Remittance inflows: Risks and realities
While it is crucial to continue facilitating remittance inflows, remittances should not be viewed as a substitute for government policy and structural reform. The Government needs to assess the existing policies affecting remittances
Remittances have been gaining significance day by day in research and policy debate on poverty alleviation and growth.
However, evidence on the developmental consequences of this transfer seems mixed, though there is growing evidence that remittances act as a shock-absorber in low-income countries by providing critical income support in the aftermath of economic shocks and natural disasters.
Worldwide, remittance flows have been steadily rising, from negligible amounts in 1980 to about $588 billion in 2015—$435 billion of which were received by developing economies.
As a source of foreign funds in recent years, workers’ remittances have amounted to almost to 2 percent of GDP on average for all emerging market and developing economies, while foreign direct investment (FDI) formed 3 percent, portfolio investment amounted to nearly 1 percent, and official transfers (foreign aid) were merely over ½ percent.
At the household level, remittances normally have a positive development impact. They help improve children’s education, contribute to better health and family welfare, and thus support future human capital development.
Further, they often alleviate the hardship of poverty by supporting family budget and basic consumption, although they sometimes promote conspicuous consumption.
By alleviating credit constraints and providing risk insurance for rural households, remittances help in the development of small enterprises and promote entrepreneurial skills.
Collective remittances can contribute to the development of villages and local communities as they assist in building social assets and facilities such as schools, hospitals community centres, and various small infrastructure projects and also by promoting micro-enterprises.
The process, including the involvement of migrants’ associations and returnees, bears the potential of injecting new economic and social impulses into erstwhile stagnant communities.
Remittances to developing countries, as compared to other forms of external financial flows, are normally stable and exhibit relatively little pro-cyclicality in host countries.
However, country experiences reveal that economic slowdown in the host country and other external shocks can lead to a sharp fall in remittance inflows to individual home countries.
Moreover, it has been demonstrated that when the receiving households perceive the flow of remittances as being stable and predictable, they are more likely to spend rather than save and invest, weakening its role as development capital.
Again, several risks need to be taken into account and addressed with regard to labor migration and remittances. The principal argument against migration is the loss of skilled workers (the ‘brain drain’).
The successful return of migrants with improved skills and acquired capital is criticized as a delusion rather than reality, as home economies normally cannot provide an attractive environment for migrants to return to.
This holds especially true for those skilled migrants who are often unable or uninterested in reintegrating or investing in their country of origin. If migration is not macro-managed, it cannot be guaranteed that human capital is developed or that skills useful for the home environment are acquired.
It has also been contended that remittances do not always result in long-term investment, as migrants and their relatives usually spend them on ‘consumptive’ investments (food, health, household’s needs) and hardly invest in long-term businesses.
Even if remittances have the potential to lift people out of poverty, they do not always transform them into entrepreneurs, since remittances play first a strategic role of social insurance for families and they are not for investment purposes.
Moreover, home countries incur costs if the emigrating workers are very skilled, or if their departure generates labor shortages.
Also, if remittances are massive, the recipient country could face an appreciation of the real exchange rate that may make its economy less competitive internationally. Moreover, remittances can also create dependency, weakening recipients’ incentives to work, and thus retarding economic growth.
Despite these risks, remittances are a critical lifeline for millions of households in Nepal. They have been supporting families in raising their living standards and contribute to improved health, education, and housing.
Remittance flows have always been providing for the daily needs of families during natural disaster, economic hardship, or political instability. For example, when the earthquake struck in April 2015, remittance senders were the first to respond.
Moreover, it should be realized that households can profit even more if remittance income can be protected and invested within the formal financial system through savings, insurance and other services.
While it is crucial to continue facilitating remittance inflows, remittances should not be viewed as a substitute for government policy and structural reform. The Government needs to assess the existing policies affecting remittances and adjust them in line with prevailing best practice approaches.
Likewise, the risks as well as the realities pertaining to remittances must also be taken into account in the policy formulation process.
Dr. Pant works at Nepal Rastra Bank.