Remittance: Are we ready to harness the potential?

Remittance is increasingly becoming a major policy issue due to its widespread effects on growth and development. Emphasising the impact of remittances on human development many researchers have suggested that a remittance recipient country with efficient policy intervention in investment management, household education and state provision of basic public goods can improve its Human Development Index (HDI) significantly.
The urgency for including human capital development aspect in the remittance policy can further be augmented by the research findings that remittance inflow maybe a stable source of physical capital accumulation, but it does not increase the Total Factor Productivity (TFP) or efficiency of an economy. These analyses bring forward the question of sustainability of the sector and direct the focus of the policy towards a wider socio-economic development which includes human capital formation, skilled migration, and experience sharing with resulting expatriate community network popularly known as diaspora.
Why are remittances so important for Bangladesh?  First, this is a relatively new area of development. Most of the policy makers, especially in the developing world, believe that the increasing physical capital stock would improve the economy and sustain growth (classical Growth Model). Thus the policy makers facilitate "remittance enabling environment" in the policy document, but fail to give proper attention on the much needed human capital formation process. Second, the share of the remittance to GDP (14 per cent) and population (10 per cent) is so large that a single policy, focused on only remittance improvement is insufficient to address the whole interrelated component of the system.
Finally, the economy of a developing country with foreign exposure remains extremely vulnerable to the exogenous shocks. The challenge of the policy makers is to harness the potential of this sector, which may be counterproductive without proactive intervention as several researches indicate that remittance may cause high inflation or damage to the domestic industry.
The remittance system has taken a new meaning as the question of migration is attached to it. The Great Migration from 1910 to 1970 drew more than six million African Americans from the rural Southern states to the Northern industrial provinces of the US.
Before that the Trans-Atlantic slave trade in between 1500-1900 exported around 12 million African migrants to America.  However, this huge migration could not produce enough benefit to the home country of the migrants as they could not keep up a functional relationship with their homeland. Instated, this mass migration caused fragile African states with weak institutions. This is true that the early migration was not motivated by voluntary will; rather it was a forced deportation of a population with limited human rights and decision making capacity.
In contrast, the new philosophy of migration, remittance and development is much different today. The new concept emphasises on the emotional nexus between the host country and recipient country through which the transfer of knowledge, creativity, and innovation become relevant other then only sending back remittances. Based on this idea World Bank has defined 'remittance' as transfer of money by residential and non-residential migrants, and transfer of portfolios and goods to the home country by the diaspora network.
The diaspora development has played a very crucial role in the recent software industry of India. Despite the weak domestic institutional capacity of the home country, the innovation industry creates an ample opportunity by utilizing the human capital through skill and knowledge sharing within the diaspora network. Research shows that expatriate communities from developing countries may play a vital role in trade and development between the host and the country of origin.
A study on Bangladesh economy has found that inflow of remittances is consistently improving the balance of payment and increasingly promoting investment and export. A similar analysis shows that the foreign remittances have long-run positive impact on the poverty reduction. Another important development impact of remittances on Bangladesh economy is that it increases the reserve of foreign exchange and reduces reliance on the foreign aid (loan). Although there is a strong conviction that inflow of remittances is doing well for the recipient economy, unfortunately the empirical evidence shows some grime aspects of remittances. Analysis of 111 countries' remittance to GDP (gross domestic product) ratio statistics reveals that higher the ratio of remittances higher the level of corruptions, inefficiency and deterioration of the rule of law. The influx of remittances is just like a resource boom, where the economy is flooded with foreign exchange creating opportunity of rent seeker groups.
A study on Pakistani economy shows that the inflow of remittances from oil-producing countries deteriorates the quality of governance. In addition, this excessive foreign liquid asset puts pressure on the domestic manufacturing industry and on the non traded goods leaving the country with excessively dependent on import popularly known as Dutch Disease. This is because the remittance-receiving countries experience long-run exchange rate appreciation which adversely affects the export and loss of trade competitiveness which is evident from analysis of the last 30 years' consistent deterioration of Bangladesh's Terms of Trade (TOT).
The challenge for the policy maker is to reach a win-win scenario for both the host and receiving county. This is especially important for labour market as it becomes a challenge for the labour-exporting country to keep up with the domestic demand for labour supply as expatriation reduces labour force and increases reservation wages. Overall, remittance can be a suitable source of development only if the recipient country has good institutional capacity such as efficient financial system, better public goods provisions and good governance.

The writer is doing Masters in Applied Economics at University of Adelaide, Australia.
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