A remarkable 23% of households in Vietnam receive remittances in any given year. Of this total, 18% receive payments that originate within the country while the other 5% are the fortunate recipients of flows from overseas. In total almost 4 million households benefit from receiving remittances.

Remittances are important for households that receive them, because they are large enough, on average, to pay for 38% of all the expenditures incurred by recipient households.

Out of these dramatic facts some interesting questions arise: Where do the remittances come from? What is the money used for? And do remittances spread income more widely, or contribute to greater inequality?

Remittances from overseas

Remittances from abroad are believed to amount to about $1 billion annually, although this number is somewhat speculative. What is known is that in 1996 about $400 million was remitted through banks and other licensed remittance-server organizations. But for every dollar that passes through such channels it is believed that up to two more enter as cash. Vietcombank in Ho Chi Minh City handles at least $10 million worth of remittances every month. The amount of remittances that flow in through official channels is highly sensitive to government policy; when a 5% withholding tax was levied on remittances in late 1996, the flow halved. After the government suspended the tax in February 1997 the inflow recovered.

An inflow of $1 billion is large. It represents about 5% of GDP, or the equivalent of 11% of export earnings. Remittances bring in more foreign exchange than any other source, with the sole exception of oil exports.

Virtually all of the inflow of remittances comes from overseas Vietnamese. Between 1970 and 1996, 899,000 Vietnamese settled in the United States. When children are included, this group represents about a million and a half people. If one adds the large Vietnamese communities in Europe (especially France) and Australia, as well as smaller numbers elsewhere, there may be as many as 2 million Vietnamese living overseas. The typical overseas Vietnamese is therefore sending about $500 to family and friends in Vietnam every year, or the equivalent of about $2,000 per emigrant household.

This is a high level of giving. It can be explained in part by the recent nature of Vietnamese emigration, which means that most "Viet Kieu" still have strong family links inside the country, links that have, if anything, grown stronger in the 1990s as travel has become easier and phone calls (somewhat) cheaper. Vietnam receives about 300,000 visits from overseas Vietnamese annually, and most of these visitors carry presents of cash back to their relatives.

Local expectations of large gifts from apparently wealthy returnees can be a cause of some resentment. For example, a young Viet Kieu professional based in Philadelphia explained that he can afford to pay for the ticket to Vietnam and for his stay there, but is deterred from returning to Vietnam because he is not sure that he can afford to visit his relatives.

The large amount of giving is noteworthy given that many of the Vietnamese in the United States and elsewhere have had to struggle hard to establish a degree of financial security in their adopted countries. Whether measured in per capita terms, or relative to incomes, remittance flows into Vietnam are far more important than flows into China, although both countries have overseas populations equivalent to about 3% of the in-country population.

Domestic remittances

The bulk of remittances ó by quantity if not dollar value ó occur within Vietnam. Some of the money is carried from donor to recipient by family and friends, but much of it is also handled by the efficient post office money transfer system. The donor goes to a local post office and deposits the money that is to be sent. A letter is then sent to the recipient, indicating that the cash can be picked up at the nearest post office.

A recent study of migrants in Ho Chi Minh City found that 20% of the men, and 30% of the women, who had migrated since 1989 sent back remittances to their families, and that these remittances averaged 7-10% of their incomes. Most of the remittances were to support the living standards of their relatives at home. Approximately half of the population of the main cities in Vietnam was born elsewhere, and the high degree of geographic mobility contributes to the importance of remittance flows.

Do they equalize incomes?

Remittances from Mexican emigrants who live and work in the United States tend to flow to poorer households in rural Mexico, helping to equalize incomes in that country. But in Egypt the flow of remittances from Egyptians working abroad (mainly in the Persian Gulf region) go to better-off households, creating greater inequality. Which pattern fits Vietnam?

Overall, remittances in Vietnam lead to greater income inequality. If one divides the population into five quintiles, from the lowest to the highest level of expenditure per capita, then it is clear from Table 1 that better-off households are more likely to receive remittances. Where just 16% of households in the poorest quintile received remittances, the figure was 37% for those in the top fifth. And among households that receive remittances, the typical remittance received by a richer household is larger than that received by a poorer family.

This is only half the story. As Table 2 shows, the more complete finding is that remittances from within Vietnam serve to equalize incomes, whereas remittances from outside the country tend to increase inequality. Officials in Vietnam welcome the inflows, but have expressed some ambivalence about the effects; this may have been behind the (unsuccessful) effort to tax remittance inflows in 1996.

Who receives remittances?

The stereotype about remittances is that they constitute flows from economically established, middle-aged families to aging parents. While there is some truth to this generalization, the reality is much more complex, as the numbers in Table 3 testify. Among the more striking features of remittances are the following:

Half of all single-person households receive remittances, and the flows are on average quite large (about $120 per year in 1992/3). It is likely that remittances permit many people to live alone who would otherwise be obliged to live with friends or family.

Almost a third of two-person households receive remittances. In this group there is a high proportion of elderly couples whose children have moved away, and the remittances they receive serve the role of pensions.

A quarter of the households headed by women receive remittances, a substantially higher rate than for male-headed households. This group includes households headed by a widow, or by the wife of a migrant worker. Thanks in large measure to remittances, female-headed households in Vietnam are as well off as male-headed households.

Households where the head does not work, whether because of retirement or for some other reason, are far more likely to receive remittances, especially from overseas, than households where the head works. One interpretation is that remittances, especially the larger ones originating abroad, allow one to retire. The best asset that an elderly person in Vietnam can have is a close relative overseas.

The high proportion of foreign remittances flowing to households in the Southeast region is striking, but not surprising. Most of the Vietnamese living overseas come from the south of the country.

More remittances flow to urban than to rural areas, especially remittances from abroad. The major recipient of the inflow of foreign remittances is Ho Chi Minh City, which is already the richest part of Vietnam. No wonder then that these inflows contribute to greater inequality, as they top-up the incomes of families that are already among the better off.

A relatively high proportion of foreign remittances flow to households with high educational expenses, as if foreign relatives are trying to help pay for the education of nieces and nephews. And a high proportion of all remittances flow to households with heavy medical expenses.

These patterns shed some light on the motivations behind remittances. One reason for giving is as a form of insurance: help your brother when he needs it, in the expectation that he will help you when you need it. This does not adequately explain the large flows from overseas, or the flows to the elderly.

A second motivation may be a sense of duty, to support one's parents, kin, or spouse. This is clearly the dominant explanation, but it is also tempered by a concern for the poor. Foreign-based givers get satisfaction from giving to their poorer cousins in Vietnam; and within the country, donors tend to be better-off than recipients, and presumably give more willingly to needy parents rather than to those who can fend adequately for themselves.

How are remittances used?

Once received, remittances tend to get mixed in with other forms of income, although there is some evidence that a greater proportion of remittance income is saved than is income from other sources. There is also a suspicion that a significant proportion of remittances may not be for gift purposes at all, but instead for small investments.

The Ministry of Planning and Investment believes that there are "several billion dollars" worth of illegal foreign-invested projects in Vietnam. Many of these projects are said to have financial backing from entrepreneurs in Taiwan and Hong Kong, and it is reasonable to surmise that some of the financing slipped into the country in the guise of remittances. Officially-approved projects by overseas Vietnamese are relatively small and quite scarce: as of August 1997 they had made commitments to invest in 25 projects worth a total of $129 million, or just half a percent of all foreign investment commitments in the country.

The inflow of unrecorded remittances plays an important role in fueling the black market for foreign exchange, and this in turn makes it easier for smugglers to find the dollars they need to finance their clandestine imports. The remittance flow from abroad also helps maintain the value of the dong and finance part of the sizable current account deficit.

And the good news, both on the macroeconomic front and from the viewpoint of individual recipients, is that the flow of remittances is likely to continue, at more or less its current level, for the foreseeable future, or at least for as long as there is a thriving community of overseas Vietnamese who retain close ties with the folks back home in Vietnam.

Jonathan Haughton is a Faculty Associate at the Harvard Institute for International Development and an Assistant Professor of Economics at Suffolk University in Boston.