Remittances and economic development
Friday, 10 August 2007
Md. Abdul Jabbar
REMITTANCES have played a significant role in poverty reduction in most of the developing countries. However, there have been few studies on the impact of remittances on the growth of GDP of a country. In estimating the impact of remittances on the GDP growth and trying to find out why people remit back home, we find that remittances are more compensatory in nature and hence, are the reflection of a situation in the home country. Better economic situations inhibit remittance flows while poor performance of the economy increases the flow of remittances. Since the remittances have been used mostly for consumption purposes in our country, they have limited direct impact on the growth of GDP.
Remittance flows, once largely ignored by economists and policy makers, have grown over the past decade to the point where they play a huge role. Because of the growing role that remittances play in the world economy, many governments have created every appropriate opportunity on priority basis to enhance its flow.
Between 1960 and 2000 the world population doubled from three billion to six billion while the total number of international migrants more than doubled (from 76 million). As a result, international migrants represented 2.5 per cent of the world population in 1960 and 2.9 per cent in 2000. The United Nations (UN) now estimates that there were almost 200 million international migrants in 2005. This figure shows an accelerating trend, with the percentage rising from 2.1 per cent per year between 1960 and 2000 to 2.7 per cent per year between 2000 and 2005.
Remittances to developing countries rose from US$160 billion in 2004 to US$167 billion in 2005 and are likely to keep on growing. These estimates do not include unrecorded flows, much of which travel through informal, or even underground, financial channels; these are thought to be at least half the magnitude of recorded flows.
Remittance flows frequently outstrip foreign direct investment (FDI), which is three and a half times net official flows. Not surprisingly, migration and remittances are now high on many agendas. But the typical approach is narrow and short-term. Little attention is being paid to the effects on sustainable development, equity and long-term poverty reduction.
In some countries, remittances as a share of GDP are substantial; for example, this share is 15 per cent in El Salvador and 35 per cent in Haiti. About 28 per cent of households in El Salvador receive remittances. In Bangladesh, it is about 7.0 per cent of GDP.
Remittances serve as an important means of reducing poverty. Remittances are private transfers that go directly to the poorer, economically isolated segments of the population. With no government involvement, these flows go directly to those who most need them. Often these flows are critical for the survival of the receivers, and under the right circumstances can be used by the senders and/or recipients to break the grip of poverty. Studies have shown that remittance recipients are more likely to send their children to school, have more access to health care, and are more likely to start small businesses. Product options introduced recently in some remittance services allow remittance senders to directly pay for a house or to save money in a bank account from overseas.
Remittances can also serve as a catalyst to financial market deepening. According to a recent survey, 33 per cent of Mexican remittance recipients reported having a bank account, which is significantly higher than the 22 per cent reported for the general population. Credit unions in central America have reported that remittance receivers are more likely to open accounts, aided by financial products, tailored to their needs.
In many cases households receiving remittances never had sufficient liquidity to merit consideration of a bank account. But they are now accumulating savings from remittance flows, accessing other financial service products such as loans and insurance, and establishing a credit history.
While domestic retail payment systems can be extremely efficient, cross-border payment mechanisms are generally far less efficient, especially for small retail payments, such as remittances. It is a treasury priority to look for ways to address the impediments to efficiently sending small payments across borders.
Competition, technology and the high daily volume of business have combined to spur the development of efficient, electronic, domestic payment systems in some of our economies.
Remittances are important at both the macro- and micro-economic level. They increase both the income of the recipient and the foreign exchange reserves of the recipient's country. "If remittances are invested, they contribute to output growth, and if they are consumed, then also they generate positive multiplier effects," notes Ratha. A 1990 study found that Mexico's Gross National Product (GNP) rose by between $2.69 and $3.17 for every dollar Mexican households received from workers in the United States.
Last year, when the President of El Salvador discussed the need for continuing Temporary Protective Status (TPS) for Salvadorans in the United States, it brought home to many the significance that remittances carry in certain nations' economies. "Remittances are more stable than private capital flows, which often move pro-cyclically, thus raising incomes during booms and depressing them during downturns," notes Ratha. "By contrast, remittances are less volatile -- and may even rise -- in response to economic cycles in the recipient country."
The international migrant community is becoming increasingly aware of the potential of structuring the transfer of funds to achieve more effective economic results. Remittance senders are making greater use of the formal financial system, lowering costs and multiplying financial benefits.
But much more needs to be done to leverage these resources and, particularly, to provide transnational families with access to the financial system and more options to use their funds. Despite the unprecedented levels of interest in remittances, a variety of historical, legal, regulatory, and cultural obstacles continue to prevent the financial sector from successfully integrating remittance senders and receivers.
The basic economic principle of remittance flows in the Americas and throughout the world is quite simple: developed countries need migrant labour, and families back home need the money that comes from their earnings. Each year migrants leave their villages and hometowns to seek jobs and better lives for themselves and their families. The equation over the years has not changed: people move "North" by the millions and money moves "South" by the billions.
The challenge now is to help leverage the economic development impact of remittances. For this reason, the IMF recently commissioned a comprehensive survey of remittance senders and receivers to focus on the development potential of these flows while remittances are clearly far from reaching their full potential as an investment tool.
A commitment to family values is the driving force of the remittance flows linking these transnational families that live in two countries and contribute to two economies and two cultures at the same time. Migrants have become an integral part of the labour market in many developed countries around the world. And the developing economy is yet to utilise its potentiality to their favour. Bangladesh has enormous potential to reap its benefits in the coming days.
....................................
The writer is Sr. Vice President of the Islamic Bank, Bangladesh
REMITTANCES have played a significant role in poverty reduction in most of the developing countries. However, there have been few studies on the impact of remittances on the growth of GDP of a country. In estimating the impact of remittances on the GDP growth and trying to find out why people remit back home, we find that remittances are more compensatory in nature and hence, are the reflection of a situation in the home country. Better economic situations inhibit remittance flows while poor performance of the economy increases the flow of remittances. Since the remittances have been used mostly for consumption purposes in our country, they have limited direct impact on the growth of GDP.
Remittance flows, once largely ignored by economists and policy makers, have grown over the past decade to the point where they play a huge role. Because of the growing role that remittances play in the world economy, many governments have created every appropriate opportunity on priority basis to enhance its flow.
Between 1960 and 2000 the world population doubled from three billion to six billion while the total number of international migrants more than doubled (from 76 million). As a result, international migrants represented 2.5 per cent of the world population in 1960 and 2.9 per cent in 2000. The United Nations (UN) now estimates that there were almost 200 million international migrants in 2005. This figure shows an accelerating trend, with the percentage rising from 2.1 per cent per year between 1960 and 2000 to 2.7 per cent per year between 2000 and 2005.
Remittances to developing countries rose from US$160 billion in 2004 to US$167 billion in 2005 and are likely to keep on growing. These estimates do not include unrecorded flows, much of which travel through informal, or even underground, financial channels; these are thought to be at least half the magnitude of recorded flows.
Remittance flows frequently outstrip foreign direct investment (FDI), which is three and a half times net official flows. Not surprisingly, migration and remittances are now high on many agendas. But the typical approach is narrow and short-term. Little attention is being paid to the effects on sustainable development, equity and long-term poverty reduction.
In some countries, remittances as a share of GDP are substantial; for example, this share is 15 per cent in El Salvador and 35 per cent in Haiti. About 28 per cent of households in El Salvador receive remittances. In Bangladesh, it is about 7.0 per cent of GDP.
Remittances serve as an important means of reducing poverty. Remittances are private transfers that go directly to the poorer, economically isolated segments of the population. With no government involvement, these flows go directly to those who most need them. Often these flows are critical for the survival of the receivers, and under the right circumstances can be used by the senders and/or recipients to break the grip of poverty. Studies have shown that remittance recipients are more likely to send their children to school, have more access to health care, and are more likely to start small businesses. Product options introduced recently in some remittance services allow remittance senders to directly pay for a house or to save money in a bank account from overseas.
Remittances can also serve as a catalyst to financial market deepening. According to a recent survey, 33 per cent of Mexican remittance recipients reported having a bank account, which is significantly higher than the 22 per cent reported for the general population. Credit unions in central America have reported that remittance receivers are more likely to open accounts, aided by financial products, tailored to their needs.
In many cases households receiving remittances never had sufficient liquidity to merit consideration of a bank account. But they are now accumulating savings from remittance flows, accessing other financial service products such as loans and insurance, and establishing a credit history.
While domestic retail payment systems can be extremely efficient, cross-border payment mechanisms are generally far less efficient, especially for small retail payments, such as remittances. It is a treasury priority to look for ways to address the impediments to efficiently sending small payments across borders.
Competition, technology and the high daily volume of business have combined to spur the development of efficient, electronic, domestic payment systems in some of our economies.
Remittances are important at both the macro- and micro-economic level. They increase both the income of the recipient and the foreign exchange reserves of the recipient's country. "If remittances are invested, they contribute to output growth, and if they are consumed, then also they generate positive multiplier effects," notes Ratha. A 1990 study found that Mexico's Gross National Product (GNP) rose by between $2.69 and $3.17 for every dollar Mexican households received from workers in the United States.
Last year, when the President of El Salvador discussed the need for continuing Temporary Protective Status (TPS) for Salvadorans in the United States, it brought home to many the significance that remittances carry in certain nations' economies. "Remittances are more stable than private capital flows, which often move pro-cyclically, thus raising incomes during booms and depressing them during downturns," notes Ratha. "By contrast, remittances are less volatile -- and may even rise -- in response to economic cycles in the recipient country."
The international migrant community is becoming increasingly aware of the potential of structuring the transfer of funds to achieve more effective economic results. Remittance senders are making greater use of the formal financial system, lowering costs and multiplying financial benefits.
But much more needs to be done to leverage these resources and, particularly, to provide transnational families with access to the financial system and more options to use their funds. Despite the unprecedented levels of interest in remittances, a variety of historical, legal, regulatory, and cultural obstacles continue to prevent the financial sector from successfully integrating remittance senders and receivers.
The basic economic principle of remittance flows in the Americas and throughout the world is quite simple: developed countries need migrant labour, and families back home need the money that comes from their earnings. Each year migrants leave their villages and hometowns to seek jobs and better lives for themselves and their families. The equation over the years has not changed: people move "North" by the millions and money moves "South" by the billions.
The challenge now is to help leverage the economic development impact of remittances. For this reason, the IMF recently commissioned a comprehensive survey of remittance senders and receivers to focus on the development potential of these flows while remittances are clearly far from reaching their full potential as an investment tool.
A commitment to family values is the driving force of the remittance flows linking these transnational families that live in two countries and contribute to two economies and two cultures at the same time. Migrants have become an integral part of the labour market in many developed countries around the world. And the developing economy is yet to utilise its potentiality to their favour. Bangladesh has enormous potential to reap its benefits in the coming days.
....................................
The writer is Sr. Vice President of the Islamic Bank, Bangladesh