Remittances: Determinants and Consequences

Table 1. Remittance Inflows, Selected Countries (billions $) Country %GDP Bangladesh % China Guatemala Haiti Honduras India Jamaica Nicaragua Nigeria Philippines Vietnam Source: World Bank These flows are through formal channels. Such figures likely underrepresent actual flows. Informal remittances may be 35-75% of official remittances.

Table 2. Remittance Outflows, Selected Countries (billions $) Country2009%GDP France % Germany % Italy % Kuwait Macao % Netherlands % Russian Federation % Saudi Arabia % Spain % Switzerland % United States % Source: World Bank

Motives to Remit Circumstances of migration and migrant ties to the source country are critical. 1.Altruism toward family in the source country. likely a function of migrant earnings and family needs at home. ● consumption ● human capital investment ● home improvements Often directed at women—mothers, wives.

2. Self interest Migrant may plan to return (temporary migrant) and ● acquire a home ● acquire land ● improve land ● invest in a business ● save for retirement ● repay a loan Funds could be entrusted to a close family member so they are readily available upon the migrant’s return.

3. Part of a plan of mutual support This determinant ties back to the family strategy migration that is stressed in the new economics of migration. For example, before the economic downturn in the U.S., 79% of Mexican workers in the U.S. were estimated to be remitting over $350 per month to Mexico.

Consequences of remittances for countries that receive them 1. They raise GDP, disposable income, and, potentially, saving. Households that receive remittances tend to save more. 2. They provide foreign exchange. However, by causing an appreciation in the real exchange rate, they may cause a reduction in exports.. 3. They could place upward pressure on prices. 4. If they are viewed by receiving households as income transfers, there could be a substitution of unearned remittance income for labor earnings, thus encouraging withdrawal from the labor force. 5. They provide funds for development finance that could increase productive capacity and promote sustained economic growth. (They could directly finance capital accumulation in countries that rely on domestic sources of income to finance investment.)

6. They enhance macroeconomic stability. 7. They may lower the cost of capital by improving the credit- worthiness of potential domestic investors. 8. If remittances are viewed as an addition to permanent income, they are more likely to be used for consumption. 9. They could finance investment in human capital. But, more education could lead to more out-migration in the future. Some evidence suggests that remittances help keep children in school longer. 10. Remittance income may affect the institutional environment in receiving countries. They increase the tax base, so governments could appropriate more resources, which could be distributed to those in power. In a sense, government corruption becomes less costly to the people themselves because the remittances provide a buffer between the government and the people.

Empirical work on the effects of remittances on economic growth Empirical results have been very mixed. ● negative ● no measurable effects ● positive effects ● conditional effects dependent on factors such as the quality of the country’s institutions

But some results seem convincing. Remittances have had a significant impact in reducing poverty through ● increased income of recipient households ● smoothing consumption ● easing capital constraints They have had a marginal positive impact on economic growth in Asia and Pacific countries through ● increasing domestic investment ● improving human capital Various technical econometric problems make definitive answers difficult to ascertain.

Final notes Remittances are expensive to transmit. The cost of sending remittances from bank to bank can run as high as 10%, depending of course on the magnitude being sent. Because the banking sector in African countries is somewhat less advanced than in many other countries (e.g., few ATM machines), these fees tend to be higher in Africa, where fees approaching 10% are not uncommon. Thus, the services provided by the banking sector cause some fraction of the remittances to channel into this sector. The magnitude of remittances is dependent upon the host-country economy. Any downturn in this economy results in higher unemployment and lower wages/earnings among the migrants and remittances fall. Moreover, the host country may tighten its doors to illegal migration. In countries in which legal admittances are dependent upon economic conditions legal admittances will automatically be reduced. Future remittances will decline.