The Money Trail

The Money Trail Asian Development Bank
31 Dec
2015
Remittance payments are a fundamental, yet often overlooked, part of the global economy. But the impact on nations receiving the money isn’t just a financial one

Remittances are one of the silent cogs that make the world’s economy turn and are arguably the most overlooked source of funding for developing nations. They flow around the world as remorselessly as ocean currents, moving invisibly, around the clock. Then this electronic money lands in bank accounts far from where it was earned, paid to families often separated by thousands of miles.

Workers’ remittances is money transferred by migrants back to their countries of origin or citizenship. They contribute significantly to foreign currency inflows in tranquil and turbulent times. Perhaps the most readily identifiable form of remittances are with Philippine nurses or South Asian construction workers. In reality though, remittance workers and their impacts are everywhere and they say a good deal about the changing face of labour, people movement and human geography.

In many cases remittances are the largest source of external finance for developing countries. ‘Anybody can send remittances,’ says Jean-Christophe Dumont, Head of the International Migration Division at the Organisation for Economic Co-operation and Development (OECD). ‘They aren’t just migrants. They can be the diaspora who still have families in their country of origin, family migrants, humanitarian migrants. But a large part are sent home by temporary migrants.’

Worldwide, migrant workers are forecast to remit US$685billion this year according to the World Bank – a rise of ten per cent on last year – of which developing countries will receive US$454billion. The scale of remittances makes them a significant player in development. The World Bank says that in 2013, remittances were more than three times larger than official development assistance and, excluding China, exceeded foreign direct investment flows to all developing countries. Remittances supplement social protection systems, contribute to economic development and even sustain objectives such as the Millennium Development Goals.

 

INCOME LEVELS

All of this reflects the staggering scale of human migration around the planet. The World Bank estimates that more than 215 million people now live outside their country of birth. The Indian diaspora comprises 25 million people – ten per cent live in the United States alone – and India is the largest recipient of officially recorded remittance inflows (US$71billion in 2014).

Other countries projected to have received large remittances in 2014 included China (US$64billion), the Philippines (US$28billion), Mexico (US$24billion), Nigeria (US$21billion), and Egypt (US$18billion).

Despite the huge sums that flow into large countries, these remittances can be a relatively small share of GDP – remittance flows to India amount to only 3.7 per cent of GDP. Many smaller countries are far more dependent on remittance inflows. Tajikistan, with 42 per cent, has the highest proportion and other heavily dependent countries include Kyrgyzstan (32 per cent) and Nepal (29 per cent). In Pakistan, remittance flows are crucial to sustaining the nation’s balance of payments and cover almost half of all imports. The World Bank found that remittances to Bangladesh amount to 80 per cent of the receiving household’s income.

In sub-Saharan Africa, the World Bank says that remittances as shares of GDP are significant for Lesotho (24 per cent), the Gambia (20 per cent), Liberia (19 per cent) and Senegal (11 per cent). As shares of reserves, remittance flows to Sudan are exceptionally high (220 per cent), and significant for Senegal (72 per cent), Togo (66 per cent) and Mali (60 per cent). Elsewhere, remittances represent a high proportion of GDP for Moldova (24.9 per cent); Armenia (21 per cent); Haiti (21 per cent); Lesotho (19.8 per cent); Liberia (19.7 per cent); Samoa (19.7 per cent); Lebanon (17.7 per cent) and Honduras (16.9 per cent).

The main drivers of remittances, says the World Bank, are economic conditions and a ready pool of labour. Generally, remittance workers gravitate to areas that embrace freedom of movement, such as the EU, the Association of South-East Asian Nations (ASEAN) and Mercosur, a five-nation bloc in South America.

Remittance flows from major oil producing countries track closely with oil prices, while housing construction in the US is traditionally a large employer of migrants. When the US construction sector added 19,000 jobs per month in 2012, remittances to Mexico saw a corresponding 12 consecutive months of growth. The construction frenzy in the Gulf is driving remittance flows to South Asia.

 

NATIONAL DEPENDENCE

Other factors are at play. According to the World Bank’s 2014 Migration and Development Brief, humanitarian impulse is a powerful motivator of remittances. The devastating earthquake that struck Haiti in 2010 spurred remittance flows to that country and after the widespread floods in Pakistan in August 2010 remittances jumped 19 per cent. The super typhoon that struck the Philippines in 2013 brought an 8.5 per cent increase in payments.

Conflict can accelerate or stifle the flow of remittances. The World Bank says that deteriorating security in Libya saw Egyptian and Tunisian migrant workers head home in 2014. High unemployment in Europe – where 80 per cent of Moroccan migrants reside – means that remittances to Morocco are likely to be weak in 2015. Eight per cent of the population of Tajikistan left the country between 1991 and 2005 to escape armed conflict and, according to the International Monetary Fund, by 2005 almost every family in Tajikistan had sent at least one family member abroad as a migrant worker.

‘In some cases remittances are very dependent on a specific migration corridor,’ says Dumont. ‘Tajikistan is hugely dependent on migrants working in Russia, but anything that happens there would have a tremendous impact. Such countries are taking a big risk.’

Internal remittances sent by migrants moving within their country can be just as significant but are often under-counted and under-recognised says Dr Priya Deshingkar, research director for Migrating out of Poverty, the University of Sussex. ‘These internal migrants tend to come from the poorer households,’ she says. ‘The importance is that their remittances tend to flow directly back to poor families and have the potential for poverty reduction.’

Deshingkar has identified this trend in Ghana and India, countries with what she describes as ‘quite marked regional inequalities’ as well as in South Africa, Nigeria, Rwanda, Uganda, Vietnam and Bangladesh. ‘They tend to work in low-level jobs: construction work, domestic work, shop floor assistants, porters. These jobs are hugely important to the economy. They serve as cheap labour and contribute to development.’

 

DEVELOPMENT BLOCKS

Internal remittances contradict popular negative perceptions about the movement of people from rural to urban areas. ‘The common view is that this just moves poverty from one place to another, that these people are clogging up cities that already cannot cope,’ says Deshingkar. ‘But it’s more to do with governments wanting cheap labour but not being prepared to provide the social services for these internal migrants.’

Internal remittances can be a warning signal that governments are failing to addressing the underlying issues that drive people to migrate, she suggests. ‘Governments don’t really evaluate this. The options of poor credit people are highly limited. There are inter-locking factors of class equality, ethnic discrimination and government failures that mean people want to get out.’

These same factors can await migrant workers at their destination, says Mayumi Ozaki, a financial specialist for the Asian Development Bank (ADB). ‘Sometimes they are cheated, agreements are informal, they can be exploited.’

Despite the global scale of remittances, the jury is out on just how far workers’ remittances promote or hinder long-term development. ‘One of the problems is that the UN and the World Bank have really latched on to remittances as a major engine of development,’ says Dr Laura Hammond, head of development studies at SOAS, University of London, ‘but that impact can be overstated. If remittances are sent back by poor refugees, they aren’t enough to make a difference developmentally. But where migrants are better paid and more secure in their jobs, they can send much more.’

‘Remittances are generally positive for relieving poverty,’ says Ozaki, who identifies a list of priorities that remittance-receiving households work through: food, clothes, appliances; then repayment of loans; then for paying off health or education fees and bills. Only then would most households invest any remaining money. ‘It’s a good thing in that it improves the household environment. The problem is that if they don’t, or cannot do something productive with the remittances, what happens when the migrant worker returns home?’

educationMigrant workers send money home to fund education (Image: Asian Development Bank)

 

THE PHILIPPINE FACTOR

The Philippines has experienced a generation of remittance-driven migration, according to the ADB. Today, almost ten per cent of the population lives outside the country. In the early 1970s, the Philippines’ labour export strategy benefited middle- and low-skilled workers sent to oil-rich Middle Eastern countries. The 1990s growth of Asian tiger economies subsequently led to an increase in a demand for professional and domestic workers. Social patterns in the United States and western countries also required significant numbers of nurses and caregivers.

‘Remittances are a lifeline for the Philippines economy, but is it positive?’ asks Ozaki. ‘That’s more questionable. A lot of the workers are skilled: teachers, nurses. If these people had the option they would probably choose to stay in the Philippines. There is more effort now [to keep these people at home] so that they can choose to migrate, rather than feel they are forced to.’

A 2009 study by the ADB looked at the Philippines and concluded that remittances may help in fighting poverty but not in rebalancing growth in the long run. It found that remittances can lift households out of poverty, but negatively influence the share of food consumption and that they do not have a significant influence on other key items of consumption or investment. While 72 per cent of households that received remittances spent some of this money on education, the sums were often not substantial enough to have a meaningful influence.

‘Remittances should not be seen as a sufficient condition for development in a home country,’ says Dumont. ‘The share of remittances that goes to productive investment is fairly low. Not much goes into capital. Remittances can bring benefits at the household level. At the macro-level, things are more nuanced.’

Yet many of the ways in which households spend remittances can have a positive impact, argues Deshingkar. ‘Not all of it is invested in productive uses,’ she agrees. ‘But even spending on consumer durables in a rural society can lead to an enhancement of social status.’

Remittances are important for households on the breadline that are vulnerable to price spikes or natural disasters, a concept known as ‘consumption smoothing’, according to Dr Ghazala Mansuri, a lead economist at the World Bank. ‘Countries can have local shocks, floods or droughts,’ she says. ‘Remittances can help you ride that out, it means children keep going to school, you get better health care, that leads to positive outcomes across generations.’

The African Economic Research Consortium on Ghana found that remittances improved household welfare and help to minimise the effects of economic shocks to household welfare. They did not offset the shocks completely, however, except for food crop farmers (the poorest in Ghana). Remittances were spent on pay for schooling and wages of farm labourers, and to develop small businesses – a typical feature in the majority of countries that rely significantly on such payments.

‘Remittances are like a safety valve,’ says Mansuri. ‘They take the pressure off the need for job creation in the local economy. The question is how well that money is invested – if it is invested at all – and is it accelerating the shifts in the home economy that are really needed?’

Remittance work is often built around long-term family objectives. ‘Sometimes the migrant worker is chosen by the family. One son goes to the Middle East to study, a daughter goes to Europe to work and send money back,’ says Hammond. ‘That money can pay for another child to be educated who can then migrate.’

A study on Pakistan by the World Bank Institute found that remittances have a positive and significant impact on child education and health, including a gender-equalising effect, as the gains for girls are appreciably greater than those for boys. With better access to schooling, children in remittance-receiving households tend to work substantially fewer hours.

 

SOCIAL IMPACTS

Remittances don’t just involve money. The importance of social and cultural remittances – the ideas, practices, mind-sets and world views that get transferred from host to home communities – is increasingly recognised. ‘People return with ideas and new ways of thinking, they can challenge gender roles and responsibilities, cultural norms such as dress,’ says Deshingkar. ‘They can-re-shape the sender’s nation.’

Hammond has witnessed this phenomenon in Somalia. ‘Fifteen years ago, people were pretty much on an equal footing,’ she says. ‘Now you have an emerging class who are really tied to the diaspora. There is a real question in Somalia – what percentage of the diaspora is welcome, and how much is too much? At first it can create a backlash, those returning are seen as having lost their culture and are frowned upon. But the more who come back, the more it starts to chip away at established cultural norms.’

But what are the negative impacts on the home nation left behind? In Nepal, the outflow of migrant workers rose 16 per cent in 2013­–2014 compared with a year earlier, says the World Bank. In its Nepal Migration Year Book, the Nepal Institute of Development Studies says that at least 1,099 Nepali migrant workers a day fly out of the country. The migration of Nepali nurses emerged as a trend in the 2000s and by 2010, there were between 4,000 and 5,000 Nepali nurses in Western countries.

The institute concluded there was no brain drain, as the country has 34,000 qualified nurses and only 12,000 employed in the country. But it highlighted social impacts, reporting that ‘while the migrant nurses are busy in caring for others in the distant countries, their own children and family grow in negligence and suffer from the lack of affectionate care.’

Other studies highlight further unfavourable effects on child care: less breastfeeding and uncompleted vaccination programmes. A 2010 study by the University of California found that Mexican children of migrants are more susceptible to drug abuse and absenteeism or dropping out of school. A University of the West Indies study found that Caribbean children left behind are likely to suffer from depression, withdrawal, and running-away behaviour due to the lack of parental contact and supervision.

Would these kind of outcomes have been better had a parent not migrated to become a remittance worker? Mansuri is unsure. ‘The push factor would have been pretty big for a mother to go abroad and leave her family. People know there will probably be a fracturing of the family, but my impression is that these women leave under a fair amount of duress.’

Asian migrant workers tend to be young and male, says Ozaki, and this can cause other practical problems for those left behind. ‘Often they are the one who tended the family’s fields. If they go, that task falls to the women, and that means they cannot work.’

 

SECONDARY SOURCES

Another consequence is that migrant workers simply choose to not keep their side of the bargain. ‘Migration can be part of a strategy by an agricultural household,’ says Dumont. ‘They send one family member abroad to diversify sources of income. But that can reduce the level of investment in production because the flow of income may be a little less, or the worker may decide to invest a little less. They decide they don’t need to work 70 hours a week any more.’

The same impact can be felt at home, where Mansuri believes that family members of remittance senders may lose the incentive to work or study. ‘If the migrant comes from an unskilled background, there will be low education among those left behind. Those people look and see there is plenty of low-skilled work around the world, and so they don’t need that much education.’

A 2012 paper from the Institute of Development Studies at the University of Sussex looked at how remittances affected Tajikistan. It found that on average, men and women from remittance-receiving households were less likely to participate in the labour market and supply fewer hours when they do.

Hammond says this downside is not commonplace. ‘In most cases remittances are a supplemental source of income, the recipients are not sitting, waiting for the monthly paycheque.’

High transaction costs for remittances are a constant source of grievance. Fees are typically around 7.5 per cent, though can be as high as 15 per cent. The World Bank says that international mobile remittances could expand access and lower costs through branchless banking, but these have not taken off.

‘Costs are outrageously high,’ says Dumont. ‘It’s a question of fairness.’ Recent clampdowns on money laundering and terrorist funding that travel via remittances have also hit the vast majority of innocent remitters. ‘Banks are not moved by predictions of humanitarian crisis if remittances stop flowing. They are more concerned about being fined,’ says Hammond. ‘People are having a difficult time, and they have a choice – they can stop sending, or they can find illegal ways to do it, sending cash over with couriers. That creates an opportunity for anyone who wants to take advantage of them.’

 

CHANGING NATURE

Dumont sees little slowing of the pace in the growth of remittances, yet he has a warning for those countries who lean heavily upon them. ‘That involves a risk. Remittances can play against the need to put in place public policies that would enable more rapid economic development and relieve social pressure. If you make the changes at home to enable the economy to grow, you lessen the need for people to migrate and send back remittances,’ he says.

The risk is that remittances end up as an economic crutch. ‘If the level of remittances is very high and the country does not manage them very well, you can get a negative feedback on economic development,’ argues Dumont. ‘Remittances are certainly not the panacea. If economic conditions are right, they can boost the economy. If not, there is a risk of dependency. Any debate on remittances needs to ask why the country is not doing much better already.’

Mansuri believes the nature of remittances will evolve and may trigger new positive benefits: ‘It may be that the world will require fewer lower skilled migrants. The Middle East is changing from just churning out oil to requiring more doctors. Investment in education will develop because people will be competing for very different kinds of jobs. The average migrant will require more skills.’

One third of all migrants moving to OECD nations already have a tertiary degree. ‘That doesn’t mean they are all necessarily working at the level of their education,’ says Dumont. ‘There’s an issue with over-education, but that’s not the case for all parts of the world. In the Middle East, the level of education is still low among the unskilled migrant workers from India, Pakistan, Bangladesh and the Philippines.’

Most countries are still getting to grips with the phenomenon of remittance workers, argues Ozaki. ‘The remittance issue is relatively new for most countries in Asia,’ she says. ‘They’ve only had it for ten or 15 years and they don’t really have a position on it. My impression is that they are happy to have the foreign exchange coming in, and that means the policy debate on the future direction of their economies is not really happening.’

That debate must happen, argues Deshingkar. ‘Migration is something that goes hand in hand with development. As economies grow, there’s bound to be migration and movement. That’s what history shows us. The pressure is on governments and they really have to start taking it seriously. It will come to a point where they can’t ignore it.’

This article was published in the May 2015 edition of Geographical magazine.

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