The tale of globalisation's exiles
Saturday, 15 September 2007
Richard Lapper
Last month, as a crisis in a small sub-section of the US housing market created havoc around the globe, media attention has focused on high finance and the linkages between the world's big economies.
But there is another compelling story of economic integration and global mobility of money that is arguably more important to more people than derivatives and off-balance sheet investment funds. It is the story of remittances, the poor man's counterpart to arcane financial innovations, and how they have wrought vast and visible changes in many developing countries.
With borders opening and the wage gap between rich and poor countries widening, more people than ever have decided to seek their fortunes and work abroad. The growth of money transfer services means it is easier than ever for them to send their wages home to support families.
In many developing countries today, more money comes from remittances than from foreign aid, foreign investment or even traditional exports. In Central America, remittances have long eclipsed traditional agricultural mainstays such as coffee and bananas. Migrants send more money to Morocco than tourists spend there. In some small countries - Lebanon, Serbia, Haiti, Tonga, Albania and Jamaica are all examples - remittances generate more revenues than all merchandise exports put together. The latest World Bank figures list 14 countries where migrants' earnings account for 15 per cent or more of economic output, ranging from Moldova with 38 per cent to Jamaica with 16.4 per cent.
Remittances are a larger part of the global economy than they have ever been. Migrants from developing countries sent back $206.3bn (£102.3bn, €151.1bn) in 2006, according to the World Bank, nearly seven times the level of 1990. That is according to official figures - unofficially, they may be double.
Based on extensive surveys, Manuel Orozco, a remittances specialist at the Washington-based Inter-American Dialogue institute, estimates based that the total amount sent home to the developing world last year was $298bn, much higher than the World Bank's estimate.
Dilip Ratha, who heads the migration and remittances unit at the World Bank, says he expects remittances worldwide to continue growing at about 10 per cent a year in the medium term.
Others say that the phenomenon is levelling off, and that the slowing rate of increase of remittances from the US to Mexico could be a harbinger of a downturn. A survey by the Inter-American Development Bank this month found that legal restrictions faced by illegal immigrants in Georgia, Louisiana and a number of other states were leading many migrants to cut the amount they were sending back.
Some economists are sceptical about the value of these flows, arguing that they do not compensate for the economic disruption caused to a country by high rates of migration. That is especially the case for countries that export skilled workers such as doctors or engineers.
In an article published this year*, for example, the late economist Riccardo Faini, formerly of the Centre for Economic Policy Research, demonstrated that skilled migrants remit less money to their home countries than unskilled, largely because the former are more likely to come from wealthier families and more able to bring dependants to the host country. The negative impact of the brain drain, therefore, is not mitigated by any increase in remittance income.
Not only do countries find themselves short of skilled personnel, they also effectively waste money training them. Jamaica had to train five and Grenada 22 doctors to keep just one, according to research cited by the World Bank, for example. In the Philippines some doctors have re-trained as nurses in order to go abroad.
There is some concern about the macroeconomic impact of remittances. In countries that are exceptionally dependent on remittances for foreign exchange, the inflows can artificially inflate the value of a local currency, making imports cheaper and exports less competitive.
In addition, remittances can create economic dependency and reduce the willingness of poor communities to do low-paid manual work, especially among younger people.
But more recently, policymakers have begun to stress the positives, arguing - as the World Bank did in an important 2005 report - that remittances can reduce poverty and help the less well-off ride out downturns. As well as helping meet bills for food and medicines, transfers are used for school fees and books. The money tends to be more reliable than other sources of foreign capital: during the 1990s remittances were one of the least volatile sources of foreign exchange for developing countries. While capital flows tend to rise and fall with the economic cycle, flows of remittances were more stable. "They tend to be counter-cyclical," says Mr Ratha.
Development economists such as Mr Ratha stress the importance of channelling remittances towards material assets such as houses or small businesses. There have been some signs that this is happening.
A 2006 study by the Inter-American Development Bank indicated that up to a third of migrants are investing money compared to only about 5 per cent in a similar survey conducted two years ago. Earlier papers by the same bank cite evidence from Turkey, Mexico and Egypt showing that remittances help migrants build up businesses and build homes.
Even so, governments will almost certainly need to do more in order to harness the potential of these flows. Remittances can be channelled into the formal financial system where they can - in theory at least - be converted into savings and a source of long-term investment. Successful investment schemes using remittances - some with government backing - are one of the main themes of this series.
Last month, as a crisis in a small sub-section of the US housing market created havoc around the globe, media attention has focused on high finance and the linkages between the world's big economies.
But there is another compelling story of economic integration and global mobility of money that is arguably more important to more people than derivatives and off-balance sheet investment funds. It is the story of remittances, the poor man's counterpart to arcane financial innovations, and how they have wrought vast and visible changes in many developing countries.
With borders opening and the wage gap between rich and poor countries widening, more people than ever have decided to seek their fortunes and work abroad. The growth of money transfer services means it is easier than ever for them to send their wages home to support families.
In many developing countries today, more money comes from remittances than from foreign aid, foreign investment or even traditional exports. In Central America, remittances have long eclipsed traditional agricultural mainstays such as coffee and bananas. Migrants send more money to Morocco than tourists spend there. In some small countries - Lebanon, Serbia, Haiti, Tonga, Albania and Jamaica are all examples - remittances generate more revenues than all merchandise exports put together. The latest World Bank figures list 14 countries where migrants' earnings account for 15 per cent or more of economic output, ranging from Moldova with 38 per cent to Jamaica with 16.4 per cent.
Remittances are a larger part of the global economy than they have ever been. Migrants from developing countries sent back $206.3bn (£102.3bn, €151.1bn) in 2006, according to the World Bank, nearly seven times the level of 1990. That is according to official figures - unofficially, they may be double.
Based on extensive surveys, Manuel Orozco, a remittances specialist at the Washington-based Inter-American Dialogue institute, estimates based that the total amount sent home to the developing world last year was $298bn, much higher than the World Bank's estimate.
Dilip Ratha, who heads the migration and remittances unit at the World Bank, says he expects remittances worldwide to continue growing at about 10 per cent a year in the medium term.
Others say that the phenomenon is levelling off, and that the slowing rate of increase of remittances from the US to Mexico could be a harbinger of a downturn. A survey by the Inter-American Development Bank this month found that legal restrictions faced by illegal immigrants in Georgia, Louisiana and a number of other states were leading many migrants to cut the amount they were sending back.
Some economists are sceptical about the value of these flows, arguing that they do not compensate for the economic disruption caused to a country by high rates of migration. That is especially the case for countries that export skilled workers such as doctors or engineers.
In an article published this year*, for example, the late economist Riccardo Faini, formerly of the Centre for Economic Policy Research, demonstrated that skilled migrants remit less money to their home countries than unskilled, largely because the former are more likely to come from wealthier families and more able to bring dependants to the host country. The negative impact of the brain drain, therefore, is not mitigated by any increase in remittance income.
Not only do countries find themselves short of skilled personnel, they also effectively waste money training them. Jamaica had to train five and Grenada 22 doctors to keep just one, according to research cited by the World Bank, for example. In the Philippines some doctors have re-trained as nurses in order to go abroad.
There is some concern about the macroeconomic impact of remittances. In countries that are exceptionally dependent on remittances for foreign exchange, the inflows can artificially inflate the value of a local currency, making imports cheaper and exports less competitive.
In addition, remittances can create economic dependency and reduce the willingness of poor communities to do low-paid manual work, especially among younger people.
But more recently, policymakers have begun to stress the positives, arguing - as the World Bank did in an important 2005 report - that remittances can reduce poverty and help the less well-off ride out downturns. As well as helping meet bills for food and medicines, transfers are used for school fees and books. The money tends to be more reliable than other sources of foreign capital: during the 1990s remittances were one of the least volatile sources of foreign exchange for developing countries. While capital flows tend to rise and fall with the economic cycle, flows of remittances were more stable. "They tend to be counter-cyclical," says Mr Ratha.
Development economists such as Mr Ratha stress the importance of channelling remittances towards material assets such as houses or small businesses. There have been some signs that this is happening.
A 2006 study by the Inter-American Development Bank indicated that up to a third of migrants are investing money compared to only about 5 per cent in a similar survey conducted two years ago. Earlier papers by the same bank cite evidence from Turkey, Mexico and Egypt showing that remittances help migrants build up businesses and build homes.
Even so, governments will almost certainly need to do more in order to harness the potential of these flows. Remittances can be channelled into the formal financial system where they can - in theory at least - be converted into savings and a source of long-term investment. Successful investment schemes using remittances - some with government backing - are one of the main themes of this series.