Remittances for Finance for Development

Migrant remittances have emerged as a major source of external development finance in recent years. Remittances can be described as household income received from abroad, resulting mainly from the international migration of workers. Remittances may be sent as cash or gifts, and may flow through a variety of formal or informal channels. The term poverty refers to the lack of access to basic necessities such as food and shelter available to an individual. The existence of poverty can create pathways for social and financial exclusion, meaning that not only are these individuals deprived of the bare necessities but also social factors and financial services. Remittances have also been linked to the stimulation of growth, factors which will be explored in this essay.

Migrants generally send money home for food, buying household necessities, building houses, funding education, healthcare and business investments. Recipients also have the option to save the money sent to them. Though, even when remittances are saved by households, this typically means that the household uses the funds to purchase land or a better home or for home improvement. This generates very little new capital or other economic activity, thus hindering economic growth. However, remittances may promote development by providing funds that recipients can spend on education or health care or invest in entrepreneurial activities. By doing this, they can also reduce poverty in the long-run. Ratha (2003) demonstrates that remittances are associated with increased household investments in education, entrepreneurship, and health. Studies based on household surveys in El Salvador and Sri Lanka found that children of remittance-recipient households have lower school dropout rates and that these households spend more on private tuition for their children. In Sri Lanka, children in remittance-receiving households have higher birth weight, suggesting that remittances enable households to afford better health care. A higher birth weight also indicates that a new born is more likely to be healthy, thus, inferring that income is not spent on medical fees.

Remittances play an insurance role in developing countries as they respond countercyclically to economic conditions and personal circumstances in migrant home areas. Ratha (2003) and World Bank (2011) have noted the stability of remittances in the face of worldwide economic conditions. For example, remittances remained remarkably stable in the wake of the recent financial crisis, dropping just 5.2% between 2008 and 2009. In contrast to foreign direct investment which declined 39.7% over the same time period. Whilst this may not directly reduce poverty or increase growth it does ensure consistency in the economy; it illustrates that in comparison to other financial resources, remittances are not as dependant on the global economy and are therefore reliable.

Remittances, unlike private investment money, don't flow back at the first sign of trouble in the country. When the family is in trouble, facing hardship and/or hard times, remittances increase. This is usually when a migrants send more money. Migrants send even more money home for special occasions like a surgery, a wedding and unexpected funerals that they cannot attend- especially for households in poverty.

Chami and Fullenkamp express that remittances do not represent a first-best solution to the problems of poverty and development. Far from it. They are costly to those who send them and are difficult to channel into activities that lead to economic growth and development. They also have unintended consequences that may even make them obstacles to development. There is an exorbitant cost of sending money home. Money transfer companies structure their fees to milk the poor. The most widely recognized type of formal channel are from operators such as Western Union and MoneyGram, which have networks of agents where remittances can be initiated in the sending country and redeemed in the receiving country. Formal channels also include banks and credit unions in both sending and receiving countries that often operate in collaboration with money transfer operators. The global average cost of sending money is 8 %, to Africa the cost is even higher at 12%. Sending money within Africa (for example, from Benin to Ghana) is even higher at over 20 percent. And then there is the case of Venezuela, where, because of exchange controls, even if a migrant sends $100 their family may only receive $10. Thus, migrants avoid sending money through an official channel and use either an informal channels or it goes in suitcases. Informal channels include systems—such as hawala and hundi in South Asia and padala in the Philippines—operated by non-financial firms or brokers with physical presence in remittance-sending migrant enclaves and in remittance receiving areas in migrant home countries. This method causes problems to arise as officially transferred remittances as published in the recipient countries balance of payments is grossly underestimated.

Though official statistics may not be accurately recorded, from a macroeconomic perspective, remittances can boost aggregate demand. Remittances are likely to affect wages and employment both at the household level and in the aggregate. If leisure is a normal good, remittances should reduce labour supply among recipient households by creating a pure income effect. The increase in aggregate demand and the reduction in labour supply from recipient families should both boost wages, which will lure some members of non-recipient families into the labour force. Thereby, increasing GDP as well as spur economic growth. However, research indicates that remittances may also have adverse macroeconomic impacts by increasing income inequality and reducing labour supply among recipients. Because remittances are gifts rather than earned income, recipients may not look as hard for work or put as much effort into schooling if they know they can count on remittance income to supplement or replace their wages. Researchers have found evidence that recipients of remittances reduce their labour force participation. To the extent that people do make investments with remittance income, they have an incentive to take on riskier projects, because they are betting with other people’s money. Many remittance-receiving regions report anecdotal evidence of local real estate price bubbles funded in large part by remittances. Thus, remittances can distort asset prices and actually exacerbate poverty by pricing many poor families out of the real estate market—not to mention the adverse consequences for everyone after the price bubble bursts. This implies that remittances dampen growth because recipients may become dependent on them and work less.