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Have remittances been neglected in comparison to exports in the economic policy dialogue of low income countries (LICs)?

Sudharshan Canagarajah's picture

A liberal trade regime is regarded by most economists as being necessary for sustainable economic growth and poverty reduction over the long term. One of the main reasons for this is that trade liberalization helps to boost incentives for export growth, and in turn exports are one of the main drivers of long term economic growth. Most of the fastest growing developing countries in the last three decades, such as the East Asian tigers, have also sustained very rapid export growth. Exporters usually face greater competitive pressure than do suppliers of goods to the domestic market, and so must constantly innovate to improve efficiency and the quality of their products. Hence exports usually lead the economy in upgrading technology and improving factor productivity, both of which are crucial for long term growth.

 
Table 1: Macro data for Tajikistan for 2008-2009
 

(in millions of US  dollars unless specified) 2008 2009
Real GDP growth rate (%)  7.9 3.4
Current account balance -394 -363
Exports 457 458
Imports 3179 2387
Private transfers (Remittances) 2343 1622
Capital and financial account balance 511 403
Public capital net 352 279
Private Investment as a% of GDP 6.0 1.0
Foreign Direct Investment 300 35

Source: IMF, WB and country data

With increasing global migration flows worker remittances have become an important source of current account inflows for many developing countries. For some of the smaller LICs, remittances actually exceed export earnings, although precise data are usually lacking (remittances are probably underestimated in most developing countries). Table 1 shows this scenario for Tajikistan. In effect these countries export their labor rather than goods and (non-labor) services. Despite public and political hostility to immigration in some of the main destinations for migrant workers (e.g. Russia, US and Western Europe), demographic trends related to aging populations suggest that these countries will require more, not less, immigrant labor over the long term.   

These trends beg a number of questions which are germane to development policy. Are remittances and the associated labor migration a substitute for, or complement to, export earnings? Do remittances “crowd out” exports (for example through the real exchange rate or the impact of emigration on real wages), and if so, what are the consequences for long term development? What are the advantages and disadvantages of remittances relative to exports? Do remittances have distributional advantages over equivalent levels of export earnings? Do remittances help to diversify foreign exchange earnings and, therefore, reduce vulnerability to external shocks?

It is more likely that remittances will complement exports in those developing countries where exports comprise capital intensive products, such as oil or minerals, than in countries which export labor intensive products. Hence the optimal strategy towards labor migration and remittances will be influenced by the nature of its export industries.

Economists have not yet begun to tackle these issues in a systematic way as an integral part of the economic policy dialogue. But as remittances become increasingly important for many developing countries, they should not be ignored any longer.

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