Remittances by definition represent the flow of cash money sent by migrant workers to their home country. According to Dilip Ratha (2007, p1) leading economist in charge of migration and remittances team at the World Bank, in 2006, recorded remittances from developing countries represented $206 billion, more than double the level of 2001.He also believes unrecorded flow going through unofficial channel makes the figures even larger.
Workers' remittances became over the last decade an important source of external revenue for developing countries and the lack of information ,data, measurement has pushed many developed countries to study in depth remittances .Moreover as it is shown on exhibit 1, the G-8 countries have decided at Hokkaido Toyko summit (July 2008) to improve data, and monitor better, development impact and remittances services .Also in October 2009 the French ministry of immigration Mr Besson signed an agreement with the AFDB (African development Bank) that allows the creation of a fund with an endowment of 6 millions Euros to better monitor migration and remittances (AFDB, www.afdb.org) . So the last four years have seen the developed countries increase their interest on remittances in the perspective of controlling and monitoring better migration and development issues.
As shown on the exhibit 2, remittances are the third largest source of external revenue for developing countries after FDI and private equity and represents more than twice the ODA ,however if unofficial channels were taken in account remittances will be the second most important source of revenue. Certainly, remittances have an important impact on the economy of developing countries but how important is this impact? This essay will answer this question by first describing the phenomenon of remittances, secondly exposing the impact of it and finally analysing the policy of response that has to be adopted to tackle this issue
Exhibit 1: Excerpt from the G-8 Hokkaido Toyko summit document
"44. We acknowledge the importance of facilitating remittance flows given their development impacts. The G8 conference on remittances in Berlin in November 2007 reviewed the actions agreed at the Sea Island Summit in 2004. In this context, we will follow-up the seven recommendations adopted at the Berlin conference on improving data, development impact, remittance services, access to finance, innovative channels and on the creation of a Global Remittances Working Group. We appreciate the work done by international financial institutions in this regard and invite the World Bank to facilitate the work of the group and provide for coordination. "
Source: ministry of Japan, Hokkaido Toyako summit (2008):
http://www.mofa.go.jp/policy/economy/summit/2008/doc/doc080709_03_en.html
Exhibit 2: Remittances and Capital Flows to developing countries*
*Dilip Ratha calculation based on Global Development Finance 2007 and IMF Balance of Payments
Statistics Yearbook 2006
Source: Dilip Ratha (2007, p 3)
Trend of remittances
Overview
The top 3 recipients of remittances are India, china and Mexico as it is shown on Exhibit 4.The reason being is that India and china have a large immigrant population in developed countries and the Mexican immigration is made easier because of the proximity of their country with USA. So according to the World Bank (Dilip Ratha 2007, P4) China, India and Mexico received each 25 billion dollars as remittances in 2006. However the smaller the country and more important are remittances compared to the size of their economy. Indeed expressing remittances as share of GDP, exhibit 4 shows that the top recipient were Moldova, Tonga and Guyana .Moreover Dilip Ratha (2007 P2) explained that the doubling of the remittances to developing countries between 2001 and 2006 mentioned in the introduction and illustrated in exhibit 5, was attributed to a better measurement of flow because of the war against terrorism since September 2001, it was attributed also to the reduction of cost in the finance industry, to a growth of migrants, and finally to the depreciation of the US dollar increasing the dollar value compared to other currencies.
Remittances are countercyclical and stable
Dilip Ratha (2007 P3) explained that Remittances are more stable than private capital flows indeed the latter move procyclically : when there is a boom they tend to increase and they depress in a downturn period .However remittances may be countercyclical relative to the economy indeed they tend to increase when there is an economic crisis, a natural disaster or a political issue, because migrants are more keen to support their family at home in difficult times .For example Remittances rose during 1998 in Thailand and Indonesia because of the financial crisis illustrates Ratha (2007 P3)
Exhibit 4: Top recipients of remittances, 2006
Source: Dilip Ratha calculation based on IMF Balance of Payments Statistics Yearbook 2007, World
Development Indicators 2007, and World Bank Development Prospects Group data
Exhibit 5: Worker's remittances compensation of employees and migrant transfers
Source: World Bank 2009 Migrations & Data
http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/0,,contentMDK:21122856~pagePK:64165401~piPK:64165026~theSitePK:476883,00.html
Theories of motivation behind remittances
Chimhowu, J. Piesse, and C.Pinder (2005 chapter 3 P88) identified in the literature two models of thinking that could explain motivations behind remittances .The first one is the risk sharing motive developed by Stark in 1991 .This motive indicates that remittances are part of a risk management strategy .Indeed remittances provide benefits for both the migrant who intend to return and the recipient household who have sufficient resources for its needs .So there is a mutual benefit for the migrant and the recipient which have a common fund that can be used in case of an external shocks. For example a loss of employment for the migrant or an economic crisis in the recipient country. Although in this case the migrant motives are more self interest orientated than altruism.
The second theory underlined by the authors is the idea that "remittances fulfil an obligation to the household one based on affection and responsibility towards the family". In this theory remittances to the household recipient are only to reduce poverty of the household and by doing so represent additional resources .In most case the family put pressure on the male members to migrate. Sometimes all the members of the family contribute financially to send the migrant abroad in hope that he will get a job that going to provide remittances .So the migrant worker is driven here by a motive of altruism more by self interest.
Remittances can have a long term or short term effect on the recipient household whether the money is sent home for local consumption, for building a house or for productive investment. Indeed remittances utilised for local consumption tend to have short term significance and may increase "inter household inequality" and remittances utilised for productive investment can have long term significance in reducing poverty and inequality in the communities
Also the impact of remittances in the developing country will be the object of the second part of this essay.
Impact of remittances in developing countries
Economic impact
According to C. Sander and S. M. Maimbo (2005 chapter 2 P63), remittances contribute relatively to the balance of payments .Indeed as shown on exhibit 4,some developing countries rely heavily on remittances inflow because of the ratio of remittances to GDP. For instance the authors indicate that "remittances to Eritrea were 194 percent of exports and 19 percent of GDP in 1999, these same values in Cape Verde were 51 Percent and 12 %, in Morocco 18 percent and 5 %".So remittances represent an important part of the inflow in developing countries .It is, also a source of foreign reserve indeed, according to the authors in 1998 Ghana remittances were the fourth largest source of foreign exchange after Cocoa, Gold and Tourism. Also, P.Fajnzylber and J.Humberto Lopez (2008 P8) affirms that in Africa and Latina America a one percentage point increase in the ratio of remittances to GDP enable 0.29 percent and 0.37 percent decline, respectively, in the number of people below the poverty line .In developing countries most of the remittances are used for local consumption, health and education, however they might be used for private investment or to repay debts encountered when leaving for abroad. Moreover the motive developed above of going abroad to improve the quality of life of the family explains the high proportion of remittances allocated to consumptions, health and education. De Haan (2000 p11) gave the example of Zimbabwe where household with migrants were found to have less arable land than household without migrants however they had a better education level. Indeed Dilip Ratha (2007 P5) affirms that remittances have reduced the population behind the poverty line in many low income countries: by 5% in Ghana 6 % in Uganda and 11 %in Bangladesh
Social impact
Chimhowu, J. Piesse, and C.Pinder (2005 chapter 3 P91) have emphasised on the effect of remittances in the social structures and practises .For instance remittances enable girls to complete their high school education rather than having to leave early to work in the farm or at home .This pattern can lead women to better ambitions and better earnings in the future. However there are negative aspects specially concerning the migrants return because they may have non traditional attitudes that can bring conflicts with the family .Another negative effect is when migration is a long term strategy and the migrant wants to stay and build a family which makes him send less and less remittances and successive generation are less likely to continue sending. In the other hand as analysed C. Sander and S. M. Maimbo (2005 chapter 2 P64), migrants specially from Africa tend to form community groups, association to collectively send remittances
The Worldwide financial crisis effect on low income countries shows the importance of remittances
It was mentioned above that remittances are countercyclical however this pattern doesn't make sense if the economic crisis is worldwide. Because migrant workers on the top of worrying for their employment have to face a crisis in the host country which means that remittances tend to drop. Indeed, according to the FAO (FAO Report 2009 P16) remittances will drop by 5 to 8 % in 2009 after growing by 15 and 20% per year from 2005 to 2007.The FAO add that the impact of the crisis on developing countries through remittances is even bigger because of the multiplier effect .Empirical studies (FAO Report 2009 p17) suggest that the value of the multiplier is between 1.5 and 2 .The greater ratio remittances to GDP is and the more the impact of the financial crisis. For example in 2007, remittances in Tajikistan represented 46% of the GDP .Knowing that most of the migrants of Tajikistan have moved to Russia ,which have experienced a slowdown of the economy and also a devaluation of Rouble ,it is reasonable to think that this country will be hugely affected by a decrease of remittances. Indeed, The FAO (FAO Report 2009 P 19) have simulated a scenario where they predicted that a 50 % decrease of remittances would raise the proportion of people living behind the line of poverty from 53.1% to 59.6% which represent a poverty increase of 12.2 %.
Policy response
Cost reduction
One of the main issues with remittances is the cost of money transfer. Indeed, Dilip Ratha of the World Bank development prospect group (2007 P10) suggests that "a typical poor migrant sends about $200 or less per transaction. The average cost through the top three money transfer operators (Western Union, MoneyGram, and Dolex) can be as high as $16 for $100 and $18 for $200" So basically the smaller remittances cost more per dollar sent However throughout recent years the cost of remittances have declined thanks to more awareness from policy makers and migrants and due to technology progress. For instance in Mexico, the cost of sending remittances has dropped by 54 % between 1999 and 2004, since then there hasn't been a significant change in the cost. As a consequence, in order to tackle the poverty in developing countries there is a necessity from policy makers, international organisations to intervene and cut the cost of sending money
International remittances Agenda
The World Bank (Dilip Ratha 2007 P12) has encouraged and set up a new agenda for a better understanding of remittances .The Agenda is divided in four points : 1."Monitoring Analysis and projection", This involves the improvement of data measurement of remittances and a the provision of better assessment of impact on developing countries 2 "Retail Payment Systems". This involves the use of new instruments of payments like cell phones or internet, compliance with anti-money laundering for example and also disclosure of remittances fees. 3 "Financial access of individuals or households". This involves that banks or microfinance institutions improve services given by for example to advise migrants on possibilities of long term investments or opening facilities the evening for migrant workers who work all day and can find difficult to send money during their work time .And 4."Leveraging remittances for capital markets access". This involves that banks use remittances to raise significant bond financing .Indeed a migrant worker might be more interested in investing in his country than a foreign private investor because the migrant has better knowledge of the country than the foreigners
Conclusion
To conclude, we can say that remittances certainly have had a skyrocket progression over the last decade .For countries that rely heavily on that kind of support, Remittances are a source of fresh air that enable household to access additional resources for health education and expenses. For example countries like Tajikistan, Lesotho, Moldova, Lebanon or Haiti encounter a ratio remittance to GDP of more than 25% and the total inflow of remittances to developing countries as shown on Exhibit 3 is estimated by the World Bank to be around $317 Billion in 2009. However it is really time that a international organisation for remittances to be created .Because remittances are as large as FDI and twice ODA although there are no specific institutions to monitor, measure relevant data .This is not make easier by the fact that in region like sub-saharian Africa or East Asia accurate data are difficult to find because of the infrastructure in place.
Two major reasons for policy makers to better considered remittances: the first one as shown in this essay is the positive impact that have remittances in developing countries .Impact even enhanced with the worldwide financial crisis .Developed nations had previously engaged themselves on the millennium goals and remittances are definitely a channel that has to be study in depth because it helps reduce poverty and hunger. The second reason is the informal channels that are taken by remittances because of high costs of transfer or money laundering .Indeed there is here an opportunity to increase remittances by lowering costs of transfer ,so that more people will benefit from it and get out of poverty .
Hundreds of millions of people rely on remittances; a lot even live or survive thanks to a family member that escaped from misery in his home country. We certainly cannot blame them for hoping better quality of life for themselves and their relatives
