Remittances comprise one of the largest international flows of money and have become an important source of development finance. Remittances provide an opportunity for developing countries to benefit from migrants who have chosen to work abroad, rather than focusing on the negative consequences of migration. There were an estimated 214 billion migrants worldwide in 2010 (Singh, 2013) and many international banks and development agencies have become increasingly interested in migrant remittances as a form of development assistance and poverty reduction (Gabriel and Pellerin, 2008).
Although the traditional argument suggests that remittances are merely used for survival and consumption, this is arguably a form of development aid; it assists in providing those in the origin country with a higher standard of living, building both physical and human capital that can be conducive to development. Yet use of remittances varies widely between different countries. Formal and informal remittances to developing countries are now three times more than official foreign assistance and formal international remittances form a large part of GDP in many developing countries (Singh, 2013). The challenge facing many developing countries is how to exploit this inflow of capital efficiently to stimulate economic and social development. While there are mixed positive and negative impacts, this paper argues that remittances can be viewed as a form of development aid when used with the appropriate institutions for productive economic and social investments.
Remittances can be a source of knowledge transfers and thus, a source of human capital conducive to development.
Remittances are a reliable form of capital flow and not subject to the volatility that other forms of aid and development assistance are susceptible to. Accumulated migrant earnings can allow investments that would not have otherwise been made due to credit constraints and large up-front costs (Yang, 2006) and importantly remittance flows are often unaffected by governance problems that may be associated with other forms of aid flows (Ratha, 2007). They are direct, private, untaxed flows that can be used without policy influence. Furthermore, remittances have been more resilient when dealing with economic downturns (Singh, 2013). Studies have found that remittances actually tend to rise when the origin country experiences an economic crisis or political conflict as migrants send more money home to families and friends.
Extra money allows households to diversify their sources of income and reduce their vulnerability to these economic difficulties. Remittances are also more evenly distributed than capital flows to developing countries; in many households across developing countries, at least one individual has left to work abroad and sends regular remittances back to the origin household (World Bank, 2005). In 2003, remittances to the Philippines were fifty-one times higher than previously estimated and informal remittances are estimated to be at least fifty percent of recorded remittances (Singh, 2013). Thus, there is a significant amount of capital available for investment if used appropriately and efficiently.
Steps should be taken to reduce costs and encourage the use of banking channels to improve capital market access for banks and governments.
Remittances can be a source of knowledge transfers and thus, a source of human capital conducive to development. Studies based on household surveys in El Salvador and Sri Lanka find that children of remittance-receiving households have a lower school dropout ratio and these households also invest more in private tuition for their children (Edwards and Ureta, 2003). Although the ‘brain drain’ is a concern amongst many developing countries experiencing a large outflow of the skilled population, Stark (2004) suggests that migration can in fact be conducive to the formation of human capital and thus, development. The research found a positive causal relationship between migration of skilled workers from a developing country and formation of human capital within the origin country. In addition to providing financial resources for poor households, remittances can reduce poverty and improve welfare through indirect multiplier effects and also macroeconomic effects (Ratha, 2007).
Countries such as Canada and Australia aim to attract highly skilled workers through points systems; thus, only a percentage of a population in a developing country can migrate. The selective system of migration generates an increasing demand for higher levels of education in the origin country and therefore the possibility of migration incentivises individuals to acquire a higher level of education (Skeldon, 2009). For example, overseas Filipinos are highly educated: 31% of overseas workers have “some college” as their highest level of education, and a 30% have a college degree (Yang, 2006). Furthermore, remittances can be used to fund this demand for education and development. The return of highly skilled migrants can also be beneficial through the teaching and training of individuals in the origin country. Circulating knowledge and expertise can be effective, as seen in India’s IT sector, but Stark (2004) suggests that these networks are only efficient in a number of industries. In the Philippines there is a ‘culture’ of migration where individuals enter particular professions with the hope of migrating. Arguably, remittances cannot be used effectively for development without the appropriate highly skilled and educated workers in the origin country to understand how to use the inflow of capital.
Remittances are also more evenly distributed than capital flows to developing countries; in many households across developing countries, at least one individual has left to work abroad and sends regular remittances back to the origin household (World Bank, 2005).
Workers’ remittances provide valuable financial resources to developing countries, particularly the poorest (World Bank, 2005). Governments can use remittance flows to enhance their development through the implementation of appropriate policies yet these policies are highly contextual. Studies have shown that remittances, when used for economic development, are more effective in a good policy environment (Ratha, 2007). As discussed previously, informal remittances make up a large proportion of total remittances and it is difficult to calculate how much. Low-income countries received approximately $56 billion or 3.5 percent of GDP as remittances in 2006, yet in Sub-Saharan African countries this figure was at 2.1 percent. This relatively low share of remittances is almost certainly due to the large share of informal flows (Ratha, Mohapatra and Plaza, 2008). The government must encourage the use of formal remittance channels and boost incentives to send more money home by reducing remittance fees. Reducing remittance costs would encourage the use of these formal financial channels. Reinvesting the vast flows of remittances in sub-Saharan Africa and encouraging their use for development will inevitably be challenging while remittance fees remain so high.
The government must encourage the use of formal remittance channels and boost incentives to send more money home by reducing remittance fees.
By encouraging the use of these banking channels, the government can improve the development impact of remittances by incentivising saving and enabling investment opportunities (Ratha, 2007). Increasing levels of saving is a good form of development assistance in itself; higher savings rates correlate to higher income growth, and also reduce the impact of financial difficulties (Loayza, Schmidt-Hebbel and Serven, 2000). Loayza et al. (2000) also suggest that the use foreign aid often reduces savings rate and therefore the encouragement of using formal channels for remittances may work to enhance capital accumulation and therefore development assistance. Yet the success of this relies upon well-developed financial institutions to ensure that remittances are invested appropriately in physical and human capital.
Dependence on remittances diverts resources away from important investment opportunities for sustainable development.
Use of remittances vary according the country. A study of remittances in the Philippines by Yang (2008) finds that positive exchange rate shocks lead to a significant increase in remittance expenditures on education. Yet Osili (2004) reports that a large proportion of remittance income in Nigeria is spent on housing. Thus, contribution to economic and social development is likely to differ among different policy environments. Improving the overall investment climate is difficult; some governments have considered taxing remittances to increase revenue for investment but this may directly impact poor families and increase the amount of informal remittance flows. Arguably, remittances are private flows and the government should avoid trying to direct the use of the flows. Steps should be taken to reduce costs and encourage the use of banking channels to improve capital market access for banks and governments (Ratha, Mohapatra and Plaza, 2008).
Yet others argue that resources received from overseas rarely fund productive investments, and mainly allow higher consumption (Yang, 2006). For example, a study by Adams, Cuecuecha and Page (2008) reports that households in Ghana receiving international remittances spend more on consumer goods and durables, and they also spend less on housing and food than households without remittances. Ratha (2007) argues that large outflows of skilled workers can reduce growth in countries of origin and remittances may also cause recipient households to choose more leisure than labor as they become dependent on the regular flow of remittances. Dependence on remittances diverts resources away from important investment opportunities for sustainable development. Yet, arguably, higher consumption has the potential to stimulate economic growth through rising demand and opportunity for industrial expansion. Furthermore, high savings rates create higher investment and growth due to enhanced consumption habits (Rodrik, 1998).
Contribution to economic and social development is likely to differ among different policy environments.
Migrant remittances are increasing, but a large proportion of the flows bypass formal financial channels, which could be used efficiently for investment in economic development. Remittances to developing countries from overseas residents and nonresident workers are estimated to have reached $126 billion in 2004 (World Bank, 2005); thus, there is a significant amount of capital available for investment if used appropriately. Humanitarian aid and emergency assistance are often volatile forms of development finance and are susceptible to government interference; to contrast, remittances are regular, private flows that can add to the formation of physical and human capital within the origin country. Remittances can be counted as a form of development aid if developing countries know how to exploit the inflow of capital efficiently to stimulate economic and social development.
Written by Imogen Braddick