Economics of migrant remittances: What shapes and what shakes
Monday, 16 July 2007
Jamaluddin Ahmed
MIGRATION and settlement are considered long drawn out process. Over time, three major sets of theories have emerged to try to explain migration and resettlement. The neo-classical equilibrium perspective- emphasises tendencies of people to move from densely to sparsely populated areas, from low to high-income areas, or link migration to cyclical fluctuation of business of a country. These approaches are normally called as "push-pull" theories.
The historical structural approach has its roots in Marxist political economy, and assesses the unequal distribution of economic and political power in the world economy. Migration was seen mainly as a way of mobilising cheap labour for capital. The migration system approach sets out to provide a conceptual framework which includes both ends of the flow and studies all dimension of the relation between flows of capital, commodities, ideas and people, and such that flows rise out of historical linkage, for example, colonisation, military presence, political influence, trade or cultural penetration.
Literature provides substantial evidence that migrants have potential to contribute to the economic development of their home countries through their financial resources as well as their skills. Moreover, they also have the potential to assist host countries with their skills; labour and efforts also address the unique demographical imbalance due to a decreasing and increasing aged population. The WTO implication on the opening of cross boarder service migration and remittance is taking a much stronger shape than earlier time. In the developing and foreign loan syndrome economies like that of Bangladesh, migrant remittance forms one third of annual import and four times greater than foreign loans and grants and several times greater than foreign direct investment to the country. Migrant remittance is easing pressure on foreign rate and reserve position.
In the recent times, attention has been given to the utilisation of remittance flow in poverty reduction and development of private sector competition through innovative remittance product to make faster channelling to the beneficiaries. Moreover, organisations are working to protect the rights of migrants in terms of fixing the exchange rate, competitive charges for remittance and maintaining of agreed real time delivery of remitted money. It is argued that transparency in fixing exchange rate, cost of remittance, and real time delivery is possible when a country has a vision and strategy for efficient national payments system supported by automated clearing house. Also, where participating banks and remittance providers have their IT infrastructure and government enacted the consumer protection law including the infrastructure for e-governance.
Literature describes two opposing perspectives on cost and benefits of remittance with studies supporting both. The first is positive and describes remittances as improving recipient's standard of living, providing money for basic needs such as food, clothing, housing improvements, and education and providing hard currency for consumer goods such as small household appliances. The transfer of funds is a direct benefit to those who may need it most. Proponents of remittances contend that research has undervalued the role of remittance in promoting economic development and remittances are indeed an important factor for economic development as they have high income and employment multipliers. For example, statistical analysis finds that each $1.0 remitted to Mexico adds $ 2.90 to its GDP and increases $3.20 in economic output, which again leads to an increase in national income and productions of billions of dollars each year (Durand 1996). At the macro economic level, remittances often provide a significant source of foreign currency, increase national income finance imports and contribute to the balance of payments. Remittances have also transnationalised economic, social, and political life and contributes to the wire transfer and courier companies as well as money exchangers. Some economists, like Philip Martin caution, however that remittances are rarely the spark that creates enough economic activity to make migration unnecessary. He and others believe that remittances not only fail to help the economy but also in a way decrease the likelihood of an improved economy. The inflow or funds can be deceptive if it creates dependence among the recipients, encourages the continued migration of the working age population, and decreases the likelihood of investment by the government or foreign investors because of an unreliable workforce or one that is accustomed to not working.
Moreover, these researches view remittances as unpredictable and as a cause of increasing income inequality. Also, the remittance frequently are spent on imported consumer goods, rather than locally produced ones, decreasing the potential multiplier effect of the money and increasing import demand and inflation. Benefits of remittances include among others, (i) easing foreign exchange constraints and improving balance of payment; (ii) easing pressure on exchange rate, (iii) permitting imports of capital goods and raw materials for industrial developments; (iv) becoming the potential source or savings and investment and capital formation for developments; (v) raising the immediate standard of living of recipients, remittances being the addition to resources and (vi) facilitating better income distribution. There is evidence of growing literature on remittance and their effects on the social sectors. Rivera and Campos and Larde Palomo (2002) carried similar study on El-Salvador and found that remittance helped reduce national poverty rate by 4.2 per cent, as well as Gini Coefficient from .055 to .053. Cox and Edwards and Vreta (2003) found that in rural areas the probability that a child -- from household receiving a 100 dollar remittance per month -- leaves a primary school is 56 per cent lower -- than that of child from a household not receiving remittance. In urban areas, the corresponding probability was 24 per cent. Lopez-Calix and Saligson (1990) in their survey on the role of remittances in financing small business found that on average 16 per cent remittances were used for investment purposes. Delegado and Siri (1996) proposed a series of financial mechanisms, such as, investment in funds and micro-enterprise credit lines, among others, to facilitate the use of remittances in starting up new business. At the same vein, Cacers (2003) explored the role of remittance that could play in developing the rural sector.
(The writer is Vice President, Institute of Chartered Accountants of Bangladesh and Treasurer of Bangladesh Economic Association.)
MIGRATION and settlement are considered long drawn out process. Over time, three major sets of theories have emerged to try to explain migration and resettlement. The neo-classical equilibrium perspective- emphasises tendencies of people to move from densely to sparsely populated areas, from low to high-income areas, or link migration to cyclical fluctuation of business of a country. These approaches are normally called as "push-pull" theories.
The historical structural approach has its roots in Marxist political economy, and assesses the unequal distribution of economic and political power in the world economy. Migration was seen mainly as a way of mobilising cheap labour for capital. The migration system approach sets out to provide a conceptual framework which includes both ends of the flow and studies all dimension of the relation between flows of capital, commodities, ideas and people, and such that flows rise out of historical linkage, for example, colonisation, military presence, political influence, trade or cultural penetration.
Literature provides substantial evidence that migrants have potential to contribute to the economic development of their home countries through their financial resources as well as their skills. Moreover, they also have the potential to assist host countries with their skills; labour and efforts also address the unique demographical imbalance due to a decreasing and increasing aged population. The WTO implication on the opening of cross boarder service migration and remittance is taking a much stronger shape than earlier time. In the developing and foreign loan syndrome economies like that of Bangladesh, migrant remittance forms one third of annual import and four times greater than foreign loans and grants and several times greater than foreign direct investment to the country. Migrant remittance is easing pressure on foreign rate and reserve position.
In the recent times, attention has been given to the utilisation of remittance flow in poverty reduction and development of private sector competition through innovative remittance product to make faster channelling to the beneficiaries. Moreover, organisations are working to protect the rights of migrants in terms of fixing the exchange rate, competitive charges for remittance and maintaining of agreed real time delivery of remitted money. It is argued that transparency in fixing exchange rate, cost of remittance, and real time delivery is possible when a country has a vision and strategy for efficient national payments system supported by automated clearing house. Also, where participating banks and remittance providers have their IT infrastructure and government enacted the consumer protection law including the infrastructure for e-governance.
Literature describes two opposing perspectives on cost and benefits of remittance with studies supporting both. The first is positive and describes remittances as improving recipient's standard of living, providing money for basic needs such as food, clothing, housing improvements, and education and providing hard currency for consumer goods such as small household appliances. The transfer of funds is a direct benefit to those who may need it most. Proponents of remittances contend that research has undervalued the role of remittance in promoting economic development and remittances are indeed an important factor for economic development as they have high income and employment multipliers. For example, statistical analysis finds that each $1.0 remitted to Mexico adds $ 2.90 to its GDP and increases $3.20 in economic output, which again leads to an increase in national income and productions of billions of dollars each year (Durand 1996). At the macro economic level, remittances often provide a significant source of foreign currency, increase national income finance imports and contribute to the balance of payments. Remittances have also transnationalised economic, social, and political life and contributes to the wire transfer and courier companies as well as money exchangers. Some economists, like Philip Martin caution, however that remittances are rarely the spark that creates enough economic activity to make migration unnecessary. He and others believe that remittances not only fail to help the economy but also in a way decrease the likelihood of an improved economy. The inflow or funds can be deceptive if it creates dependence among the recipients, encourages the continued migration of the working age population, and decreases the likelihood of investment by the government or foreign investors because of an unreliable workforce or one that is accustomed to not working.
Moreover, these researches view remittances as unpredictable and as a cause of increasing income inequality. Also, the remittance frequently are spent on imported consumer goods, rather than locally produced ones, decreasing the potential multiplier effect of the money and increasing import demand and inflation. Benefits of remittances include among others, (i) easing foreign exchange constraints and improving balance of payment; (ii) easing pressure on exchange rate, (iii) permitting imports of capital goods and raw materials for industrial developments; (iv) becoming the potential source or savings and investment and capital formation for developments; (v) raising the immediate standard of living of recipients, remittances being the addition to resources and (vi) facilitating better income distribution. There is evidence of growing literature on remittance and their effects on the social sectors. Rivera and Campos and Larde Palomo (2002) carried similar study on El-Salvador and found that remittance helped reduce national poverty rate by 4.2 per cent, as well as Gini Coefficient from .055 to .053. Cox and Edwards and Vreta (2003) found that in rural areas the probability that a child -- from household receiving a 100 dollar remittance per month -- leaves a primary school is 56 per cent lower -- than that of child from a household not receiving remittance. In urban areas, the corresponding probability was 24 per cent. Lopez-Calix and Saligson (1990) in their survey on the role of remittances in financing small business found that on average 16 per cent remittances were used for investment purposes. Delegado and Siri (1996) proposed a series of financial mechanisms, such as, investment in funds and micro-enterprise credit lines, among others, to facilitate the use of remittances in starting up new business. At the same vein, Cacers (2003) explored the role of remittance that could play in developing the rural sector.
(The writer is Vice President, Institute of Chartered Accountants of Bangladesh and Treasurer of Bangladesh Economic Association.)