Remittances for Finance for Development

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On one hand, remittances have contributed to the macro-economic stability of receiving countries: because remittances are less volatile than other capital flows, they tend to stabilize the exchange rate and may sustain current account deficits. Remittance inflows can make a macro-economic contribution by financing a large proportion of the balance of trade deficit and thus reducing the current account deficit to manageable proportions. The repatriable deposits provided external resources to finance the current account deficits, but in much the same way as any other form of borrowing abroad may have done. It is important to acknowledge that remittance inflows and repatriable deposits actually provide a counterpart in terms of domestic resources. This is because the inflow of remittances finances consumption demand and reduced pressures on the current account. By contributing to national savings they can finance domestic investment. On the other hand however, large inflows of foreign currency tend to appreciate the nominal or real exchange rates, leading to negative effects on the competitiveness of export-oriented sectors, similarly to the phenomenon known as “Dutch disease” in the literature on natural resource booms.

The relationship between migration and economic growth are dependent upon factors such as; the magnitudes of the outflow of workers, the employment status before migration, the skill composition of migrants and the size of the return flow. Another important factor to consider is whether the migration is permanent or temporary. Highly skilled citizens are more likely to be hired for long-term periods, resulting in permanent migration. If workers were employed before departure this could benefit the economy by reducing unemployment due to job availability (surplus of educated unemployed), however, the emigration may have led to some deterioration in the quality of the labour force even if the best migrated were replaced by the second-best. Emigration of educated persons to industrialise countries, especially those with professional expertise, technical qualifications or managerial talents, raise complex issues, that may in fact discourage economic growth. A reason for this is that the cost of training such persons in the education system is incurred by the home country whereas the benefit is accrued to the migrated countries, creating an unrequited scarce of human capital.

Temporary migration is likely to increase the incidence of the open or disguised unemployment only at the margin, by exerting pressure on the labour market where job opportunities are scarce. The problem of unemployment may be aggravated among return migrants if they are reluctant to enter the same occupation on return. In one sense, given their savings out of remittances, they are somewhat better endowed to fend for themselves in the market as compared with the resident non-migrants. However, as the magnitude of return flows increases, manpower planning at a macro level and policy intervention at a micro level should be addressed not simply to facilitation the reabsorbtion of these workers but also to utilise the skills which have been upgraded or acquired in overseas employment.

On average migrants send $200 per month, but, month after month repetition, by millions of people, leads these sums of money to add up to rivers of foreign currency. In 2013, international migrants sent $413 billion home to families and friends — three times more than the total of global foreign aid (about $135 billion). In Egypt remittances are three times the size of revenues from the Suez Canal. In Tajikistan, remittances are 42 percent of GDP. And in poorer, smaller, conflict-afflicted countries like Somalia or Haiti, remittances are a lifeline.

Although, migrants send money home, they also save a large amount of money where they live. Annually, migrant savings are estimated to be $500 billion. Most of that money is parked in bank deposits that give you 0% interest rate. If a country were to come and offer a 3% or 4% interest rate, and then say that the money would be used for building schools, roads, airports, train systems in the country of origin, migrants may be more inclined to part with their money if that they are involved and stay engaged with their country’s development. This would also provide an opportunity for remittance channels, as they could be used to sell these bonds to migrants because when they come on a monthly basis to send remittances.

Governments may consider remittances to be an inappropriate strategy as there are insidious effects of remittances on economic development and well-being. For example, a remittance-receiving household no longer has to care as much about the quality of the government and its ability to provide infrastructure and institutions that facilitate growth. If conditions are bad at home, families send more members abroad and use remittance income to compensate for the lack of government services. They lose interest in pressuring the government to deliver better services. The government, for its part, does not feel compelled to provide these services because it realizes that these households can fend for themselves, and the quality of government declines even further. Whereas, foreign aid may be considered a better alternative as money must go through official agencies, the government. Thus, recipients must put their trust in government institutions and lack of government trust prohibits growth. However, a remittance recipient may argue that remittances are an appropriate strategy as remittances directly reach the poor and the migrant families.

CONCLUSION

Evidence is inconclusive, in part because remittances have their greatest impact during economic downturns when jobs decline and in part because any effect on permanent behavior takes root over a long time. On the other hand, because remittances finance education and health and alleviate credit constraints for small entrepreneurs, they may enhance growth. To the extent that they increase consumption, remittances may increase individual income levels and reduce poverty, even if they do not directly improve growth[a]

Economy growth and remittance cannot be perceived as cause and effect as we cannot isolate extraneous factors.

These transfers are intended to provide for people’s basic need for food, clothing, and shelter. The effort to lift people out of poverty is laudable, and numerous survey studies on the use of remittances have concluded that remittances have always been overwhelmingly directed toward consumption and not investment activities. But we should not expect remittances to be engines of growth in the same way as foreign direct investment.[b][c]

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