Role of Remittances in Shaping the Economy

international moneyRemittances play an important part in developing the countries’ economic systems, individual households, and businesses.[1] Since 2009, the World Bank has acknowledged the importance of remittances by including them in its measure of creditworthiness, allowing nations with high remittance levels to borrow more money than they otherwise could.[2] According to the World Bank estimates, migrant workers sent home $526 billion in 2012. The World Bank expects this to get to $534 billion by 2015.[3] This is vital for some countries such as Tajikistan, where remittances form more than half of its GDP.[4]

  • Foreign Exchange:

Remittances provide receiving countries with much needed foreign exchange. Remittances are more stable and reliable form of foreign exchange earnings in developing countries as compared to Foreign Direct Investments (FDIs) or aid flows. It likewise serves to alleviate balance of payments and debt crisis that beset the economy of developing nations. Additionally, they also act as a potential stabilizing factor for the economy.[5] For example, in Pakistan, Bangladesh and Nepal money received in remittances is larger than national foreign exchange reserves, according to the World Bank.[6]

  • Development:

Remittances act as a blessing for a country’s financial development. Their frequency and magnitude tend to be counter – cyclical. Economic distress in home country inspires the migrant workers to increase the volume of funds they remit. Thus, aiding in the development of the economy.[7] Remittances also put pressure on the exchange rate to appreciate, fuel inflationary pressures and finance large and widening trade deficit of countries.

  • Poverty:

Remittances play a substantial part in the social aspect of the economic system. It helps to alleviate poverty, which is the ‘first round’ of effects of remittances.[8] The entire household income increases in the presence of the remittance that leads to increasing household consumption, thereby bringing down poverty and raising the standard of livelihood.[9] Thus, an economy will fare far better if the people below the poverty line reduce which then, in turn, leads to positive economic outlook.

  • Education:

In many developing countries, education is not accessible to all or is expensive at all levels. Remittances can allow for the payment of school and college fees and can enable children to study rather than work for family’s survival. Thus, remittance may act as a ‘survivalist’ income supplementation by making basic needs such as education accessible to the wider population.[10] Remittance-inspired expenditures on education can help create the type of human capital that is often being seen as an essential condition for accelerated economic growth.[11]

  • Investment:

Remittance expenditures form an important component of the local economy. It helps individuals to invest in real estate sector, as well as, invest in different kinds of equipment that could be seen as an improvement in the earning capacity of the person in the remittance-receiving country.[12] For example, the Indian government, as per the Foreign Exchange Management Act (FEMA), is becoming lenient in rules and regulations regarding the investment in real estate sector, thereby attracting an inflow of capital through remittances.[13]

  • New Businesses:

Remittances provide capital for starting new companies and embarking on entrepreneurial activities. This is because remittance-receiving individuals have a sense of security and somewhat of startup capital to get started.[14] According to the World Bank, the global remittance markets will be rated at about $600 billion in 2015, which would enable and encourage new financial startup in this particular industry as well. In response, to the ever increasing remittance market, the telecom operators are putting in their international remittance programs. For instance, Vodafone has recently allowed customers to transfer money through cell phones to individuals on each other networks’ across regions. French Telecom giant, Orange, also offers international mobile money transfers across West African countries.[15]

  • Reduction in Debts:

At the micro level, being in thrall to moneylenders or parlous financial institutions is a common experience for many in the developing countries. Remittances provide for the repayment of debts and for the means to avoid the taking on of debt by providing alternative income and asset streams. Thus, individuals are free from the potential overburden of debts, and there will be an increase in the investment in healthcare, education, housing, and other necessary commodities.[16]

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References

Adams, R. H., Jr., & Cuecuecha, A. (2010). Remittances, Household Expenditure and Investment in Guatemala. World Development, 38(11), 1626-1641. doi:10.1016/j.worlddev.2010.03.003

Connor, P., Cohn, D., & Gonzalez-Barrera, A. (2013, December 17). Changing Patterns of Global Migration and Remittances: More Migrants in U.S. and Other Wealthy Countries; More Money to Middle-Income Countries (Rep.). Retrieved http://www.pewsocialtrends.org/files/2013/12/global-migration-final_12-2013.pdf

Mahapatra, L. (2014, February 26). Remittance Economies: How Migrant Workers Are Shaping The Economies Of Their Home Countries. International Business Times. Retrieved from http://www.ibtimes.com/remittance-economies-how-migrant-workers-are-shaping-economies-their-home-countries-maps-1557882

NRI guide to property investment in India – NDTV. (2013, May 31). Retrieved from http://profit.ndtv.com/news/your-money/article-nri-guide-to-property-investment-in-india-322344

Pettinger, T. (2013, January 31). Economic Impact of Migrants and Remittances [Web log post]. Retrieved from http://www.economicshelp.org/blog/6784/economics/economic-impact-of-migrants/

The Role of Remittances in Developing Countries. (n.d.). Retrieved from http://wiki.dickinson.edu/index.php/The_Role_of_Remittances_in_Developing_Countries

Scott, M. (2015, June 8). Shaking up Global Remittance Market: Startups & telcos making money available at the click of smartphones. Economic Times. Retrieved from http://economictimes.indiatimes.com/small-biz/small-biz-usa/shaking-up-global-remittance-market-startups-telcos-making-money-available-at-the-click-of-smartphones/articleshow/47584091.cms

Turnell, S., Vicary, A., & Bradford, W. (n.d.). Migrant Worker Remittances and Burma: An Economic Analysis of Survey Results (Rep.). Retrieved http://www.econ.mq.edu.au/Econ_docs/bew/Burma_Survey_Remittances.pdf

 

[1] The Role of Remittances in Developing Countries. (n.d.).

[2] Connor, P., Cohn, D., & Gonzalez-Barrera, A. (2013, December 17). Changing Patterns of Global Migration and Remittances: More Migrants in U.S. and Other Wealthy Countries; More Money to Middle-Income Countries (Rep.).

[3] Pettinger, T. (2013, January 31). Economic Impact of Migrants and Remittances [Web log post].

[4] Mahapatra, L. (2014, February 26). Remittance Economies: How Migrant Workers Are Shaping The Economies Of Their Home Countries. International Business Times.

[5] Turnell, S., Vicary, A., & Bradford, W. (n.d.). Migrant Worker Remittances and Burma: An Economic Analysis of Survey Results (Rep.).

[6] Mahapatra, L. (2014, February 26). Remittance Economies: How Migrant Workers Are Shaping The Economies Of Their Home Countries. International Business Times.

[7] Turnell, S., Vicary, A., & Bradford, W. (n.d.). Migrant Worker Remittances and Burma: An Economic Analysis of Survey Results (Rep.).

[8] Turnell, S., Vicary, A., & Bradford, W. (n.d.). Migrant Worker Remittances and Burma: An Economic Analysis of Survey Results (Rep.).

[9] The Role of Remittances in Developing Countries. (n.d.).

[10] Turnell, S., Vicary, A., & Bradford, W. (n.d.). Migrant Worker Remittances and Burma: An Economic Analysis of Survey Results (Rep.).

[11] Adams, R. H., Jr., & Cuecuecha, A. (2010). Remittances, Household Expenditure and Investment in Guatemala. World Development, 38(11), 1626-1641.

[12] Turnell, S., Vicary, A., & Bradford, W. (n.d.). Migrant Worker Remittances and Burma: An Economic Analysis of Survey Results (Rep.).

[13] NRI guide to property investment in India – NDTV. (2013, May 31).

[14] The Role of Remittances in Developing Countries. (n.d.).

[15] Scott, M. (2015, June 8). Shaking up Global Remittance Market: Startups & telcos making money available at the click of smartphones. Economic Times.

[16] Turnell, S., Vicary, A., & Bradford, W. (n.d.). Migrant Worker Remittances and Burma: An Economic Analysis of Survey Results (Rep.).