Recent data suggests that remittances to Africa have
added up to far more than Western donors send in foreign aid. Not only are Africans sending more money home than Western donors are giving, the money is also thought to be much more
effective.
According to Adams Bodomo, a professor at the University of
Hong Kong, the remittances to Africa have been “more efficient and better targeted....it’s more
effective because it’s better informed.
An African family member abroad knows what is needed...only a small
amount of ‘traditional aid’ ends up with the people who need it.”
This can be connected with our in-class
discussion about one of the major problems with bilateral aid: governments don’t always know what the people need.
Because of the vast influx of remittances from country to
country, efforts have been made to facilitate this process. For example the AIR project (African
Institute for Remittances), commits itself to “us[ing] remittances as
development tools for poverty reduction.”
In doing this, they have dedicated resources to performing more research
on remittance flows and policy change in order to develop ways in which remittances can effectively contribute to development in Africa.
Others are actually capitalizing on remittance flows. A company called Xoom has created a
convenient service to simplify the wiring of money from one country. They do this by allowing the customer to use their bank accounts and credit cards instead of hassling with cash. And all this for a small fee of
around $5 per transaction. Because of
the immense number of remittances that are being transferred around the world, the
company is sure to make a hefty profit in the billions.
However, some claim that remittances aren't all they’re
cracked up to be. A study by Chami et al. argues that, contrary to popular belief, remittances are not necessarily
correlated with economic growth.
Part of the problem, they say, is the Dutch disease, or the idea that an
increase in remittance flow will appreciate the country’s exchange rate, thus
distorting the market. Dutch disease
often leads to a decrease in price competitiveness for the remittance-receiving
country.
Though not everyone agrees on the effectiveness of
remittances, it will be interesting to read upcoming research on whether or not
remittances can become the “new foreign aid,” or, if in the long run,
remittances are problematic.
What policy recommendations could be useful to implement, given the popularity of remittances?
It is interesting that the professor at the University of Hong Kong stated that remittances are "more effective because its better informed". I think this is a good description of remittances, in contrast to that of foreign aid. Bridget, I agree with your argument that governments do not always know what the people need. Yet, remittances are from a person, or family member, to another person(s), their family members. For this reason, I trust the motivations behind remittances. However, I found it surprising that the company Xoom is capitalizing off of the remittances. I do understand though, that through the work of this company, there is possible growth in remittances through this company. I like the argument for remittances, rather than against, simply due to the more "trustworthy personable" nature of remittances themselves. A possible policy recommendation for remittances would be the amount that can be sent back and forth, as well as direct activities that the remittances can be used for, such as building a road, research, growing sustainable crops, or building a school. Allocating where these remittances are sent within a country could provide economic growth and stability for the receiving country.
ReplyDeleteBridget, I am glad that you are bogging about remittances. I work at a bank and it is crazy how much money flow gets out to especially Mexico. Customers are always telling me that they would rather come to the bank because the transaction fees are much lower and rather not go to Western Union. Remittance for the most part is good because it takes care of so many family member back home. I get many of my customers who sends it back to Mexico because they want to send their kids to good school or to support family business in general. Even though remittances are offered at my bank for countries such as China, India, Peru, Thailand and may more. Yet I see that our Mexican customers sends most of the money to their country and also Peru and Guatemala. I am not sure why other customers choose not to send money through our bank. I know that is a little more expensive for rest of the countries to send money but may be because most of the other countries don't know about this remittance.
ReplyDeleteI loved learning about the sheer level of remittances that are currently flowing to developing countries. I had no idea that the level was so high. Although there are always costs associated with any economic activity, I personally believe that remittances are the best form of economic flow into a developing nation. I don't subscribe to the idea that free markets are always the best way to facilitate growth and economic wellbeing, but as an economics major I do believe that we should use them wherever possible (although with healthy monitoring and transparency) because they do tend to be the most efficient. I especially liked the added benefit of being a counter-cyclical economic phenomenon. Is it possible that one of the best cures for the global econ stagnation we are seeing could be more open immigration? Allowing labor to go where it is most needed with the added benefit of money efficiently flowing into countries that desperately need it? Seeing as capital and goods are being increasingly freed up in terms of movement, the next logical step would be people I think. There are many more potential barriers to freedom of movement of the labor factor but in times like these its important to think outside the box. Who knows, its definitely got me thinking though.
ReplyDeleteThis article brought up a new perspective because I've never thought about remittances taking over as the new foreign aid, but the argument completely makes sense. It makes the world of a difference when aid is not merely distributed but distributed effectively, and it seems like remittances is a way to actually increase development. One of the main problems in developing countries is that the people (especially those who run a business) do not have access to formal institutions. As a result, there is no rule of law, control of corruption, or maintained property rights, which leads to a booming informal sector. In relation to remittances, the article says that about 75% of remittances are sent informally in Africa. I think in order to further increase the efficiency, more formal institutions like Xoom need to be created to help the flow of remittances.
ReplyDeleteThis is a very interesting article Bridget and it connects very well the topic of remittances that we have been covering in class recently. I'm sharing an article I found in the Economic Times that should contribute to this conversation. The article covers how a Parliamentary panel in New Delhi is asking the government to take steps that would cut the costs of remittances that are sent by overseas Indians. The article says that Indians sent 69 billion US dollars back to India as of 2012. "In a report to Lok Sabha, the Standing Committee on External Affairs recommended that the Ministry of Overseas Indian Affairs should consult with the RBI to reduce cost of remittances and devise methods for encouraging the diaspora community to send money through regular banking channels." Perhaps remittances are a viable option for economic development.
ReplyDeletehttp://articles.economictimes.indiatimes.com/2013-04-26/news/38843410_1_finance-ministry-remittances-foreign-investment-promotion-board
I thought it would be beneficial to write about both the positives and negatives of remittances as we have mostly brought up the positive side of remittances. The positives being that it provides a constant source of income to countries where they have highly variable incomes. It also allows for families to be able to pay for education of their family members and it can also help with any health related issues, which will allow them to attain better employment opportunities in the future.
ReplyDeleteHowever, there are quite a few negative consequences of remittances. The IMF sites that remittances are not associated with increased domestic investment or more efficient domestic investment and studies show that remittances have no significant effect of GDP growth. Remittances may also reduce a governments commitment to maintain fiscal policy discipline and they countries may be encouraged to borrow more. It also reduces political will to enact policy reform and also has serious societal consequences as it breaks up families and leaves countries without their most skilled workers.
http://www.imf.org/external/pubs/ft/op/259/op259.pdf
In a study published the Carnegie Endowment for International Peace titled "NAFTA's Promise and Reality", the authors explain that the displacement of subsistence farmers, resulting in part from the NAFTA-sanctioned influx of U.S. agricultural imports, has forced poverty-stricken households to find supplemental income – often in low-productivity, low-paying jobs. Many have resorted to migration both domestically and internationally, especially from the U.S. Like Kalsang said, households increasingly depend on remittances from family members who migrate for work, using money flows to finance agricultural inputs in the absence of credit programs, the chance to receive and education and to cover basic needs. I also think its sort of a double edged sword - on one hand, it can have a lot of positive effects on domestic economies, but it also originates from a place of desperation. In the case of Mexico, the need to migrate to the U.S. may very well be because of U.S. economic policies towards Mexico.
ReplyDelete