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Assessment of Distributive Effects of Emigrant Remittances in Developing Countries

Jibrin Musa Talba , Ibrahim Moussa, Jidda Mohammed Abdul-Aziz Ajayi
Journal of Finance and Economics. 2017, 5(4), 185-188. DOI: 10.12691/jfe-5-4-5
Published online: August 19, 2017

Abstract

Despite the rising volume of remittances flowing to developing countries, their distributional effect on the recipient countries has been largely unexplored. We examine this topic using data from World Bank. Despites the positive effects of emigrants remittances in terms of developing microfinance Institutions and welfare improvement of the recipient households, its negative effects ranges from appreciation of the national currency, hampering competitiveness, monetary management and rekindle inflationary pressures, extension of trade deficits and brain drain to mention just a few. Remittances represent a short-term fix for long-term problems. If properly channeled Remittances could be used to finance development and reduce poverty. Government of the recipients countries should promote Diaspora bonds in order to reap full benefits of emigrants remittances.

1. Introduction

A remittance is a transfer of money by a foreign worker to an individual in his or her home country. Money sent home by migrants competes with international aid as one of the largest financial inflows to developing countries. Workers' remittances are a significant part of international capital flows, especially with regard to labor-exporting countries. 1 In 2014, $436 billion went to developing countries, setting a new record. Overall global remittances totaled $582 billion in 2015. Some countries, such as India and China, receive tens of billions of US dollars in remittances each year from their expatriates. In 2014, India received an estimated $70 billion and China an estimated $64 billion.

Remittances are playing an increasingly large role in the economies of many countries. They contribute to economic growth and to the livelihoods of less prosperous people (though generally not the poorest of the poor). According to World Bank estimates, remittances will total US$585.1 billion in 2016, of which US$442 billion went to developing countries that involved 250 million migrant workers. For some individual recipient countries, remittances can be as high as a third of their GDP.

As a share of GDP, the top recipients of remittances in 2013 were Timor- Leste (216.6%), Tajikistan (42.1%), Kyrgyzstan (31.5%), Nepal (28.8%), Moldova (24.9%), Lesotho (24.4%), Samoa (23.8%), Haiti (21.1%), Armenia (21.0%), The Gambia (19.8%), Liberia (18.5%), Lebanon (17.0%), Honduras (16.9%), El Salvador (16.4%), Kosovo (16.1%), Jamaica (15.0%) and Bosnia and Herzegovina (13.4%, which is about 1.817 billion $ on 31 December 2014).

Emigrant remittances have come to represent an increasingly important source of financial flows between developed and developing countries in recent decades. Officially recorded remittances—comprising all unrequited transfers from migrant workers to family and friends in their countries of origin—climbed steeply in the decades between 1970 and 2000, declining only in the late 1990s. They then grew sharply after 2002 ($115.5 billion), peaking at $305 billion in 2008 before dipping in response to the global financial crisis (Table 2). Future flows are bound to be affected by the simultaneous economic slowdown in the high-income countries—including the United States and Western Europe, which account for almost two-thirds of the remittances that migrants send home to developing countries—and in the developing countries that account for 10–30 percent of the rest. The fact remains that workers’remittances dwarf official aid as a source of funds for the developing world.

The distributive effect of remittances has been the subject of a large part of the evolving literature. Not only have remittances been shown to mitigate the impact of adverse shocks on an economy, but they also have been linked with helping to reduce poverty. Aggarwal and Spatafora, 1. Kireyev 23 suggests that the decline in the poverty rate in Tajikistan from 81 to 60 percent from 2000 to 2003 was helped by the significant level of remittances to that country (where flows of remittances had reached 50 percent of GDP). Moreover, children in households receiving remittances are more likely to receive better education and healthcare.

This paper examines the distributive effects of remittances on recipient countries -welfare and poverty. It will advice policy makers and explain the significant role of remittances in financing for development of poor countries.

Improvements in banking technology that reduce the costs of formal remittance services and increase the geographical range over which remittances can be sent have steered unofficial remittances into the formal sector, enabling them to be recorded Chami, Fullenkamp, and Jahjah, 11. That trend is expected to continue.

Nevertheless, a significant proportion of estimated remittance flows—estimated at between 35 and 70 percent of official remittances—remains unrecorded. Unrecorded remittances are channeled through the informal sector and are not captured in official balance-of-payment statistics. While remittances that move outside the formal sector may be used for legitimate reasons, they also may be channeled to unproductive and illegal activities, such as money laundering, drug money flows, and the financing of terrorism.

Examples of remittance channels, formal and informal, include:

• Interbank transfers

• Formal nonbank money-transfer operators

• Post-office transfers

• Cash and commodities carriers

• Informal money transfer operators Kireyev, 23

Other channels are specific to a region or country, such as fei-ch’ien (China), padala (Philippines), hundi (India), hui kuan (Hong Kong), and phei kwan (Thailand). The hawala system, historically associated with South Asia and the Middle East, refers to an informal channel for transferring funds from one location to another through service providers—known as hawaladars—regardless of the nature of the transaction or the countries involved El-Qorchi and others, 14.

While some studies suggest that self-interest is the prime motive for remittance arrangements, most agree that the practice is primarily altruistic Stark and Lucas 34; Chami, Fullenkamp, and Jahjah 11, and mainly confined to transfers between family members. The concentration on the household has formed the basis of studies of the microeconomic impact of emigrant remittances. Those studies have shown that remittances raise household consumption, stimulate investment (notably in real property), and result in better education and health care Kireyev 23. Thus, from a microeconomic perspective, remittances should have a positive impact on growth.

But the literature, most of it recent, is not definitive on the macroeconomic impact of remittances. For example, Chami, Fullenkamp, and Jahjah 11 suggest that remittances have a negative impact on economic growth, whereas Aggarwal and Spatafora 1 find no effect, and Giuliano and Ruiz-Arranz 15 argue that remittances promote growth in countries with shallow financial systems but have no impact in countries with well-developed financial systems. The lack of a clear relationship is not surprising. First, the impact on growth will depend on whether the remittances are spent on consumption or investment. To this end, the research suggests that remittances have primarily been used for consumption purposes, with little impact on long-run growth. Second, the research shows that remittance inflows are countercyclical, increasing during periods of weak economic growth in the receiving countries. This countercyclical nature makes it difficult to establish the true impact of remittances on economic growth. It does suggest, however, that remittances can play a large part in maintaining macroeconomic stability and mitigating the impact of adverse shocks. A number of papers quoted in Spatafora 33 have attested to this.

However, the distributive effects of remittances can also be negative. Kireyev 23 outlines a number of negative effects of remittances for Tajikistan that also figure in studies of other countries. Remittance inflows may have any of the following negative effects:

• They may impede monetary management and rekindle inflationary pressures, as the unpredictability and seasonal nature of foreign currency inflows create uncertainties for monetary management.

• They may lead to an appreciation of the national currency, hampering competitiveness.

• They may contribute to the expansion of the trade deficit. In Tajikistan, most remittances are used to finance imports.

• They may create a strong disincentive for domestic savings. Declining savings can deplete the resource base for investment and may even turn it negative.

• They may pose a serious moral hazard (see glossary) by reducing the pressure for reforms. Remittances enable households and private businesses to support their own consumption or investment independent of the national government, thus reducing pressure on the authorities to create a better business environment and to deal with the problems that forced emigrant workers to leave the country in the first place.

A related negative associated with migration is brain drain. Although migrants may learn skills that may be useful to their country of origin when and if they return, the loss of human capital that comes with emigration hampers a country’s development prospects. Mishra 29 shows, for example, that the Caribbean countries—, which have lost in excess of 70 percent of their best-educated labor, force (those with more than 12 years of schooling)—are not fully compensated for brain drain by the significant inflow of remittances.

Some research has focused on the policies and regulations that determine the flow of remittances, but further research is needed on how to create a sustainable development path for the source country.{1} In summary, remittances represent a short-term fix for long-term problems.

5. Conclusion

The paper began by demonstrating the well-established causal link between a well-functioning financial system and economic growth. It then identified the impact of macroeconomic fundamentals on the financial system, showing, for example, that imbalanced growth and high inflation harm the financial system. While the link between financial development and income inequality remains unclear, recent empirical studies have found that financial development tends to reduce income inequality. From a brief history of financial sector reform in developing countries, we saw that reforms, which began in the mid-1970s, started by liberalizing interest rates. Later reform efforts concentrated on indirect instruments of monetary control and the dismantling of directed credit before moving on to strengthen the overall financial sector infrastructure, including legal, regulatory, and supervisory frameworks. The most recent reforms have included moves toward greater transparency and better auditing and accounting standards. The paper then discussed policy measures that can be used to increase access to financial services by strengthening institutional infrastructures, liberalizing markets, and fostering greater competition. The paper concluded with a discussion of microfinance and emigrants’ remittances, both increasingly important channels of financial flows to the poor in developing countries.

Note

1. Multiple exchange rates, restrictions on holding foreign-exchange deposits, large black market premia, high transaction costs in the form of money-transfer fees, and dual exchange rates all reduce remittance inflows.

References

[1]  Aggarwal, R. and N. Spatafora. (2005). Remittances, determinants and impact. Mimeo. International Monetary Fund. Washington DC.
In article      
 
[2]  Aghion, P., P. Howitt, and D. Mayer-Foulkes. (2005). ―The Effect of Financial Development on Convergence: Theory and Evidence. Quarterly Journal of Economics 120, No.1 (February): 173-222.
In article      View Article
 
[3]  Arestis, P.and Demetriades, P.O. (1997). Financial Development and Economic Growth, Assessing the Evidence. Economic Journal 107 (442): 783-99.
In article      View Article
 
[4]  Aslanbeigui, Nahid, and Gale Summerfield. (2000). The Asian Crisis, Gender, and the International Financial Architecture. Feminist Economics 6 (3): 81-104.
In article      View Article
 
[5]  Beck, T., Demirguc-Kunt, A. and M.S. Martinez-Peria. (2005). Reaching Out: Access to and use of banking services across countries. World Bank Policy Research Working Paper WPS3754. Washington DC: World Bank.
In article      View Article
 
[6]  Beck, Thorsten, Asli Demirguc-Kunt, and Ross Levine. (2004). Finance, Inequality, and Poverty: Cross-Country Evidence. NBER Working Paper 10979, National Bureau of Economic Research, Cambridge, MA.
In article      View Article
 
[7]  Beck, T., R. Levine, and N. Loayza. (2000). Finance and the Sources of Growth. Journal of Financial Economics 58 (1): 261-300.
In article      View Article
 
[8]  Caprio, G. and P. Honohan. (2001). Finance for Growth: Policy Choices in a Volatile World. World Bank Policy Research Report. Washington DC: World Bank.
In article      View Article
 
[9]  Caprio, G., and P. Honohan. (1999). Restoring Banking Stability: Beyond Supervised Capital Requirements. Journal of Economic Perspectives 13 (4): 43-64.
In article      View Article
 
[10]  Carlozzi, Nicholas, and John B. Taylor. (1985). International Capital Mobility and the Coordination of Monetary Rules. In Exchange Rate Dynamics under Uncertainty, ed. J. Bhandari. Cambridge, MA: MIT Press.
In article      View Article
 
[11]  Chami, Ralph, Connell Fullenkamp, and Samir Jahjah. (2005). Are Immigrant Remittance Flows a Source of Capital for Development? IMF Staff Papers 52 (1): 55-81.
In article      View Article
 
[12]  Claessens, Stijn. (2005). Access to Financial Service: A Review of the Issues and Public Policy Objectives. Paper presented at the Fifth Services Experts Meeting on Universal Access, organized by the OECD and the World Bank, Paris, February 3-5.
In article      View Article
 
[13]  Elson, Diane. (1994). People, Development, and International Financial Systems. Review of African Political Economy 62: 511-24.
In article      View Article
 
[14]  El-Qorchi, Mohammed, Samuel M. Maimbo, and John F. Wilson. (2002). Hawala: How Does This Informal Funds Transfer System Work, and Should It Be Regulated? Finance and Development 39 (4).
In article      View Article
 
[15]  Giuliano, Paola, and Marta Ruiz-Arranz. (2005). Remittances, Financial Development, and Growth. IMF Working Paper WP/05/234, International Monetary Fund, Washington, DC.
In article      View Article
 
[16]  Greenwood, J., and B. Jovanovic. (1990). Financial Development, Growth and the Distribution of Income. Working Paper, University of Western Ontario.
In article      View Article
 
[17]  Gupta, Poonam. (2005). Macroeconomic Determinants of Remittances: Evidence from India. IMF Working Paper WP/05/224, International Monetary Fund, Washington, DC.
In article      View Article
 
[18]  Honohan, Patrick. (2004). Financial Development, Growth, and Poverty: How Close Are the Links? Policy Research Working Paper 3203, World Bank, Washington, DC.
In article      View Article
 
[19]  Jalilian, Hossein, and Colin Kirkpatrick. (2005). Does Financial Development Contribute to Poverty Reduction? Journal of Development Studies 41 (4): 636-56.
In article      View Article
 
[20]  Khandker, Shhidur R. (2003). Microfinance and Poverty-Evidence Using Panel Data from Bangladesh. Policy Research Working Paper 2945, World Bank, Washington, DC.
In article      View Article
 
[21]  King, R. G., and R. Levine. (1993). Finance and Growth: Schumpeter Might Be Right. Quarterly Journal of Economics 198: 717-38.
In article      View Article
 
[22]  King, R. G., and R. Levine. (1993). Finance, Entrepreneurship and Growth: Theory and Evidence. Journal of Monetary Economics 32: 513-42.
In article      View Article
 
[23]  Kireyev, Alexei. (2006). The Macroeconomics of Remittances: The Case of Tajikistan. IMF Working Paper WP/06/2, International Monetary Fund, Washington, DC.
In article      View Article
 
[24]  Levine, R. (1997). Financial Development and Economic Growth: Views and Agenda. Journal of Economic Literature 35: 688-726.
In article      View Article
 
[25]  Levine, R. (2004). Finance and Growth: Theory and Evidence. NBER Working Paper 10766, National Bureau of Economic Research, Cambridge, MA.
In article      View Article
 
[26]  Levine, R. (2005). Finance and Growth: Theory, Evidence and Mechanisms. In Handbook of Economic Growth, ed. Philippe Aghion and Steven Durlauf. Amsterdam: North Holland.
In article      
 
[27]  Littlefield, Elizabeth, and Richard Rosenberg. (2004). Microfinance and the Poor. Finance and Development 41, No. 2 (June): 38-40.
In article      View Article
 
[28]  Martinez-Peria, M. S., A. Demirguc-Kunt, and R. Aggarwal. (2006). Do Workers’ Remittances Promote Financial Development? Policy Research Working Paper 3957, World Bank, Washington, DC.
In article      View Article
 
[29]  Mishra, Prachi. (2006). Emigration and Brain Drain: Evidence from the Caribbean. IMF Working Paper WP/06/5, International Monetary Fund, Washington, DC.
In article      View Article
 
[30]  Pattillo, Catherine, Sanjeev Gupta, and Kevin Carey. (2005). Sustaining Growth Accelerations and Pro-Poor Growth in Africa. IMF Working Paper WP/05/195, International Monetary Fund, Washington, DC.
In article      View Article
 
[31]  Rajan, R.G. and L. Zingales. (1998). Financial Dependence and Growth. American Economic Review 88(3): 589-66.
In article      View Article
 
[32]  Schumpeter, J. (1911). The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest and Business Cycle. Cambridge, MA: Harvard University Press.
In article      
 
[33]  Spatafora, Nikola. (2005). Workers’ Remittances. IMF Research Bulletin 6 (4).
In article      
 
[34]  Stark, O., and R. E. B. Lucas. (1988). Migration, Remittances, and the Family. Economic Development and Cultural Change 36 (3): 465-81.
In article      View Article
 
[35]  Stark, O., and R. E. B. Lucas. (2009). Global Development Finance 2009. Washington, DC: World Bank.
In article      
 
[36]  Ratha, D. 2003. Workers’ Remittances: An Important and Stable Source of External Development Finance, chapter 7. In Global Development Finance: Striving for Stability in Development Finance,World Bank. 157-75. Washington, DC: World Bank.
In article      View Article
 

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Cite this article:

Normal Style
Jibrin Musa Talba, Ibrahim Moussa, Jidda Mohammed Abdul-Aziz Ajayi. Assessment of Distributive Effects of Emigrant Remittances in Developing Countries. Journal of Finance and Economics. Vol. 5, No. 4, 2017, pp 185-188. http://pubs.sciepub.com/jfe/5/4/5
MLA Style
Talba, Jibrin Musa, Ibrahim Moussa, and Jidda Mohammed Abdul-Aziz Ajayi. "Assessment of Distributive Effects of Emigrant Remittances in Developing Countries." Journal of Finance and Economics 5.4 (2017): 185-188.
APA Style
Talba, J. M. , Moussa, I. , & Ajayi, J. M. A. (2017). Assessment of Distributive Effects of Emigrant Remittances in Developing Countries. Journal of Finance and Economics, 5(4), 185-188.
Chicago Style
Talba, Jibrin Musa, Ibrahim Moussa, and Jidda Mohammed Abdul-Aziz Ajayi. "Assessment of Distributive Effects of Emigrant Remittances in Developing Countries." Journal of Finance and Economics 5, no. 4 (2017): 185-188.
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[1]  Aggarwal, R. and N. Spatafora. (2005). Remittances, determinants and impact. Mimeo. International Monetary Fund. Washington DC.
In article      
 
[2]  Aghion, P., P. Howitt, and D. Mayer-Foulkes. (2005). ―The Effect of Financial Development on Convergence: Theory and Evidence. Quarterly Journal of Economics 120, No.1 (February): 173-222.
In article      View Article
 
[3]  Arestis, P.and Demetriades, P.O. (1997). Financial Development and Economic Growth, Assessing the Evidence. Economic Journal 107 (442): 783-99.
In article      View Article
 
[4]  Aslanbeigui, Nahid, and Gale Summerfield. (2000). The Asian Crisis, Gender, and the International Financial Architecture. Feminist Economics 6 (3): 81-104.
In article      View Article
 
[5]  Beck, T., Demirguc-Kunt, A. and M.S. Martinez-Peria. (2005). Reaching Out: Access to and use of banking services across countries. World Bank Policy Research Working Paper WPS3754. Washington DC: World Bank.
In article      View Article
 
[6]  Beck, Thorsten, Asli Demirguc-Kunt, and Ross Levine. (2004). Finance, Inequality, and Poverty: Cross-Country Evidence. NBER Working Paper 10979, National Bureau of Economic Research, Cambridge, MA.
In article      View Article
 
[7]  Beck, T., R. Levine, and N. Loayza. (2000). Finance and the Sources of Growth. Journal of Financial Economics 58 (1): 261-300.
In article      View Article
 
[8]  Caprio, G. and P. Honohan. (2001). Finance for Growth: Policy Choices in a Volatile World. World Bank Policy Research Report. Washington DC: World Bank.
In article      View Article
 
[9]  Caprio, G., and P. Honohan. (1999). Restoring Banking Stability: Beyond Supervised Capital Requirements. Journal of Economic Perspectives 13 (4): 43-64.
In article      View Article
 
[10]  Carlozzi, Nicholas, and John B. Taylor. (1985). International Capital Mobility and the Coordination of Monetary Rules. In Exchange Rate Dynamics under Uncertainty, ed. J. Bhandari. Cambridge, MA: MIT Press.
In article      View Article
 
[11]  Chami, Ralph, Connell Fullenkamp, and Samir Jahjah. (2005). Are Immigrant Remittance Flows a Source of Capital for Development? IMF Staff Papers 52 (1): 55-81.
In article      View Article
 
[12]  Claessens, Stijn. (2005). Access to Financial Service: A Review of the Issues and Public Policy Objectives. Paper presented at the Fifth Services Experts Meeting on Universal Access, organized by the OECD and the World Bank, Paris, February 3-5.
In article      View Article
 
[13]  Elson, Diane. (1994). People, Development, and International Financial Systems. Review of African Political Economy 62: 511-24.
In article      View Article
 
[14]  El-Qorchi, Mohammed, Samuel M. Maimbo, and John F. Wilson. (2002). Hawala: How Does This Informal Funds Transfer System Work, and Should It Be Regulated? Finance and Development 39 (4).
In article      View Article
 
[15]  Giuliano, Paola, and Marta Ruiz-Arranz. (2005). Remittances, Financial Development, and Growth. IMF Working Paper WP/05/234, International Monetary Fund, Washington, DC.
In article      View Article
 
[16]  Greenwood, J., and B. Jovanovic. (1990). Financial Development, Growth and the Distribution of Income. Working Paper, University of Western Ontario.
In article      View Article
 
[17]  Gupta, Poonam. (2005). Macroeconomic Determinants of Remittances: Evidence from India. IMF Working Paper WP/05/224, International Monetary Fund, Washington, DC.
In article      View Article
 
[18]  Honohan, Patrick. (2004). Financial Development, Growth, and Poverty: How Close Are the Links? Policy Research Working Paper 3203, World Bank, Washington, DC.
In article      View Article
 
[19]  Jalilian, Hossein, and Colin Kirkpatrick. (2005). Does Financial Development Contribute to Poverty Reduction? Journal of Development Studies 41 (4): 636-56.
In article      View Article
 
[20]  Khandker, Shhidur R. (2003). Microfinance and Poverty-Evidence Using Panel Data from Bangladesh. Policy Research Working Paper 2945, World Bank, Washington, DC.
In article      View Article
 
[21]  King, R. G., and R. Levine. (1993). Finance and Growth: Schumpeter Might Be Right. Quarterly Journal of Economics 198: 717-38.
In article      View Article
 
[22]  King, R. G., and R. Levine. (1993). Finance, Entrepreneurship and Growth: Theory and Evidence. Journal of Monetary Economics 32: 513-42.
In article      View Article
 
[23]  Kireyev, Alexei. (2006). The Macroeconomics of Remittances: The Case of Tajikistan. IMF Working Paper WP/06/2, International Monetary Fund, Washington, DC.
In article      View Article
 
[24]  Levine, R. (1997). Financial Development and Economic Growth: Views and Agenda. Journal of Economic Literature 35: 688-726.
In article      View Article
 
[25]  Levine, R. (2004). Finance and Growth: Theory and Evidence. NBER Working Paper 10766, National Bureau of Economic Research, Cambridge, MA.
In article      View Article
 
[26]  Levine, R. (2005). Finance and Growth: Theory, Evidence and Mechanisms. In Handbook of Economic Growth, ed. Philippe Aghion and Steven Durlauf. Amsterdam: North Holland.
In article      
 
[27]  Littlefield, Elizabeth, and Richard Rosenberg. (2004). Microfinance and the Poor. Finance and Development 41, No. 2 (June): 38-40.
In article      View Article
 
[28]  Martinez-Peria, M. S., A. Demirguc-Kunt, and R. Aggarwal. (2006). Do Workers’ Remittances Promote Financial Development? Policy Research Working Paper 3957, World Bank, Washington, DC.
In article      View Article
 
[29]  Mishra, Prachi. (2006). Emigration and Brain Drain: Evidence from the Caribbean. IMF Working Paper WP/06/5, International Monetary Fund, Washington, DC.
In article      View Article
 
[30]  Pattillo, Catherine, Sanjeev Gupta, and Kevin Carey. (2005). Sustaining Growth Accelerations and Pro-Poor Growth in Africa. IMF Working Paper WP/05/195, International Monetary Fund, Washington, DC.
In article      View Article
 
[31]  Rajan, R.G. and L. Zingales. (1998). Financial Dependence and Growth. American Economic Review 88(3): 589-66.
In article      View Article
 
[32]  Schumpeter, J. (1911). The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest and Business Cycle. Cambridge, MA: Harvard University Press.
In article      
 
[33]  Spatafora, Nikola. (2005). Workers’ Remittances. IMF Research Bulletin 6 (4).
In article      
 
[34]  Stark, O., and R. E. B. Lucas. (1988). Migration, Remittances, and the Family. Economic Development and Cultural Change 36 (3): 465-81.
In article      View Article
 
[35]  Stark, O., and R. E. B. Lucas. (2009). Global Development Finance 2009. Washington, DC: World Bank.
In article      
 
[36]  Ratha, D. 2003. Workers’ Remittances: An Important and Stable Source of External Development Finance, chapter 7. In Global Development Finance: Striving for Stability in Development Finance,World Bank. 157-75. Washington, DC: World Bank.
In article      View Article