Sunday, August 15, 2004
The importance of remittances
I have argued several times on this blog that inward remittances are a reasonable trade-off for the so-called brain drain in developing countries. As I had mentioned in an earlier post referring to India, even ball-park estimates of the amount India loses every year due to the brain drain factor would not cross $4-$5 billion a year. Compare that with the approximate $10 billion India makes every year from remittances (mind you, all such estimates are bound to be under-estimates, given the nature of remittances). Clearly, a net-positive. The Economist has more on the increasing importance of remittances to developing countries.
According to a recent study* by Dilip Ratha, an economist at the World Bank, remittances amounted to $93 billion last year. This is more than poor countries received from aid or capital markets. The real number, Mr Ratha says, may be twice as high—making remittances greater than foreign direct investment and in some countries more valuable than exports.
What is plain, however, is the importance to several countries of emigrants' remittances. These payments provide more than a quarter of GDP for Jordan, Lesotho, Nicaragua, Haiti and Tonga, and more than 5% for many others. In 36 countries, remittances exceed all other imports of capital combined, public and private.
As a source of finance, remittances have several advantages. Unlike development loans, they do not come with a liability or an obligation to pay interest. They are sent directly to the people for whom they are intended and thus cannot be squandered by governments. They are a more stable funding source than foreign direct investment (and even more stable than portfolio flows).
It's not all rosy though.
Despite their virtues, remittances can also be a source of trouble. How much trouble, no one can tell. Because it is hard to know the size of the flows, it is hard to be sure that the mass of tiny transactions are not being used to launder money or finance terrorism. Applying know-your-customer rules to millions of tiny transactions is plainly impossible. Trying to stop suspicious flows can be costly to recipient economies: recent efforts by Saudi Arabia (after America, the largest source of remittances) to crack down on the financing of terrorism have had a discernible effect on money being sent back to the Philippines. There may also be economic costs associated with reliance on remittances. Like any unearned wealth, they may foster idleness among those who benefit. They might result in what economists call “Dutch disease”, pushing up the value of a nation's currency.
According to a recent study* by Dilip Ratha, an economist at the World Bank, remittances amounted to $93 billion last year. This is more than poor countries received from aid or capital markets. The real number, Mr Ratha says, may be twice as high—making remittances greater than foreign direct investment and in some countries more valuable than exports.
What is plain, however, is the importance to several countries of emigrants' remittances. These payments provide more than a quarter of GDP for Jordan, Lesotho, Nicaragua, Haiti and Tonga, and more than 5% for many others. In 36 countries, remittances exceed all other imports of capital combined, public and private.
As a source of finance, remittances have several advantages. Unlike development loans, they do not come with a liability or an obligation to pay interest. They are sent directly to the people for whom they are intended and thus cannot be squandered by governments. They are a more stable funding source than foreign direct investment (and even more stable than portfolio flows).
It's not all rosy though.
Despite their virtues, remittances can also be a source of trouble. How much trouble, no one can tell. Because it is hard to know the size of the flows, it is hard to be sure that the mass of tiny transactions are not being used to launder money or finance terrorism. Applying know-your-customer rules to millions of tiny transactions is plainly impossible. Trying to stop suspicious flows can be costly to recipient economies: recent efforts by Saudi Arabia (after America, the largest source of remittances) to crack down on the financing of terrorism have had a discernible effect on money being sent back to the Philippines. There may also be economic costs associated with reliance on remittances. Like any unearned wealth, they may foster idleness among those who benefit. They might result in what economists call “Dutch disease”, pushing up the value of a nation's currency.
