International Migrant Remittances - Essay Example

DO INTERNATIONAL MIGRANT REMITTANCES MAKE A CONTRIBUTION TO ECONOMIC DEVELOPMENT AND THE REDUCTION OF POVERTY IN DEVELOPING COUNTRIES? The essay discusses the issue of migrant remittances and analyses whether migrant remittances have a positive effect on the economy and poverty levels of developing countries to which the migrant workers send their money. TABLE OF CONTENTS Introduction…………………………………………..4 Data and trends of Migrant Remittances…………..4 Negative Effects of Remittances…………………….5 The Benefits of Remittances…………………………6 The Challenges……………………………………….7 Conclusion…………………………………………….9 References……………………………………………11 Introduction In developing countries, migrant remittances are considered to be one of the fast growing external capital sources. In the last few years, capital market flows and foreign direct investments declined sharply. This was primarily due to the recession in the countries having a high income. The migrant remittances however continued to grow. In the year 2002, migrant remittances around the world amounted to almost 150 billion US dollars. It was in the beginning of the 1980s that economics around the world began to give importance to the exercise of migrant remittances. The experts and scholars believe that migrant remittances have helped in compensating the loss of human capital in developing countries. There are several political debates related to the issue of remittances. Some of the hot topics of debate regarding remittances included the determinants of the remittances, and the importance of the channels which used to transfer the remittances as well as the economic impact on the countries which receive migrant remittances. In the past few years, the amount of remittances flows has increased enormously. This is one of the reasons why the research on remittances has become very prominent. This has led to the increase of scientific literature as well. Some of the sections where remittances have been studied in depth by researchers include the data on remittances, and the regional trends as well as the global trends in remittances flows, and most importantly the significance of remittances as a source of capital for economically backward countries. Data and trends of Migrant Remittances Maimbo and Ratha (2005, p.2) state ‘International migrant remittances are perhaps the largest source of external finance in developing countries. Officially recorded remittance flows to developing countries exceeded US$125 billion in 2004, making them the second largest source of development finance after foreign direct investment.’ There have been several evaluations on data sources of remittances flows. According to the IMF (International Monetary Fund), there are three distinct sections in balance of payments wherein the remittances are recorded. The first one includes the employees and the compensations of the employees who are residing abroad for less than a year. The second kind of category is the worker’s remittances. Worker’s remittances are essentially the monetary value of the remittances which are sent to the receiving country. The third section pertains to the migrant’s transfer. This is the wealth of all the migrant employees who have moved to a foreign country for employment. Negative Effects of Remittances Scholars are of the opinion that remittances have a positive effect on the economy of the receiving country. However there are a few negative effects of remittances too. One of the major negative effects of remittances is Boomerang Effect that it has on current accounts. This Boomerang Effect comes about when an increase in imports and deficit in trade balance is induced by remittances in the country which receives the remittances (Allen and Thomas, 2000). The tendency of imports also can sometimes increase the general development in the developing country’s economy. It can also lead to several changes in the production of investment goods or consumer goods. However this theory of boomerang effect is not properly supported by empirical research. Another negative effect of remittances is when the remittances cause the economy to have a greater demand than the capacity of the country to supply or produce to meet that demand. When this kind of demand applies on goods which are tradable, an appreciation of the real exchange rate can be induced by the remittances. This changed exchange rate eventually would reduce the competitiveness of the country’s domestic industries, especially in the foreign markets. Therell be a number of expensive exports and resources which would be shifted from the tradable sector to the sector which is non-tradable. Such a scenario is sometimes referred to as the Dutch Disease Effect (Allen and Thomas, 2000). This would also create a major pressure on the balance of payments, a lower growth rate of employment and finally the incentive to emigrate would be increased due to these reasons. There has been empirical evidence from countries such as Turkey, Egypt and Portugal. (McCormick and Wahba, 2004; Straubhaar, 1988) One of the reasons for the Dutch Disease Effect is that the remittances are causing the import of cheap capital goods to increase the productivity and thereby increase the competitiveness of the domestic products. Furthermore, imported capital goods may be used as a substitute for other goods which are imported. The Benefits of Remittances Although there are a number of negative points about international micro remittances, the number of positives far outweighs the number of negatives. There are some conclusions which can be drawn from international migrant remittances. Especially for the developing countries, international migrant remittances turn out to be one of the most important capital sources. Although they are not as important as the FDI, they surpass the development assistance as well as capital market flow. Furthermore, remittances are considered to be a stable capital source. Additionally, although portfolio investment and FDI have fallen in the last few years sharply due to the recession worldwide, still remittances have continued to take the growth path, which is a proof of the anti cyclical trait. Maimbo and Ratha (2005, p.4) comment ‘Global flows of migrant worker remittances were estimated at US$182 billion in 2004, up 5.7 percent from their level in 2003 and 34.5 percent compared to 2001 (World Bank 2004). Developing countries received estimated US$125.8 billion workers’ remittances in 2004, registering an increase of nearly 48.7 percent compared to 2001.’ The Challenges There are a number of central banks throughout the world which finds it difficult to implement the booking of migrant international remittances as well as migrant transfers for capital transfers. Central banks of developing countries especially have a hard time to distinguish the remittances by migrant workers from other transfers which are private in nature. Hence, these central banks often book the important segments of worker remittances flows under the category of Other Current Transfers (Eade, 1997). This implies that the official flow of remittances to the underdeveloped countries is not properly valued. This also creates a major problem while comparing of remittance data internationally. Therefore one of the best ways of evaluating the flow of formal remittances can be done by following three major balance of payment factors. First of all, worker’s remittances, secondly the compensation of the employees and finally the Other Sector Transfers. Regarding the contributions that remittances make in compensating the capital loss, there is an important assumption which is that the human propensity of migrants to remit money diminishes with the increase of education. This would imply that the highly skilled migrant workers do not compensate for the economic laws of the country from where they are leaving. Although there has been very little evidence, but a number of researchers have hinted that this assumption might be true (Faini, 2002). Additionally, a considerable segment of the money which is remitted by international migrant employees is basically utilized by the companies as profits rather than the families of the migrants in the developing countries. It is also suggested that billions of dollars would be freed up each year if and when commercial banks would start to reduce the costs of remitting money and also introduce cheap transfer services. This would eventually help the poor households of Asia, Latin America, Eastern Europe and Africa. Maimbo and Ratha (2005, p.291) state ‘First, international migration—defined as the share of a country’s population living abroad—has a strong, statistically important impact on reducing poverty in the developing world. On average, a 10 percent increase in the share of international migrants in a labor-sending country’s population will lead to a 1.9 percent decline in the share of people living on less than US$1 per day.’ For this to be a reality however there needs to be two types of policies in the remittances sending nations which must be implemented. The first policies would be policies which would be focusing on efficient markets and fair competition for remittances transfer. One such example is ensuring that there is a pricing transparency and a better awareness of the consumers about the options which are available. The second policy would facilitate the migrant workers to easily access and open bank accounts such as the US ‘Matriculas’(Rodrik, 2006). This would also allow access to transfer services which are much cheaper. Hence by reducing the overall costs of remittance sending, a large chunk of remittances flows could be easily channelized through the financial system. This would eventually assess the economic of the remittances receiving country to greatly improve. For example, the deficits of balance of payments can be reduced significantly, poverty in the economically backward countries can be reduced, the foreign exchange shortages can be lessened to a great degree, and there can also be an increased number of productive investments in the country. Conclusion Besides having all these direct beneficial effects on the economy of backward countries, remittances can also have a positive effect indirectly. Some of the indirect positive effects of remittances include the relaxing of risk and capital constraints of the country, the utilization of resources for the purpose of investments and multiplier effect generation of spending of consumption. Although remittances are believed to have several benefits, they cannot be considered as the panacea which can help the underdeveloped countries to rapidly improve and become a developed country (Rodrik, 2006). What are more important are sound economic policies of the underdeveloped countries which would hasten the process of development. The remittances thus would act as one of the contributors of economic development but would not help in a rapid progress in the economy of a developing country alone. Hence it is important that the environment of developing countries are conducive to emigration and also, it is necessary that the developing countries have proper mechanisms to limit the developmental impact which remittances by migrants can sometimes create, since it can have a number of adverse effects on the economy. Income is not the only factor on which productive investment depends on. Productive investment rather depends on interest rates, stock prices, macroeconomic policies as well as the market infrastructure. These contribute to a stable economic progress of country. Thus, along with good macroeconomic management and great development strategies, developing countries must also encourage migration of its workers as the positive effects of remittances for developing countries is validated and real. References Allen T and Thomas A (2000 eds.) Poverty and Development into the 21st Century. 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