The Hindu Business Line : Remittances and their role in global economy

THE document issued by the World Bank in September on Global Economic Prospects is significant for its emphasis on the implications of remittances and migration. Global remittances, which have doubled in the past five years, are expected to reach $167 billion in 2005. Partly, this is a reflection of greater scrutiny of fund flows following the terrorist attacks of 9/11 in the US. They also reflect changes in the structure of services that support remittance flows, leading to lower costs, expanding net worth.

They are also reflective of the generally higher growth of the global economy as a whole, which has led to larger migration. Payments have also had an increasing tendency to go through official formal channels rather than through informal channels, thanks to appropriate exchange rate adjustments.

The size of the flows from remittances is significant in many developing countries. It is in excess of the fund flows from other sources, particularly capital market flows and official aid flows.

It is significant that the global flow of funds has become radically different in the last decade, especially when it concerns developing nations. The IMF's latest World Economic Outlook shows how, in 2005, the flow of official aid to developing countries is expected to be negative at nearly $(-)200 billion, reflecting the burden of repayment of debt. FDI itself is around $202 billion and portfolio investments show a reverse flow. But remittances amount to a significantly larger figure, at $167 billion.

The World Bank Report lays considerable stress on the fact that the remittances can and do contribute to reduction of poverty in undeveloped countries, although they may indirectly lead to increase of inequality. Much of the impact also depends on the investment climate that can enable the remittances to be utilised to make higher investments and thus lead to greater growth of the economy.

The document also mentions the likely impact on the originating countries as a result of the migration of more skilled persons, which can affect productivity adversely. The problem is particularly serious in respect of migration of highly-skilled persons, such as doctors and nurses, to the developed countries.

This may, in some cases, lead to a brain gain by richer countries at the expense of the poorer nations. In some cases, such as in poorer nations of Africa, the exodus of skilled health personnel has adverse effects on health-care, adding to the constraints they already face as a result of HIV-AIDS epidemics. The report refers also to some attempts by a few developed countries to compensate for the economic loss suffered by the poorer countries as a result of the exit of qualified personnel. The UK, for instance, proposes to make grants for higher skill training in the poorer countries so affected.

Another option is self-restraint in the form of bans on recruitment of qualified health personnel by richer nations from poorer countries.

This may not work because they may apply only to public sector agencies, such as the National Health Service in the UK, if at all.

The obvious solution to this problem would lie in richer countries training more skilled health personnel, such as doctors and nurses, whom they need. But so long as the poorer countries continue to spend resources on training such persons who are willing to migrate, the present apathy of richer countries to train their own personnel will remain as it gives them an easier option.

Perhaps, this is all to the good since it can be a win-win situation for some poorer countries, which gain remittances at the same time as solving the problem of under-employment.

The Global Economic Prospects 2006 calls attention to the fact that the demographic factors, such as the ageing of the societies in Europe, Japan and the US, is leading to a continuing demand for various skilled and unskilled migrants.

The fact that the dependency ratio in developed countries is worsening — there are more dependents supported by each working person as time goes on — also makes migration a beneficial source of economic strength to the developed countries. This, of course, does not fully take into account the social and cultural costs of absorption of such migrants. The fact that migration increases the economic welfare of recipient countries is obvious. However, there can be social tensions arising from ostentatious consumption by direct recipients — who are relations of migrants.

The report does not touch on the problems that such obvious and blatant exhibitions of ostentation give rise to in poorer economies.

There is also the paradox that while Gulf remittances have been substantial in Kerala, they have not translated into investment growth and robust expansion of manufacture. Nor have infrastructure projects taken off, barring the exceptional case of Cochin International Airport.

While securitisation of remittances is recommended as a route to raising loans in the international market at concessional rates, the report says they do not seem to work out uniformly for all countries. Especially are they of doubtful benefit when a country, like India and China, does not depend on such loans.

A way has to be found to channel the remittances of migrant workers into funds, which can support infrastructure development as well as expansion of social institutions in education and health. This calls for innovative financing strategies.

Suggestions examined in the World Bank Report in regard to remittances and migration include some counter-productive ideas, such as those relating to taxation of non-resident incomes on the lines the US taxes its global incomes on its national resident in other countries.

Mr Jagdish Bhagwati, an eminent non-resident intellectual, is quoted as having hinted at such a proposal, but without endorsing it. It is to be hoped that the tax policy experts in North Block do not pursue such ideas. The Income-Tax authorities have a tough job on their hands, as it is, to tax the residents. To tax the global incomes of Indian residents abroad, in addition, would tax their ingenuity further.

The remittances of migrant workers have increased over the years. Particularly is it significant that they have increased from the US, which is the source of 70 per cent of global remittances.

The Report also reveals that a substantial part of global remittances are based on South-South migration. China itself accounts for increasing outward remittances.

We are ourselves familiar with the lure of migration to Malaysia and Singapore, with all its attendant risks. Suffice it to say that migration is not only between developing and developed countries, but among developing countries at different stages of development.

The increased role of remittances in India's balance of payments has been remarked on by many observers. Of particular importance is the development of remittances attributed to software workers located abroad. Just because much of it is centred on the developed economies of the US and Europe, their sustainability depends on the continued robust growth of these economies.

These earnings are, therefore, vulnerable to variations in the growth prospects of these economies. Any disruption in economic growth in these countries can threaten the size of their inflows.

It is essential that our software entrepreneurs devote increased attention to diversifying their sources of income — although it is unavoidable that if the US declines, the whole world will follow suit.

The Global Economic Prospects Report makes a passing reference to the adverse exchange rate effects of increased remittances. This is analogous to the Dutch disease associated with the oil and gas discoveries of Netherlands, which led to increased foreign exchange inflows, an appreciation of the Dutch guilder and a consequent loss of competitiveness of conventional exports.

Whether such an effect can be expected from migrants' remittances is doubtful, says the Report. Such an effect, it says, is more likely in the case of forex earnings from natural resources. I do not think the distinction between natural resources and remittances is as clear as made out in the report.

The increase of forex earnings from remittances, unless properly utilised in imports, can have a deleterious effect on export competitiveness, due to the resultant currency appreciation as also to the associated adverse disincentive effects on labour productivity. Remittances from migrant labour can, therefore, be a mixed blessing. They have to be managed carefully lest they convert the recipient economy into a land of lotus-eaters.

In summary, the World Bank report is a competent survey of existing research and studies on diverse aspects of migration from various countries of the world and the impact of remittances on growth, equality and poverty.

It is to be hoped that a similar comprehensive study will be undertaken by the RBI or the NCAER for specific regions, such as Kerala, to understand the macroeconomic and social impact of migration, remittances and their economic and social consequences and to suggest remedial actions.

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