remittances

Get the Conditions Right for Remittances to Matter

Recent evidence suggests that remittances have a positive impact on economic growth. This post will examine evidence based on an international panel data set that captures the surge in migration and remittances observed during 2006-09. The dataset includes 70 countries spanning from 1990 to 2009. This to our knowledge is the most recent data set that has been used in empirical remittance work. The recent effort of countries to decrease money laundering, use of improved technology and decrease in transaction costs is leading to a decrease in the unofficial portion of remittances. There has also been a surge in migration and remittances in the last half of the past decade. Thus this dataset should more comprehensively capture the growth impact of remittances compared to previous studies. Different models used to calculate the impact of remittances on growth are detailed in the report titled Bangladesh: Towards Accelerated, Inclusive and Sustainable Growth—Opportunities and Challenges, Volume II, Main Report, published in June 2012.

The impact of remittances on per capita GDP growth is economically significant

What impact do remittances have on stimulating overall economic growth? Remittances can be used for consumption and investment which further stimulates demand for goods and services, as well as contribute to financial development. On the other hand, they can create dependence in recipients and cause real exchange-rate appreciation which adversely affects domestic production.

The answer is an empirical one which we can answer using available data. Our findings echo recent economic research which shows that remittances, even when not invested directly, can have an important multiplier effect.

In our study, we focused only on the magnitude of the impact of remittances on aggregate demand in Bangladesh and calculated the traditional Keynesian multiplier effect, that is how much income is generated from every remittance dollar, following the approach adopted by Nicholas Glytsos by estimating a consumption function, an investment function, and an imports function. To estimate the parameters we used data from the Bangladesh Bureau of Statistics national accounts covering the period 1981-2010. We ran simple Ordinary Least Squares regressions to estimate the structural parameters. Here is a summary of our results:

Why do migrants send money back home? Distinguishing the different motives helps us understand the role these transfers play in influencing the behavior of households, and the policy implications of alternative motives can be very different.

I tried answering this question using micro survey data from Bangladesh on possible motivations, using a multivariate regression model.

The results were a little unexpected. Overall, the evidence contradicts the argument that remittance-receiving countries have little scope for policy intervention. The analysis shows that remittances are not driven exclusively by the need for family support but also by the migrants’ skill and education level and motivation to transfer their savings as investment in their home country. Thus, contrary to conventional wisdom, remittances play a vital role in not only supporting consumption but also in serving as an important source of investment funding. The extent to which remittances contribute to investment depends on the supportiveness of government policies and whether the economic environment is conducive to investment activity.

Surprisingly, none of the demand side variables—the existence of a surviving parent or spouse—seem to matter. Among the supply side variables, education and skill matter most.

Remittances sent by migrant workers have emerged as a key driver of poverty reduction in many developing countries. Bangladesh has caught up with growing migration trends since the mid-70s when only 6,000 Bangladeshis were working abroad. Today, there are about 8 million. Migration has now become a major source of gainful employment for Bangladesh’s growing number of unemployed and under-employed labor force. The sharpest increase in the level of manpower exports occurred during 2006--2009. Remittances have grown at a rapid pace, particularly since 2004.

So, what are the key correlates of aggregate remittance inflows in Bangladesh? What does the data tell us about Bangladesh? Many researchers have used aggregate data to analyze the macro-economic factors affecting the behavior of remitters. For example, Barua et al (2007) show that income differentials between host and home country and devaluation of home country currency positively and high inflation rate in home country negatively affect workers’ remittances¹. Hasan (2008) finds remittances respond positively to home interest rate and incomes in host countries². Ordinary Least Squares estimation is frequently used to characterize the statistical relationships between aggregate remittance inflows and their proximate macro correlates.

The key finding is that a limited number of macroeconomic factors are important in predicting the behavior of aggregate remittances.

People on a boat in Bangladesh On Nov. 7, 2012, a motorboat carrying 110 illegal immigrants heading for Malaysia capsized in the Bay of Bengal close to Bangladesh’s southeastern border with Myanmar. This tragedy came less than a fortnight after a boat with more than 135 passengers capsized in the same area. “Boat capsized with illegal immigrants from Bangladesh” is a recurring story, with Thailand, Malaysia, and other Southeast Asian countries the destinations of illegal work seekers. What makes Bangladeshis resort to such extreme methods of migration?

For countries with substantial numbers of workers in the Middle East, recent events have not only raised concerns for the repatriation and welfare of their citizens, but have also raised fears of a possible slowdown in remittances. Will remittance flows noticeably decrease due to recent events in Egypt, Libya, and Tunisia?

For South Asian countries, remittances are among the largest and most stable sources of foreign exchange and their developmental impact have been remarkable. For example, in Nepal national poverty level has come down from 42% to 31% during 1996 to 2004, and to 21% today, largely on the account of remittances which finance household consumption as well as education and health expenditures. Nepal, Bangladesh, and Sri Lanka, were among the top 15 remittance recipients in 2009—with inflows being equivalent to 24% of the GDP in Nepal, 12% in Bangladesh, 8% in Sri Lanka, 5% in Pakistan and 4% in India.

Gulf States employ more than 11 million expatriate workers, an estimated 8 million or more from South and East Asian countries. Saudi Arabia, the U.A.E, and Qatar are top destination for South Asian migrants and are main sources of remittance inflows. The table as well as the country profiles below demonstrates the sheer magnitude of migrant workers in the Arab Gulf countries and their contributions to the labor force; sometimes greater in overall numbers and proportion than the respective labor force in the countries.

This is a true story…

It is the year 2005. 26 young Bangladeshi men are crammed on a small rubber boat. Floating on the vast Mediterranean Sea. The boat's engine had stalled days ago.

10 days without food or water. The men are faced with a choice – death from drinking sea water or the inhuman alternative of having to drink one’s own urine. The pain of watching a brother or a dear friend slowly and painfully starve to death is too much. One by one the men start looking at each other - wondering which part of a dead body would be edible. Another weakly searches for something sharp enough to cut out a chunk of his own flesh, before collapsing dead from hunger and fatigue…

This is what a group of young Bangladeshis faced in 2005, when they embarked on an illegal journey to Spain. Only three survived the ordeal and lived to speak of the horrors of those 10 days.

UN Photo/WFP/Amjad Jamal

A World Bank report released on July 30 finds that poverty in Pakistan fell by an impressive 17.3 percentage points between 2001 and 2008 (from 34.5 percent in 2001-02 to 17.2 percent in 2007-08). Three out of Pakistan’s four major provinces – Khyber Pakhtunkhwa (formerly NWFP), Punjab, and Sindh – saw significant declines in poverty during this period. The largest fall in poverty was in Khyber Pakhtunkhwa (KP). According to the Bank report “high level of remittances, both foreign and domestic, seem to have facilitated” the decline in poverty in KP.

Pakistan saw migrant remittances reach a record $ 8.9 billion in fiscal year 2010, an increase of 14 percent compared to the 2009 fiscal year despite the global economic crisis (Pakistan’s fiscal year runs from July to June). The World Bank report says “Continued strong growth in worker’s remittances in the past few years has also contributed to improvements in the external current account balance” and “have facilitated improvement in the country’s external position”.

The food, fuel, and financial crises during the last three years sent shockwaves throughout the world and its effects rippled across South Asia. It impacted growth, causing a reduction of growth by nearly 3% from the peak of 8.9% in 2007 to 6.3% in 2009, led to job losses, declines in stock market value, decreases in tourism, and increasing pressures on already weak fiscal, balance of payments, reserves and exchange rates.

I was based in New Delhi during the crisis, and the effects were palpable. For a moment, it looked as if confidence was ebbing---the construction cranes in Gurgaon (the fastest-growing township around Delhi) became silent, a young scholar at Delhi University ran a survey of what graduates might do as job markets became difficult, airlines ran half-empty and racked-up massive losses, jobs were lost heavily in diamond-cutting in Gujarat and IT firms stopped hiring in Bangalore, and people paused to consider the implications of such a dramatic change from the accelerating and heady growth of the previous years. But despite the circumstances, and thanks to strong and prompt government actions, confidence has swiftly returned, the region has proven to be quite resilient and a noticeable resurgence has taken hold.

The proportion of people living below the poverty line in Bangladesh has fallen sharply from close to 60% in 1990 to 40% in 2005. Using the Household Income and Expenditure Survey conducted by the Bangladesh Bureau of Statistics; economists Aphichoke Kotikula, Ambar Narayan and Hassan Zaman find that the number of poor people in Bangladesh fell by nearly 6 million between 1990 and 2005. The study, “To what Extent are Bangladesh’s Recent Gains in Poverty Reduction Different from the Past?” also shows substantial improvements in living conditions. For instance, the percentage of households with connections to electricity increased from 31% to 44% between 2000 and 2005.

Key factors contributing to poverty reduction include changes in certain household characteristics – most prominently, a smaller number of dependents and improvements in their education.

remittances

Get the Conditions Right for Remittances to Matter

How Remittances Grease the Wheels of Bangladesh’s Economy

What Drives Remittances of Bangladeshi Migrants?

For Bangladesh, More Migrants Mean More Money

Better Jobs Can Outweigh a Secure Life

Will recent events in the Middle East Affect Remittance Flows to South Asia?

In Pursuit of the Golden Deer

Can Migrants Help in Post-Flooding Reconstruction in Pakistan?

Is South Asia Moving Up?

Geography, Infrastructure and Poverty Reduction

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