The Economics of Remittances

Definition

According to Wikipedia, Remittances are transfers of money by foreign workers to their home countries. Remittances (also known as current transfers) include worker’s remittances and other private transfers on the current account. [Gupta 2006]

 

The Indian scenario

Remittances to India have increased at about 13 per cent a year since 1991, making India one of the largest recipients of remittances in the world. They have been the most stable type of external flows in India. They have been crucial in improving the current account and in the consequent build-up of foreign exchange in the last few years.

 

The effect of remittances on output and employment generation would depend on the end-use of the transfers. The effect would be larger if remittances are geared more toward investment expenditure.

 

In terms of percentage of GDP, remittances equaled about 3 per cent in 2003.

 

[These are excerpts from Poonam Gupta’s ‘Macroeconomic Determinants of Remittances’ which came in the EPW.]

 

The Kerala scene

 

The great exodus of Keralites to the Gulf Countries during the 1970s oil boom was to a large extent possible because of the benefits these workers had gained from growing up in Kerala (better health and education, and more awareness of opportunities beyond their state). The money they send back today makes up 25% of the state budget, and one third of all remittances to India. It has not only helped to stimulate consumption levels in Kerala, which are among the highest in country, but it has also kick-started the boom in the tertiary (or service) sector of industry –IT, tourism, banking, private health care, etc. – that has been the driving force behind Kerala’s economic growth spurt. While neither the manufacturing industry nor agriculture has experienced any significant growth over the past decade, the service sector now makes up something like 65% of the state economy, and has since 1986 until today gone from a growth rate of 3.25% to 7.5%. The remittances also probably served to underestimate Kerala’s economy throughout the financial dark ages, since they do not count directly towards the GDP. [Blomqvist 2006]

 

Reasons

Obviously, the most common motivation to remit is simply that migrants care of those left behind: spouses, children, parents, and members of larger kinship and social circles. First of all, remittances may just “buy” a wide range of services such as taking care of the migrant’s assets and relatives at home, with the likelihood and size of remittances depending on whether and when the migrant intends to return. Secondly, it is clear that migration is primarily (but not only) driven by wage differentials, implying that people are ready to incur substantial moving costs in order to access to international migration. [Rapoport and Docquier 2005]

The main results established in the literature are: remittances are motivated more by an altruistic motive than by an investment motive; remittances are counter-cyclical, i.e., higher under adverse economic outcomes in the native country; they are used more for consumption than for investment; and they do not respond much to relative rates of return on investment in the home country. [Gupta 2006] This result is supported by The Hindu Business Line which says that “Unlike the capital flows, interest rate differentials are not found to be significant in determining the workers remittances, thus underlining the stable nature of these flows.”

 

A trade off?

Migration to other countries take place mainly when there are better employment avenues abroad. This usually takes place after the individual has completed his education. Large scale migration has been criticized by imposing on them the ‘brain drain’ stamp.

 

Thus when migration takes place, the home country is losing a significant chunk of its educated labour force. In developing countries like India, there is much to be done; but since the addition to labour force happens at a faster rate than the increase in employment opportunities, this ‘migration’ tends to become inevitable.

 

A trade off is evident between ‘brain drain’ and ‘remittances’. Though ‘brain drain’ is said to have a considerable pressure on the home economy (By withdrawing educated labour force) remittances tend to improve standard of living in the home country. But usually remittances better the standard of living of the ‘dependent population’. They do not affect or increase the productive capacity of the Indian economy directly, but they affect it indirectly through increased consumption.

 

Illegal flows

Unofficial remittances are sent through friends or migrants themselves or through traditional networks, known in some countries as hawala or chiti, which allow money deposited with a trader in one country to be paid out by a partner in the recipient country. [Mutume 2005]

 

Hawala is an informal banking system in which funds are transferred internationally, without being moved physically. Hawala brokers, whose relationships are based in part on trust, maintain running accounts with one another. Once a sender deposits funds with a hawala broker, the broker contacts another hawala broker in the relevant location and requests the dispersal of funds to the recipient. Hawala brokers employ fast methods of communication, such as phone or fax. The main users of the hawala system reside in the developed world and transfer funds to recipients in the developing world. [Fugfugosh 2006]

 

Conclusion

The increased inflow of remittances is what is fuelling the ‘consumption boom’ in India. The fact that the SENSEX is bullish and the real estate markets are booming are proof to this. (There has not been any proportionate increase in the intrinsic values. They might be a bubble which is financed almost to a large extent by remittances.) Adequate studies should be targeted at such interrelationships between remittances and various markets in the home country, so that the small investors do not incur huge losses.

 

Since, these remittances are relatively stable, this consumption boom will tend to sustain for longer periods. Moreover, these remittances are said to be one of the main reasons for lowering poverty. For example, remittances enhanced the standard of living of the people in Kerala. They also contributed to development in African countries.

 

The government is trying to improve the investment benefits accruing to the expatriates with a hope of increasing the flow of remittances. There is no doubt that remittances are beneficial to the receiving country.

 

Recipients spend these funds (remittances) in various ways: for some, remittances are their lifeline, without which they do not eat, as in Somalia; for others, remittances are transferred home specifically to be invested in savings schemes with attractive incentives, as in India. In Cape Verde, migrant remittances contributed to political change of the oppressive island government while for people from other countries, remittances are directed to community infrastructure development, such as collective projects in Mexico. These illustrations convey the message that in all corners of the globe, remittances are a precious tool for every single recipient and that the secure flow of remittances must be assured. [Fugfugosh 2006]

 

Thus for countries like India where additions to employment opportunities take place at a slow pace, migration will take place. Providing better investment avenues for these expatriates will help, although not significantly in bettering the flow of remittances. Moreover, by making such inflows easy and transparent, the unofficial inflows will reduce. Targeting these remittances and channeling them to socially productive investment avenues such as education and health will improve the condition of the Indian populace.

 

References

1) Steady rise in NRI remittances, The Hindu Business Line, 29th January 2004.

2) The Economics of Migrants’ Remittances, Hillel Rapoport and Frédéric Docquier, March 2005.

3) Welfare and banana leaf thalis – a foreign student’s take on Kerala, Part 1, Olof Blomqvist, 2006.

4) Informal Remittance Flows and Their Implications for Global Security, Miriam Ahmed Fugfugosh, 2006.

5) Workers’ remittances: a boon to development, Gumisai Mutume, 2005.