Economics of International Migration7 Jan Brzozowski, PhD Cracow University of Economics

Economics of remittances Basic facts&definitions Effects on the national level Case study: El Salvador. How remittances can be used in projecting development policy?

Basic facts and definitions New economics of labour migration: migration strategy aimed at diversifing sources of income Household relies on financial flows from its members who stay also in a foreign country Those who stay have the possibilities to control the remittance behavior of migrants (see next class – San Pedro Martir case) However, there are limits to such strategies (next slide: determinants of sending remitances)

(Brzozowski et al. 2014)

Determinants of remittances Usually older, married males with children at home are most likely to send remittances The likelihood of sending remittances falls with the duration of foreign stay: family unification (or disruption!) occurs When there are more migrants in households, the individual amount of remittances sent is reduced (shared responsibility for those who remain at home)

By remittances we understand the flow of: Personal transfers – capital transfered by migrants who reside abroad for period longer than 12 months Compensation of employees - capital transfered by migrants who reside abroad for period longer than 12 months Migrant transfers – assets (goods, financial resources, shares, savings etc.) brought by migrants in person during the visits at home

Limitations of statistical analysis Migrant transfers usually not evidenced, we can only estimate them Substantial amounts (at least 50% of official transfers) transferred informally Havala (Middle East) and Hundi (Indian Subcontinent) systems

Hawala system Hawaladar A (destination) Hawaladar B (home country) € Dirhams password Information Trust&honour settlements

Why people send money informally? Official exchange rate less favorable than the street/black market price: 1 USD is worth 26.6 Rial in Iran, but on the street market it costs 31.9 Rial (data for October 2014) High costs of official transfers imposed by official agencies: for instance transfering 200 USD from South Africa to Angola costs on average USD (data for November 2014, see for details) Poor development of financial sector: in many developing countries (esp. on rural areas) only few banks and most of the population does not have a banking account Cultural factors: people trust more other people than financial institutions

The magnitude of the remittances is impressive…

World Bank, 2014

Im many developing economies they constitute the main source of foreign currency

But The comparison of remittances with Oficial Development Assistance or FDI is not fair Remittances are private transfers and it is difficult to channel them for productive purposes at the macroeconomic (home country) level Remittances cannot compensate for smaller inflows of ODA – development assistance targeted at public infrastructure (bigger social gains) FDI – usually connected to high-tech transfers and job creation; remittances effect in this area is limited

What are the potential macroeconomic effects? Exchange rate: appreciation of national currency (Dutch disease effect) Increase in consumption spending (potential multiplier effect = growth of GDP) Poverty & inequality reduction Increase of education expenditures/private investments ~ less likely Potential desactivation of labor force (household members living on remittances)

El Salvador One of smallest countries of LAC region: 21 thousand sq km GDP pc 6830, below the medium level for the region (12100 USD, 2011)

Domestic war ( ) Roots of the conflict: overpopulation of rural areas, concentration of areal land in the hands of local aristocracy (football war with Honduras in 1969) Junta Revolucionaria de Gobierno vs. Farabundo Martí National Liberation Front JRG – supported by the US administration FMNLF – supported by Cuba&Nicaragua 75 thousand casualities GDP dropped by 22% ( )

Migration to the US (stock of permanent residents) Department of Homeland Security (2012) 6.3 mln population in 2011, 730 thousand permanent residents in the US. Estimates of total Immigration stock in the US – 2.5 million (28% of the total population). 53% of them are illegal aliens

First politically-driven (refugees 1992 – peace agreement, but the migration continues due to the economic factors and well-developed migration networks After 1992: migration as the inherent part of the development policy

Economic reforms Changes made according to washington consensus guidelines Liberalization of the economy, demonopolization, privatisation, reduction of public expenditures, protectionism in trade and capital market reduced Finally dolarisation of the economy (conversion of colon to USD)

Exporting people, receiving remittances : decrease of the areable land by 6%, increase of the rural population by 42% : increase of the population by 1.5 mln (33%) 56% of rural population receives remittances

From 2000s, remmitances account for more than 10% of the GDP

Development of sectors of the economy that service migrants Travel Telecomunication Real estate & construction Financial sector (increase of savings, remittances agencies)

No. of passengers at Comalpa airport in San Salvador

No. of mobile phone subscribers

Poverty and inequality reduction due to remittances No. of population living below 1 USD line reduced by 36,4% Gini coefficient reduced by 5.4%

But the contribution to economic growth moderate

Remittances crucial to economic development at the initial phase of economic reforms (1990s) Facilitated financial stability Induced economic growth in some sectors Contributed to poverty reduction But limited effect on investments (firm/job creation, investments in education and health) Remittances stimulated import and weakened export- oriented firms (untill the dolarization of the economy in 2001)

But also negative effects of remittances Saving rate in remittance-receiving households smaller by 2 percentage points Remittances induce economic desactivation Average female working time reduced by 12.3 hours in rural areas and 8.6 hours in cities in the case of households which receive remittances Remittances sent not only by honest immigrants: also by gang members, such as MS-13 to finance the development of criminal activities at home (migrant trafficking, drug trade)