East Asia & the Pacific

We have blogged about migrant remittances in the past, from an economic point of view.

The New York Times magazine (for members) includes this week an excellent article on remittances that looks at the personal stories behind migration and at its costs and benefits. Jason DeParle's article focuses on the Philippines, a country with 10 percent of its population living abroad and where remittances make up 14 percent of its GDP.

With about one Filipino worker in seven abroad at any given time, migration is to the Philippines what cars once were to Detroit: its civil religion. A million Overseas Filipino Workers — O.F.W.’s — left last year, enough to fill six 747s a day. Nearly half the country’s 10-to-12-year-olds say they have thought about whether to go. Television novellas plumb the migrants’ loneliness. Politicians court their votes. Real estate salesmen bury them in condominium brochures. Drive by the Central Bank during the holiday season, and you will find a high-rise graph of the year’s remittances strung up in Christmas lights.

 

Across the archipelago, stories of rags to riches compete with stories of rags to rags. New malls define the landscape; so do left-behind kids. Gain and loss are so thoroughly joined that the logo of the migrant welfare agency shows the sun doing battle with the rain. Local idiom stresses the uncertainty of the migrant’s lot. An O.F.W. does not say he is off to make his fortune. He says, “I am going to try my luck.

In a little over a quarter of a century, economic reforms and openness have let to rapid economic growth and poverty reduction in China with her international trade soaring to reach $1.1 trillion in 2004 when China became the world’s third largest trading economy (WTO 2005, 16).  Policymakers and development practitioners the world over are wondering how.  In a recent NBER paper “China’s Embrace of Globalization”, Lee Branstetter and Nick Lardy (2006) provided an excellent overview of China’s pre-WTO and post-WTO reforms, encompassing reforms in trade, investment and foreign exchange regimes. 

Several main themes in this paper are inspirational: first, prior to WTO accession, China had achieved a greater degree of openness to foreign trade in manufactures than is generally acknowledged; and the reforms accelerated in the late 1990s.  Second, to date, China has made reasonable progress toward meeting her WTO obligations, which will likely to make China the most open of large developing countries.  Third, the patterns of China’s trade have conformed to patterns of her comparative advantage, benefiting China and her trading partners. In particular, multinational corporations (MNCs / FIEs) are using China as an export platform, and the biggest exporters in China are foreign invested firms. As a result of this displacement effect, the combined shares of the US global trade deficit accounted for by China, Japan, Hong Kong, Taiwan and South Korea actually fell. So it is misleading to just focus on the US-China bilateral trade deficit which is rising rapidly causing so much concern.

Lawrence Summers delivered today at the World Bank his presentation “Almost a Free Lunch: Investing Foreign Exchange Reserves in Global Equity Markets”, following similar presentations at the Reserve Bank of India in Mumbai or at the Center for Global Development in Washington DC.

Mr. Summers claims that the flow of capital today is exactly the opposite of what the “International Financial Architecture” had in mind after the World War. Today we see a net flow of capital from the poorer to the richer countries. In particular, large amounts from developing countries are being accumulated as reserves in US Treasury Bonds.

He sees two main problems here:

1. The amounts that are being kept as reserves in developing countries are too big.
2. These reserves in US Treasury Bonds have a very low real rate of return, close to zero.

The gap between the return obtained at a typical central bank or what could be obtained with a typical pension portfolio or in stock is around 4 % or 5 % respectively (this gap would be of around 10 % if compared to the return of Harvard’s endowment while he was President).

Therefore, we have some of the most rapidly growing economies in the world, with high percentages of their populations living in poverty, with a “fair amount of money deployed in clearly suboptimal investment”.