibility hypothesis that posits that a dollar is a dollar and the household will expend it on the good with the highest marginal utility, irrespective of its origin. This will be done by making a distinction between the marginal impact of an increase in income and that of targeted remittances and by presenting their respective estimates. The results are expected to have potential public policy implications for remittances. Note that health expenditure is an attractive area to study the impact of remittances. According to the data generated by the Mexican Migration Project for the period 2005-2007, while 43.3 percent of people covered in the study reported that the most important motive for sending remittances is food and sustenance, other 35.8 percent considered health expenditure to be the most important reason. Amuedo-Dorantes et al. (2007) report that 46 percent of the people remitting money consider household's health expenditures (HHE) to be the most important motive for sending remittances.
According to the World Health Organization (2007a), national expenditure on health in Mexico was 6.5 percent of GDP: government expenditures account for 3.0 percent and private expenditures account for 3.5 percent. Furthermore, the proportion of remittances in national income has been increasing in Mexico over the years: from 3,673 million U.S. dollars (USD) in 1994 to 16,613 million in 2004, according to Banco de Mexico (BANXICO, 2005). Table 1 presents data on HHE, out-of-pocket expenditure, and remittances for the countries of the Central America Free Trade Agreement (CAFTA) and Mexico. Total expenditure on health as a percentage of GDP cannot be explained by general government expenditure or by remittances alone. Out-of-pocket expenditure on health seems to be directly related to remittances but this relationship is not the same for each country.
Most research on the relationship between remittances and health that utilizes household data finds a strong link between them. Some research focuses on the relationship between remittances and health outcomes. For example, Acosta et al. (2007) find that children from households that report receiving remittances tend to exhibit higher health outcomes than those from non-recipients in the cases of Guatemala and Nicaragua; Lopez-Cordoba (2006) finds that an increase in remittances lowers infant mortality rates in Mexico at the municipal level. Other studies the relationship between migration and health. For example, Hildebrand and McKenzie (2005) study the channels through which migration may affect health outcomes and find evidence that migration improves children's health through raising the health knowledge of mothers, in addition to the direct effect on health of higher wealth after migration. Rubalcava et al. (2008) find little evidence in support of the hypothesis that migrants are positively selected in terms of health.
The current research is about the relationship between remittances and HHE. Cardona and Medina (2005) study this relationship in Colombia using, as in this paper, the proportion of health expenditure as the dependent variable but do not find any significant effect of remittances on health expenditures. Amuedo-Dorantes et al. (2007) use HHE as dependent variable and find a positive relationship with remittances in Mexico. Both studies use ordinary least squares (OLS) and instrumental variable (IV) methods. Using a two-tiered Tobit model, Amuedo-Dorantes and Pozo (2008) further find a positive relationship between HHE and remittances. Our strategy is to use the 2004 ENIGH sample data to estimate Tobit and regression models, that control for the household's expenditure per capita, which allows us to separate "income" and "remittance" effects. Note that we use per capita expenditure over per capita income. It has been argued that expenditure is measured better than income and, therefore, it is more reliable. (1) The choice of HHE share in total household expenditure (not HHE per se) as the dependent variable in our empirical analysis is dictated by the fact that it allows us to relate our model to a cost function as will be discussed later. Further, the heterocedasticity problem that arises when HHE is used (because high income people tend to have higher HHE variances compared to low income people) can be avoided. The Tobit model also allows us to distinguish between private and social effects of remittances. We examine the differential impacts based on whether households have access to the Employment's Medical Insurance (EMI) or not. In addition, we look for the ultimate sampling unit (Cameron & Trivedi, 2005) in order to control for unobserved heterogeneity such as prices, distance to the health center, and other community specific factors. McKenzie (2007), and McKenzie and Sasin (2007) emphasize the -importance of using a migration variable to study a particular household outcome, such as health expenses, because of the difficulty of disentangling the effects of migration and remittances. (2) To separate these effects we use a proxy variable for migration. We address the endogeneity issue by introducing instruments that are consistent with the existing literature.
We contribute to the literature on HHE and remittances in several ways. We measure the income (expenditure) effect and remittance effect on health expenditure separately. Another major contribution is the measurement of the effects of remittances on household health expenditures for households with and without access to employment medical insurance. The control for migration in the model that addresses an important heterogeneity issue is an additional contribution of this article. The discussion on private and social measurement of the effects of remittances on health expenditure is also new to the existing literature.
The Data
Our source of data is the National Income Expenditure Survey of Households of Mexico (ENIGH) for the year 2004. The households' expenditure in the ENIGH is composed of two parts: a monetary and a non-monetary component. The non-monetary component refers to expenses that are not an out-of-pocket expenditure, but are estimated expenditures on household production, gifts, labor payments in kind, and non-monetary support from institutions. We do not include the non-monetary component because the interest of this study lies in the relationship between remittances (a monetary transfer) and health expenditures.
The labor market in Mexico is divided into two parts: a formal sector that complies with the law and has access to EMI, and an informal sector. In the formal sector, the government workers and their children have access to EMI through the Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado (ISSSTE), the private industry workers through the Instituto Mexicano del Seguro Social (IMSS), and some other workers through their firms' medical services. (3) We infer this labor market division by considering whether a household does or doesn't have access to the medical services provided by the formal sector, i.e., to EMI. In general, the workers without access to EMI are in the informal sector or in the agricultural sector and their labor income is unreported to tax authorities. We consider a household as having access to EMI if the head of the family or the spouse has access to at least one of the above mentioned medical insurance institutions. The ENIGH sample has 22,595 households and 31.6% of these households have access to EMI if we consider the head's access only, and 35.4% if we consider the head and/or the spouse. An alternative we use is to take the households with at least one household member having access to EMI (45.2%). But it is a weaker measure as the EMI access of the son or daughter cannot usually be extended to their parents, brothers, and sisters. However, the empirical results with this alternative measure are qualitatively similar showing their robustness.
There are three issues to consider while using data on remittances in Mexico. First, there are differences in the amount of remittances between the data provided by Banco de Mexico (BANXICO), the Central Bank of Mexico, and the household data collected by ENIGH. (4) The total amount of worker remittances, according to BANXICO (2008), during the third quarter (July-September) of 2004 is USD 4,551 million and the remittances reported by ENIGH during the period August-October 2004 are USD 1,037 million. Second, both data sources show that some of the more industrialized states, such as Distrito Federal, State of Mexico and Jalisco, are among the most important recipients of remittances. It indicates that remittance transfers do not necessarily have anything to do with rural community or with poverty. Finally, the remittance transfers to the households are largely constant over time. As ENIGH reports, transfers for the last six months before the household's interview, we find a correlation coefficient between remittances in the first three months and in the last three months to be 0.996 and the correlation coefficient for transfers from institutions to be 1.0. This shows that transfers, including remittances, are continuous flows and they are not just a response to emergency need for money, as likely to happen with a health problem in the household.
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