metadata: authors: 0: author: Bossavie,Laurent Loic Yves
1: author: Görlach,Joseph-Simon
2: author: Ozden,Caglar
3: author: Wang,He
count: Bangladesh
docna: 0: docna: Capital Markets, Temporary Migration and
            Entrepreneurship : Evidence from Bangladesh
docty: Policy Research Working Paper
subtopic: Employment and Unemployment,Trade and Services,Private Sector Development Law,Marketing,Private Sector Economics,Labor Markets
teratopic: Law and Development,Private Sector Development,Social Protections and Labor,International Economics and Trade
geo_reg_key: 517198,517191,517212
repnme: repnme: Capital Markets, Temporary Migration and
            Entrepreneurship : Evidence from Bangladesh
display_title: Capital Markets, Temporary Migration
            and Entrepreneurship : Evidence from Bangladesh
listing_relative_url: /research/2022/02/33723538/capital-markets-temporary-migration-entrepreneurship-evidence-bangladesh
topicv3: Private Sector Development m1326060 1921,Temporary Movement of Labor m1326476 783,Jobs m1503931 2670,Self-Employment m1504000 2698,Entrepreneurship m1582903 4424
publishtoextweb_dt: 2022-02-07T00:00:00Z
dois: 10.1596/1813-9450-9930
historic_topic: Law and Development,Private Sector Development,Social Protections and Labor,International Economics and Trade
origu: Off of Sr VP Dev Econ/Chief Econ (DECVP)
no_of_pages: 40
author_keys: 0: author_key: 1239893
1: author_key: NA
2: author_key: 658703
3: author_key: NA
model_extractions: Policy Research Working Paper 9930 Capital Markets, Temporary Migration and Entrepreneurship Evidence from Bangladesh _Laurent Bossavie Joseph-Simon Görlach Çağlar Özden He Wang_ Social Protection and Jobs Global Practice & Development Research Group February 2022
Policy Research Working Paper 9930

# **Abstract**

This paper examines international temporary migration as an intermediary step among aspiring entrepreneurs to accumulate the needed capital when they face credit constraints at home. The analysis is based on a representative dataset of lifetime employment histories of return migrants from Bangladesh. After establishing the credit constraints that potential entrepreneurs face, the paper shows that non-agricultural self-employment rates are significantly higher among returning migrants—over half versus around 20% of non-migrants. Most migrants transition into self-employment by using their savings from abroad as the main source of financing. The paper then offers, for the first time, a detailed account of the financial costs and benefits of international migration. The findings suggest that temporary migration can contribute to structural transformation of lower-income countries by enabling credit-constrained workers to enter into non-agricultural entrepreneurship.

This paper is a product of the Social Protection and Jobs Global Practice the Development Research Group, Development Economics. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www. worldbank.org/prwp. The authors may be contacted at lbossavie@worldbank.org, josephsimon.goerlach@unibocconi.it, cozden@worldbank.org, and hwang21@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# Capital Markets, Temporary Migration and Entrepreneurship: Evidence from Bangladesh<sup>∗</sup>

Laurent Bossavie<sup>1</sup> , Joseph-Simon G ̈orlach<sup>2,3</sup> , C ̧a ̆glar Ozden<sup> ̈1,3</sup> , and He Wang<sup>1</sup>

> 2Bocconi University, BIDSA, CEPR, IGIER and LEAP

> 3CReAM, IZA

Originally published in the Policy Research Working Paper Series on _February 2022._ This version is updated on _January 2024._ To obtain the originally published version, please email prwp@worldbank.org.

> ∗We would like to thank the participants at the Migration and Organizations Conference at the University of Pennsylvania, Economics of Migration online seminar series for helpful comments and suggestions. We are also thankful to Rubaba Anwar for providing excellent field coordination support during the implementation of the survey, and to the Bangladesh Bureau of Manpower, Employment and Training for granting clearance to carry out the Bangladesh Return Migrant Survey (BRMS). Funding for this research was provided by the Rapid Social Response Multi-Donor Trust Fund, the DEC Research Support Budget (RSB), Knowledge for Change Program (KCP) and the Multi-Donor Trust Fund for International Trade within the World Bank.
# **1 Introduction**

Self-employment and entrepreneurial activities create opportunities for better jobs and higher incomes, leading to overall growth in the wider economy. In the case of low-income countries, they are also among the main paths out of poverty for a large share of the population. Yet, many institutional voids in financial markets, such as weak legal regimes and regulations, absence of credit information systems, or costly insolvency proceedings, lead creditors to limit loans and charge prohibitively high interest rates. As a result, many potential entrepreneurs cannot obtain the needed capital to pursue profitable investment opportunities, resulting in constrained labor market outcomes for the individuals and lower levels of economic development for the country.

One commonly observed strategy to circumvent such constraints is temporary migration to higher income countries where workers accumulate savings at a faster rate and use them when they return home for self-employment and entrepreneurial activities. This paper provides empirical evidence on how such temporary migration episodes are used as common _intermediate_ steps to accumulate the required capital and overcome the institutional voids prevalent on the financial markets for entrepreneurial loans, a relation visualized in Figure 1. Our analysis utilizes a newly collected dataset with detailed information on the economic decisions and activities of 5,000 temporary migrants who returned to Bangladesh. The data are unique in providing the complete work trajectories of the respondents, including their economic activities and outcomes before migration, their expectations prior to departure about earning and saving prospects abroad, migration expenditures, sources of income and savings, and employment histories at the foreign destination. Most importantly, we link these trajectories with their economic activities and earnings after their return, showing how the savings from temporary migration finance self-employment and entrepreneurial investments.

International migration itself shares many common features with classical entrepreneurial investments. Temporary migration typically requires considerable upfront investment to cover the expenses and fees, with the promise of high returns afterwards. At the same time, migration involves risks. Earnings potential abroad may be misjudged or the migrant may be forced to return home prematurely, before a savings target is reached. Although almost all migrants from Bangladesh depart for their destinations with valid work contracts, actual earnings may differ from the initial expectations. Part of the compensation is paid in kind (such as housing or food) and the actual cost or the compensation may deviate from what the contract specifies. In addition, premature job dismissal is quite common and leads to immediate expulsion from the host country. By providing a detailed account of the actual financial costs and returns to temporary migration, we are able to show how it can 2
<!-- Start of picture text --> ee|<br>Individuals | Credit constraint m Entrepreneurs<br>' onentrepreneurs |<br>T"~= see" 7 A<br>SN | Financial market | /<br>| Borrow to finance | | / Accumulate assets |<br>,_the migrationcosts NS a oy |__fromabrond |<br>_ Fe<br>Uncertainty in<br>| labor contracts |<br>Temporary<br>migrants<br><!-- End of picture text -->
of businesses in developing countries, and we show that migration is an important path to circumvent poorly functioning markets for investment loans. Several studies in the international migration literature have established that self-employment rates are particularly high among former migrants who have returned home. For example, McCormick and Wahba (2001), Wahba and Zenou (2012) and Mah ́e (2019) provide evidence from Egypt. Dustmann and Kirchkamp (2002) focus on migrants who returned from Germany to Turkey, and Br ̈uck et al. (2018) explore return migration to the Kyrgyz Republic. Several other papers aim to isolate the causal relationships between migration and financial investments. These include Mesnard (2004) for Tunisia; Yang (2006), Yang (2008), and G. Khanna et al. (2020) for the Philippines; C. Woodruff and Zenteno (2007) for Mexico; and Batista et al. (2017) for Mozambique; see also Wahba (2014), Rapoport and Docquier (2006) and Naud ́e et al. (2017) for related surveys.<sup>2</sup> Rapoport (2002) and Djaji ́c (2010) construct analytical models that investigate the relationship between migration and self-employment under credit constraints.

Our paper goes beyond this literature in that it provides direct evidence on remittances and repatriated savings being the primary source of financing for newly set up businesses by returning migrants. Moreover, we give, for the first time, a detailed account of the financial costs and returns to temporary migration as a risky investment.

Why is self-employment, then, such an attractive option for low-skilled workers? Even though it has been argued that self-employment is a last resort for many workers in some contexts, evidence from Bangladesh indicates that the vast majority of the self-employed choose this option voluntarily (Gutierrez et al. 2019). While informal wage employment tends to be easily available for low-skilled workers, self-employment often generates higher income. Furthermore, wages of low-skilled workers start to decline at around age 45 since these jobs tend to be in physically demanding sectors (such as construction and agriculture) that become harder to fully perform for older workers. In contrast, most self-employed are able to maintain steady incomes until they retire.<sup>3</sup> Ability to borrow for migration, but not for self-employment, is an important part of the puzzle in this context. Two factors can explain this observation. First, it is significantly less risky for lenders to finance migration expenses than to finance a startup. Workers going to the Persian Gulf or Southeast Asian countries need to have valid contracts that specify a wage and initial duration for their employment. Although workers face some uncertainty regarding the monetary wage actually paid (as opposed to benefits in-kind that may be subtracted) and

> 2A separate literature examines entrepreneurship among _immigrants_ , see for instance Kulchina (2016), Hernandez and Kulchina (2020), Kulchina and Oxley (2020), and Agarwal et al. (2021), and the surveys by Fairlie and Lofstrom (2015), and S. P. Kerr and W. R. Kerr (2017).

> 3Self-employment options in our context primarily consist of relatively simple occupations such as owning a small store, driving a taxi, or running a small business.

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duration of employment, such contracts are a strong signal to lenders that the migrant will have the requisite income to pay back the loan. Migrants cannot settle permanently in these – destination countries, and they almost never migrate with family effectively guaranteeing that they will return home. In contrast, earnings from self-employment are riskier. We show empirically that the likelihood of default on a business loan strongly exceeds the risk for migrant loans. Second, the agency problem faced by lenders is more pronounced in the case of entrepreneurship. Migrants’ earnings abroad are easy to verify because of the formal nature of migration arrangements. By contrast, it is difficult for lenders to verify self-employment profits, which often have a high informal share (e.g. in small shops). The markets for migration loans and entrepreneurship loans can thus be thought of as two separate credit markets, in which interest rates on entrepreneurship loans are significantly higher, and quite often prohibitive.

The remainder of the paper is organized as follows. Section 2 describes the Bangladeshi context which shares many common features with other developing economies, and describes our rich data set. Section 3 discusses the institutional voids of limited access to credit among aspiring entrepreneurs. Section 4 analyzes the role played by temporary migration as a risky investment to overcome such institutional constraints. Section 5 concludes.

# **2 Context and Data**

## **2.1 Bangladeshi Context**

Bangladesh is the 8th largest country in the world in terms of population, with about 165 million people. The country experienced rapid economic growth over the past decades, with a sharp decline of the poverty rate from 43.5 percent in 1991 to 14.3 percent in 2016. Despite this rapid economic development, Bangladesh currently ranks 171 out of 225 countries in terms of GDP per capita, and is classified as a lower-middle income country.

While this paper uses Bangladesh as a case study, many aspects, in particular with respect to entrepreneurship and migration patterns, are observed in other developing countries. Self-employment is common in Bangladesh at around 40 percent of the labor force, a proportion that is similar in other low and middle-income countries, but about 15% in high income countries (Gindling and Newhouse 2014). A very large share of the working-age people are low-skilled compared to international standards (Farole et al. 2017; Barro and Lee 2013), although non-farm entrepreneurs, who make up half of all self-employed workers in Bangladesh, are on average more educated than workers in other types of employment. Nonfarm entrepreneurs are also older on average, and the rate of self-employment is increasing 5
in age, a finding which also holds in other developing economies (Gindling and Newhouse 2014). Over half of the non-farm self-employment activities are in the retail sector, and about a quarter in other service activities. Most non-farm self-employment activities are small-scale family-run enterprises, with an average of two people working in them. About 80 percent of enterprises only have the owner working in them, 17 percent employ between 2 and 4 individuals, and the remaining 3 percent have 5 or more individuals working in them. Overall, microenterprises account for over 99 percent of private sector establishments in the country. Gindling and Newhouse (2014) report similar patterns regarding the small scale of entrepreneurship activities in a large sample of developing countries with similar income patterns.

Domestic employment opportunities are limited in Bangladesh, as in many developing countries (Farole et al. 2017). As a result, many workers migrate to higher-income countries to access higher-paying employment opportunities. Bangladesh ranked 5th worldwide in the number of citizens overseas, with an estimated 7.8 million people in 2018 (Ahmed and Bossavie 2021). The incidence of emigration is also high in relative terms. About 15 percent of the total working-age male population (ages 15-64) was currently or in the past employed overseas as of 2018.<sup>4</sup> Oil-exporting GCC countries are by far the main destinations for these temporary migrants, followed by Southeast Asian countries such as Malaysia and Singapore. More than 750,000 workers have emigrated annually (pre-COVID), and the magnitude of migration outflows has risen steadily with labor demand in these destinations over the last two decades.

Migration from Bangladesh is largely temporary, which is the case in many migration corridors (Dustmann and G ̈orlach 2016). The temporary nature of migration is imposed by the laws in the destination countries in the Persian Gulf and East Asia where acquisition of citizenship or permanent residency is effectively impossible, irrespective of migrants’ occupation, education, nationality, or duration of stay (Wahba 2015; Fargues 2011; Fargues and De Bel-Air 2015). Valid employment contracts are typically for a fixed duration of time and tied to a specific employer who can extend the contract (Das et al. 2019). Yet, because stay inside the country is conditional on holding an employment contract, migrants cannot retire in the destination country, even if they have stayed for decades. Furthermore, low-skilled

> 4Emigration from Bangladesh is largely male-dominated. According from administrative data from the Bangladesh, Bureau of Manpower Employment and Training (BMET), women represent only 4 percent of temporary migrants from Bangladesh. Data from the World Bank Return Migrant Survey (BRMS) for Bangladesh show similar patterns. The prevalence of male labor migration is driven by the low labor-force participation of women in Bangladesh (Rahman and R. Islam 2013), combined with concentration of foreign labor demand in brawn-based occupations. In addition, there is social pressure on women to stay behind as they bear household responsibilities, and low-skilled temporary migrants are not allowed to take their families with them (Ahmed and Bossavie 2021).

6
migrants are almost never allowed to take their families with them. This generates additional costs and further incentives to return. Low-skilled migration from many other major migrant sending countries globally, such as India, Pakistan, Nepal, the Philippines or Egypt, shares similar features.<sup>5</sup>

# **2.2 Data**

Our main data source is a new and unique nationally representative survey, called the Bangladesh Return Migrant Survey (BRMS). The survey was specifically developed to analyze the relationship between workers’ situation before, during and after their migration episodes. A special module focused on economic activities of the migrants after their return, including entrepreneurship. BRMS was conducted by the World Bank in 2019 and consists of a sample of 5,000 temporary migrants who had returned to Bangladesh at the time of the survey.<sup>6</sup> The BRMS collected unique information on full employment histories, migration expenditures, demographic characteristics of migrants, sources of financing, and economic activities after returning to Bangladesh. It is one of the largest datasets on temporary migration conducted to date and, to the best of our knowledge, it is the first of its kind in a country from where migration is almost exclusively based on temporary contracts. BRMS is also the first comprehensive survey on temporary migrants who have returned to Bangladesh. The survey was designed for an analysis of the economic activity of recently returned, temporary migrants in rural and semi-urban areas of Bangladesh. It covers all districts in the country.<sup>7</sup> The data set has several features that enable us to study the role of temporary migration in overcoming the institutional voids in underdeveloped capital markets. The survey includes detailed retrospective questions on the entire employment histories of migrants, both in Bangladesh (before and after the migration) and while they were abroad. It thus allows us to construct full employment and migration trajectories, including the destination country, dates and duration of stay, and labor market outcomes (such as wages and occupation). The survey records different cost categories of each migration episode and detailed information on the financing sources. For temporary migrants who became entrepreneurs after return, the survey includes questions on the specific activity as well as the source of financing.

> 5In addition to the high levels of international migration from Bangladesh, internal rural-urban migration is also widespread. Although transportation costs have been shown to be important (Bryan et al. 2014), the financial constraints for overseas migrants are considerably tighter, and complemented by strictly enforced legal restrictions.

> 6Eligibility for the BRMS was restricted to migrants who had returned since 2010. This restriction was put in place to reduce possible issues that might arise regarding the accuracy of migrants’ recollection of past migration experiences, and, at the same time, to allow for some variability in the timing of return of the migrants.

> 7Bangladesh consists of eight divisions which are divided into 64 administrative districts.

7
Because the BRMS only covers households with return migrants, we complement it with a nationally-representative survey carried out in Bangladesh: the Household Income and Expenditure Survey (HIES, 2016-2017 wave). This survey collected detailed data on the socio-economic characteristics and outcomes of all members in a representative sample of Bangladeshi households. These include labor market outcomes, including entrepreneurship activities, which are recorded in a similar way to the BRMS.

# **2.3 Descriptive Statistics**

Table 1 summarizes the outcomes of return migrants (who worked overseas in the past) compared to non-migrants (who never worked overseas). First, return migrants are considerably more likely to be self-employed (without paid employee) or employer (with paid employees) than non-migrants. Return migrants who are self-employed (with or without other paid employees) also earn significantly more on average than returnees who are wage employees. Since entrepreneurs are on average older than wage workers, we also compare the earnings gap by age: the income gap between entrepreneurs and wage employees is observed at all ages (Figure A3). This suggests that self-employment is indeed an attractive option for return migrants to Bangladesh. Return migrants who become business owners also stayed longer at a destination - and presumably accumulated more savings - compared to those who become wage employees. Relative to return migrants who are wage workers and to non-migrant entrepreneurs, return migrants who are business owners are disproportionately concentrated in the service sector, and in particular in the retail/hotel/restaurant sector. Finally, return migrants who employ other workers generate higher incomes than comparable non-migrant entrepreneurs.

8
Table 1: Individual outcomes in Bangladesh by current employment status and past migration experience

|Employment status|Emp<br>(with paid|loyer<br> employees)|Self-e<br>(without p|mployed<br>aid employees)|Wage e|mployee|
|---|---|---|---|---|---|---|
|Migration experience|Non-mig|Returnee|Non-mig|Returnee|Non-mig|Returnee|
|Percentage of employment sta-|5.5%|9.5%|22.6%|59.2%|71.9%|31.3%|
|tus by migration experience|||||||
|Duration of migration|-|6.4|-|6.7|-|5.1|
|Unexpected return|-|0.24|-|0.22|-|0.30|
|Net revenue/Income ($)|4524|6319|1693|1753|1612|1597|
|Sector: Manufacture|0.25|0.02|0.14|0.005|0.30|0.06|
|Sector: Construction|0.04|0.09|0.02|0.02|0.14|0.35|
|Sector: Transportation|0.04|0.15|0.20|0.30|0.20|0.22|
|Sector: Retail/hotel/resturaunt|0.60|0.73|0.56|0.67|0.12|0.33|
|Sector: Other services|0.06|0.02|0.08|0.01|0.23|0.04|
|Number of employees|4.4|3.0|||||
|Employees: 1-2|0.71|0.76|||||
|Employees: 3-5|0.20|0.16|||||
|Employees: 6+|0.09|0.08|||||

_Note:_ The sample is restricted to males aged 18-59 who are employed in non-agricultural sectors. Net revenue and income are inflation-adjusted and converted to 2016 constant dollar. _Source:_ Non-migrant data is from the Household Income and Expenditure Survey 2016/17, while data on returnees is from the Bangladesh Return Migrant Survey 2018/19.

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Asian countries (De Mel et al. 2008). Small firms finance a smaller share of their investment with formal sources of external finance (Beck, Demirg ̈u ̧c-Kunt, and Maksimovic 2008) and are more constrained in their operations and growth (Berger and Udell 1998; Galindo and Schiantarelli 2003). In line with this evidence, financial development exerts a disproportionately large positive effect on the growth of industries that are more dependent on small firms (Beck, Demirg ̈u ̧c-Kunt, Laeven, et al. 2006).

Credit constraints are particularly salient for entrepreneurship loans, for two main reasons. First, income from self-employment is hard to verify as opposed to income from wage work stated in an employment contract, increasing information asymmetries between lenders and borrowers. Second, lending for self-employment is particularly risky given the low rates of survival of small enterprises in developing economies (McKenzie and Paffhausen 2019). To mitigate this risk, lenders limit the amount of credit provided and require high levels of collateral. In this context, micro-finance institutions emerged to address low access to formal lending opportunities by low-income borrowers. However, the conditions of entrepreneurship loans provided by microfinance institutions, which are now the main source of entrepreneurship loans in Bangladesh, are also restrictive. BRAC microfinance, the main provider of microfinance in Bangladesh, requires aspiring entrepreneurs to provide collateral assets that are at least equal to the nominal amount of their loan (Battaglia et al. 2021). Microfinance and NGO institutions, charge high interest rates, averaging 22 percent, on entrepreneurship loans (A. Islam et al. 2015; Battaglia et al. 2021). Interest rates charged by informal money lenders, to which many borrowers still resort, are significantly higher than these levels (Mallick 2012).

Only a small share of entrepreneurs in Bangladesh and other developing countries finance their initial investment through credit by formal lending institutions (C. M. Woodruff and Zenteno 2001; Banerjee and Duflo 2014). For Bangladesh specifically, international surveys and prior studies suggest that only around 20 percent of enterprises had access to start up credit (Khalily et al. 2011). These figures, drawn from international surveys like Doing Business, however, mostly cover formal businesses and may thus provide an optimistic picture of access to credit in settings where many of the enterprises are informal. In areas like rural Bangladesh, many businesses are not registered with authorities and operate at a relatively low scale. Yet, in line with these international data, Figure 3 shows that the majority of businesses in Bangladesh with up to 50 employees, including informal ones, use minimal external sources of funding.<sup>8</sup> Figure 3 further shows that government or private banks rarely Low access to credit is further restricted for low-

> 8Figure 3 distinguishes firms by their initial number of employees. Appendix Figure A2 displays a similar distribution when considering firms’ current number of employees.

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m Savings from abroad m Savings in Bangladesh @ Relatives/friends m@ Money lenders/Micro credit inst. m@ Banks
# **4 One Solution: Temporary Migration**

## **4.1 High Costs and Returns to Migration**

Temporary international migration is an expensive endeavour for which the BRMS provides a detailed breakdown for the first time. At their median values, the cost of migration exceeds (pre-departure) household income in the sample by a factor of 2.6. More than 10% of individuals require at least 10 years to raise the entire cost through their earned incomes.<sup>9</sup> Accordingly, credit access is critical for migration. The largest part of migration expenses, 56% is composed of the costs charged by the intermediary agencies that match workers with foreign employers.

In this section, we use the BRMS data to provide a cost-benefit analysis of temporary migration. Using a range of measures, we show that expected returns make migration a very profitable investment,<sup>10</sup> which enables returnees to start businesses for which local credit markets do not provide the necessary funds. Specifically, for these calculations, we use information on individuals’ earnings prior to migration, their wages while abroad, the duration of stay, the share of migration costs covered by loans, as well as the saving rates observed in different locations. Table 2 presents details of this information.

First, we compute a simple earnings-to-cost ratio, which we average across _N_ individuals _j_ in the sample: On average, the ratio of total earnings accumulated abroad over the cost of migration, _r_ 1, amounts to 9.3. Total foreign earnings are calculated as the time spent abroad multiplied by the average wage a migrant reports to have earned abroad. Foreign wages and migration _N_ costs imply an average break-even duration of _N_ <u>1</u> � _Cj/Wj_<sup>_a_=1</sup><sup>_._1years.Inourdata,the</sup> _j_ =1 median and the average duration of stay abroad are 4.7 and 6.5 years, respectively. A large majority of migrants (88%) hence earned more than their migration costs, implying a positive log earning-to-cost ratio. Panel (a) of Figure 5 shows the full distribution of this measure.

> 9Appendix Figure A4 displays the full distribution of migration costs relative to pre-migration household income.

> 10Our data in fact suggest that migrants are yet more optimistic about their foreign earnings potential. In the survey, we elicited retrospectively pre-migration expectations about wages to be earned abroad. While this is an imperfect measure of actual ex-ante expectations, the data do indicate a strong overestimation of foreign earnings: 77% of migrants in our sample expected higher earnings before migration than what they actually earned overseas, with both mean and median realized earnings falling short of the initial expectations by about 40%. This fact cannot be explained by recall bias, which would _reduce_ the difference between actual earnings and the retrospectively reported expectations. Our analysis here focuses on realized earnings.

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<!-- Start of picture text --> 2<br>°<br><a<br>Oo<br>o<br>a<br>ite)<br>Oo<br>-3 -2 -1 0 1 2 3 4 5 6<br>log(Earnings abroad / Migration costs)<br><!-- End of picture text --> <!-- Start of picture text --> 2<br>rad<br>Oo<br>o<br>a<br>wo<br>Oo<br>-4 -2 0 2 4 6<br>log(Excess earnings abroad / Migration costs)<br><!-- End of picture text -->
A more refined measure of rate of return accounts for home country earnings _Wj_<sup>_h_asan</sup> opportunity cost of migration. This excess earnings-to-cost ratio is given by the following expression: On average, the new ratio of earnings abroad to cost of migration is 5.8, and thus still clearly above 1. With this measure, the break-even point for migration duration is _N N_ <u>1</u> � _Cj/_ ( _Wj_<sup>_a−W h_</sup> _j_<sup>) = 2</sup><sup>_._3 years,with a median value of 1.4.Furthermore,75% of migrants</sup> _j_ =1 stay at the destination for long enough to break even. Panel (b) of Figure 5 shows the full distribution of (log) excess earnings-to-cost ratio.

While wages are considerably higher abroad, so are living expenses. This implies that not all excess earnings can actually be accumulated as savings. Using observed saving rates _s_<sup>_a_</sup> _j_<sup>byimmigrantworkersindifferentlocations,aswellassavingsrates</sup><sup>_sh_</sup> _j_<sup>inBangladesh,we</sup> can compute the excess saving-to-cost ratio as _N_ For excess savings, the break-even point of duration increases to _N_<sup><u>1</u></sup> � _Cj/_ ( _Wj_<sup>_asa_</sup> _j_<sup>_−W h_</sup> _j_<sup>_sh_</sup> _j_<sup>) =</sup> _j_ =1 4 _._ 2 years. In our data, 54% of the migrants still have a longer migration duration.

The returns to investment for temporary migration are not restricted to the migration episode. Indeed, when temporary migration enables workers to engage in self-employment and entrepreneurship after return, their lifetime incomes at home significantly increase compared to a counterfactual scenario where they could not have migrated. To calculate the long-term returns to migrating, we estimate a migrant’s income gains after return until retirement which can be attributed to the transition into self-employment, and compare it with the cost of migration. We approximate these long-term returns to migration as follows: first, we use the nationally representative HIES data to estimate the income trajectories for self-employed and dependently employed individuals. That is, we run an auxiliary regression of individual _j_ ’s income on a full set of age indicators **1** [ _agej_ = _a_ ] interacted with a dummy _SEj_ that takes value 1 if a respondent is self-employed, and 0 otherwise. Controls _Xj_ include 16
indicators for education level, a rural or urban location, and regional (division) effects. We then take the estimated returns to self-employment, _α_ ˆ _a_<sup>_SE_=1</sup> , for each age _a_ , to compute In this expression, _aret_ denotes the age at the time when a migrant returns home. We evaluate _r_ 4 only on those who were not self-employed before migration. Thus it measures how much the transition into self-employment after return contributes to earnings gains until retirement, which is assumed to be at 60 years of age. In our sample, the majority (65%) of return migrants who were economically active throughout, but were not self-employed or employers prior to migration, do become self-employed after return. Different from other contexts, where returns to experience lead to steep age profiles that would also generate a gain in incomes, Figure A3 shows that income profiles are virtually flat in our setting. Instead, the investment of savings from abroad into creating businesses leads to an average excess income after return as high as 2.2 times the cost of migration. When these long-term returns are taken into account, in addition to the returns over the migration episode itself, temporary migration becomes yet more profitable.

# **4.2 Borrowing for Migration**

A large fraction of migrants finance part or all of their expenses and fees through loans. A distinctive feature of the formal and strongly regulated migration relative to entrepreneurial investment is that migrants have verifiable employment contracts and a higher probability of repaying their loans. Indeed, migrants cannot migrate to the GCC or East Asian countries without an employment contract with a specific employer. As a result, earnings from overseas are easily verifiable by the lender, as opposed to mostly informal earnings from self-employment. Regarding the relative riskiness of migration loans versus business startup loans, we compare the fraction of migrants who were expelled from their overseas employment before they generated enough income to cover migration costs to the fraction of microenterprises that exit their markets before generating enough profits to cover initial investment costs. According to the BRMS data, the share of temporary migrants whose total earnings overseas are lower than the total migration costs they incur is 11.9%. In contrast, the estimated share of Bangladeshi microentrepreneurs who do not generate sufficient profits over the lifespan of their enterprise to cover initial investment costs is 60.2%.<sup>11</sup> Based on this

> 11We use the average annual survival rate of microenterprises from McKenzie and Paffhausen (2019), and average net incomes generated by household enterprises in Bangladesh from the HIES 2016/2017 to compute

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early returnees. About 40% of the migrants who stay for less than one year were forced to return.

Being forced to leave the destination country as opposed to leaving voluntarily impacts the rate of return to the migration endeavor, and the likelihood to start entrepreneurship after return. As shown in Table 3, earnings to cost, excess earnings to cost, and excess savings to cost indicators are all significantly larger for migrants who returned voluntarily compared to those who were forced to return. Panel (b) of Figure 9 visualizes the left shift in the distribution of excess earnings over costs for forced returnees compared to voluntary returns. Whereas slightly more than one-fifth of the latter fail to break even, that share rises to one third for migrants who were forced to return. Since the ability to start entrepreneurship after return is tied to savings accumulated overseas, forced returns also negatively affect self-employment after return. As shown in Table 3, migrants who were forced to return are less likely to become entrepreneurs back in Bangladesh: 55 percent of forced returnees are self-employed back in Bangladesh, compared to 64 percent of migrants who voluntarily return.

Table 3: Return rate of migration and employment status after migration by forced return

||Forced return|Normal return|
|---|---|---|
|Earning-to-cost, _r_1|6.5|10.3|
|Excess earning-to-cost, _r_2|4.3|6.4|
|Excess saving-to-cost, _r_3|2.3|3.2|
|Waged workers|41.5%|32.5%|
|Self-employed|55.0%|63.7%|
|Employer|3.6%|3.9%|

_Note:_ Calculations based on the data summarized in Table 2, and measures described in the text.

# **4.4 Human Capital as an Alternative Mechanism**

A channel other than financial wealth accumulation that could foster self-employment after return is human capital accumulation abroad. The vast majority of temporary migrants from Bangladesh are employed in brawn-based, low-skilled occupations in the construction sector overseas – primarily in construction, with a minority in service activities such as retail or transport. While studies in other contexts suggest that some workers accumulate human capital overseas which benefits them in wage employment back home, this channel does not 21
<!-- Start of picture text --> 2<br>2<br>ra<br>e<br>lo<br>O°<br>0 1 2 3 4 5 6 7 8 9 10 11 12+<br>Duration (years)<br>MEE Forced return = Normal return<br><!-- End of picture text --> <!-- Start of picture text --> 2<br>2<br><<br>a<br>ite}<br>oO<br>4 2 0 2 4 6<br>log(Excess earnings abroad / Migration costs)<br>(99 Forced return =|“ Normal return<br><!-- End of picture text -->
who were employed in transport and utility sectors. Similarly, temporary migrants employed in transport and utility sectors while abroad do not disproportionately transition into that sector after return. Overall, descriptive evidence on sectoral patterns lends little support for human capital accumulation as a driver of temporary migration from Bangladesh.

Table 4: Distribution of temporary migrants across sectors of activity

||Before Migration|During Migration|After Return|
|---|---|---|---|
|Sector|%|%|%|
|Agriculture|22.2|3.0|25.9|
|Construction|23.8|66.6|9.6|
|Manufacturing|2.5|5.1|1.7|
|Retail, Hotel, Restaurant|37.9|11.1|42.1|
|Transport, Utility|10.4|10.3|19.4|
|Other services|3.3|4.0|1.4|
|Total|100.0|100.0|100.0|

_Note:_ The sample is restricted to employed males aged 18-59. _Source:_ Bangladesh Return Migrant Survey 2018/19.

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# **5 Conclusion**

When markets for entrepreneurial loans are dysfunctional, business creation may require one or more smaller scale intermediate investments, the returns to which help cover the cost of the planned final investment. In many low income countries, one such intermediate endeavor is a temporary migration for the purpose of asset accumulation abroad. Evidence we provide from Bangladesh indeed demonstrates the important role played by temporary migration as a strategy to circumvent institutional voids on the credit market for entrepreneurs. The detour through contract migration is feasible since loans to finance migration expenses are more readily available. Yet, this route to self-employment is second best. Large efficiency gains are likely to be realized if entrepreneurial loans were more widely available and the large costs of international migration could be reduced.

While a reduction of either legal or financial barriers to migration could raise the capital stock that is available for entrepreneurial investments in a country like Bangladesh, a more direct policy intervention may target domestic credit markets. In particular weak legal regimes and regulations, the absence of credit information systems, or costly insolvency proceedings may contribute to the malfunctioning of this important sector. Agency problems faced by lenders are plausibly more important for entrepreneurial loans compared to migrant loans that are widely available in a context of regulated migration like Bangladesh.

On the other hand, economic development of low-income countries may be hampered by a scarcity of capital available, beyond any lack of efficiency in its allocation. In the absence of foreign investment, migrant remittances are an important resource for capital accumulation in labor abundant countries (Rapoport and Docquier 2006). As such, policies aiming to support temporary international migration and a repatriation of assets accumulated overseas may prove to have a strong impact on entrepreneurial investments in many low and middle income countries that are difficult to match by policies focusing on efficient loan provision alone.

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