In a global age, remittance is king. Advances in transportation have made travel easy. In turn, this has swelled the number of economic migrants.
A 2013 World Bank estimate puts the number of people living outside their country of birth at 230 million. The same report states that migrant workers sent home $526 billion in 2012. $400 billion of this total amount went to developing nations and in the future, remittances are expected to be a half-trillion dollar market.
In fact, remittances account for a major chunk of the local economy in certain developing nations.(See also: Developing Nations With Most Debt.)Remittances accounted for more than half of Tajikistan's GDP in 2012 and a third of Kyrgyzstan's economic output. Similarly, about 40% of war-torn Somalia's population depends on remittances to buy food and medicines. In 2013, India received $72 billion remittance money, the equivalent of revenues from its famed IT Services industry.
Here are three important things that you should know about the remittance economy.
Remittances Can Cost a Small Fortune, Especially to Venezuela
According to the World Bank, the global average cost for sending money home is 8%. Sending money to Africa costs 12%. But, the cost of sending money within Africa is even higher at 20%. The cost of sending money to Venezuela is even higher at 95%.
The reason rates are so high in Venezuela is because the imposition of capital controls by former President Hugo Chavez. Chavez imposed capital controls to prevent an outflow of currency from the country during strikes by energy workers in 2002-2003. However, they have become a central feature of the economy since. As a result of this, the currency has established a standard currency rate for Bolivar in the international markets. A black market has, even, emerged in the country to combat the country's currency's fixed rate in the international markets. According to Dilip Ratha, a World Bank economist, remittances to Venezuela are generally carried in a suitcase.
Remittances Are Countercyclical And Procyclical In Nature
In simple words, this means that remittances operate in a fashion that is similar to and contrary to that of the general economy. Thus, a migrant is more motivated to send money back home to his or her country of origin during times of economic recession. Thus, capital in the domestic economy of the migrant's country of origin increases and helps keep consumption patterns normal.“Remittances are a form of insurance, helping families and communities weather external shocks,” according to economist, Dilip Ratha.
Kaushik Basu, chief economist at the World Bank, adds that remittances “act as a major counter-balance when capital flows weakened as happened in the case of the U.S. Fed announcing its intention to reign in its liquidity injection program.” In the migrant's host country, the effect would be pro-cyclical because money is flowing out of the country. At the same time, during an economic recession in the host country, the migrant may send less money back home.
A 2009 NBER study by Jeffrey Frankel confirmed the cyclical nature of remittances and suggested that this might be a driving factor for governments to encourage foreign remittances because it helps national development. It also suggested that remittances should be included into the Optimum Currency Area criteria along with trade, labor mobility, and transfers. (See also: Behind the Euro: History And Future).
Remittances Do Not Have a Direct Effect On Growth
Given the volume of remittances in the economy, it is tempting to conclude that they can affect significant growth in economies. However, there is no available evidence to prove this hypothesis.
A 2009 IMF paper outlines some reasons why. For example, the cost of capital, which should typically reduce with an inflow of investments from families receiving remittances from abroad, has not reduced. The authors state this could be due to the possibility that the remittances may be received by families with a high propensity to consumer and an economy that is financially integrated with the world economy.
A 2014 paper, this time by the World Bank, also provides many reasons why remittances do not affect economies. The paper outlines three reasons for this: difficulty in measuring the effect of remittances on local economies, rising migration, which has an opportunity cost to economic production in the migrant's country of origin. Thus, countries lose talent and productivity in the form of migration to developed nations.
Another 2014 paper, this time from the Center for Global Development, sums the situation up in the following manner: “When a worker departs country A to work in country B, that reduces country A's GDP. The worker can, in principle, cause a countervailing rise in country A's GDP, if she sends enough money back, and if enough of that money is spent on domestically-produced goods and services. But, the net effect need not always be positive–even when the gross flow of money back home is substantial."
The Bottom Line
Remittances are fast becoming an essential part of the world economy. With the advent of digital technologies, the amount and quantity of remittances may increase shortly.