Remittances to LDCS: curse or panacea?

Author:Rodriguez, Ennio
Position:Texto en ingl

    The objective of the paper is to develop a conceptual framework for the LDCs with a view to maximise positive while minimising possible adverse impacts of remittances on their economies. The approach is to distil international 'best practices', and explore the lessons learned, in particular, the conditions for success where applicable, in order to review policy and institutional implications for LDCs and for development assistance. A recent study underscores the importance of remittances to Africa having quadrupled between 1990 and 2010, reaching US$40 billion (2.6 per cent of Gross Domestic product -GDP-) (Ratha, et al., 2011). The data must be interpreted with some degree of caution, however, as growth rates may be reflecting better data reporting, especially after 9/11. It should also be noted that the upward trend is broken with the world financial crisis of 2008, showing the heretofore remittance flows resilience has its limits.

    At the outset it must be mentioned that, on the one hand, enthusiasm for remittances is based on the claim that they are a 'market-led' mechanism capable of reducing poverty and generating developmental impacts on recipient households, communities and countries. While on the other, the impact of remittances has been dismissed by the 'historic structural' approach based on the argument that the motivations to migrate are not made on the basis of a rational economic choice, but rather the result of an expulsion from the hometown due to the absence of economic opportunities, and/ or strife and climatic reasons. Based on this line of reasoning, it has been argued critically that remittance flows into the expulsing communities have not managed to spark sufficient growth of employment to the point of stopping the need to continue emigrating. In general, remittances are neither the panacea (a market-led solution to poverty) nor the curse (unable to stop migration) of development as sometimes portrayed, but they do play a critical role for the recipient households, and for the recipient economies where remittances are significant.

    By their very nature, remittances are neither focused on the poorest countries nor the poorest households and geographical regions within countries. migration costs seem to discriminate against the poorest households operating like an entry barrier for the neediest. Ratha, et al. (2011), based on recent household surveys for Burkina Faso, Nigeria and Senegal, show that the probability of a household having an emigrated member is positively correlated to family size, education and wealth. migrant pro- files indicate they tend to be young, relatively well educated, and predominantly male.

    In this sense, remittances are not a substitute for development assistance nor for public policies targeting the poor households and regions, be that by expanding coverage of 'universal' and/or 'focalised' programs. Remittances can be a useful complement to such policies provided the environments are conducive to maximising their developmental impacts. Development assistance and public policies are thus relevant for reaping potential benefits from remittances. In short, even if remittances are market-led in the sense that decisions to remit funds are decentralised, their develop- mental impact should not be purely market-led, as international and national interventions can make the difference regarding their develop- mental consequences. Both the optimistic and the pessimistic arguments seem to be based on disproportionate claims as to the developmental impact of remittance flows on their own. This paper follows a more balanced and analytical approach in identifying conditions to achieve the greatest positive developmental impacts of remittances, and cautioning against possible drawbacks.

    In general, functioning institutions and a capacity for appropriate policy-making seem to be at the heart of remittances' potential impact on development. However, there is no silver bullet that can bypass what is normally weak and/or altogether missing in LDCs: institutions (rule of law, especially contract enforcement; banking regulations and supervision; and banking and micro-finance development among others) and pro-growth policies (appropriate macroeconomic policy formulation and execution, public administrative capacity, etc.). But it can be argued that, regardless of the migration motives, since remittances are flowing and many of the costs have already been incurred into, the issue becomes how to achieve the necessary institutional development and policy framework so as to maximise the positive impacts of such remittances, and minimise negative consequences.

    Development has long been described by max Weber as a transit from a rural society governed by 'patrimonialism' (form of government based on the ruler's family households), to a modern society governed by rational legal bureaucracies characterised by technical specialisation and rules (Weber, 1978). Granted, development is a complex and multi-dimensional process, but Weber's typological dimension should be included in the analysis. Developing countries, in general, have not fully accomplished the implementation of the rule of law, such that elements of modernity co-exist side by side with a state limited in its capacity to address 'common good' issues, as policies often remain captured by interest groups. The political economy of development reflects these challenges, and remittances are no exception (3). Another sociological observation is the rise of the middle class in the defence of a rules base system, as can be observed in India today, which can play a critical role in some historic moments. In addition, to the local political processes, where the press can also play a constructive part, multilateral and bilateral donors, as well as regional and sub-regional agreements can be actors also supporting modern institutional development.

    This paper makes suggestions on the direction changes in institutions and policies should take in order to achieve developmental objectives related to remittances, but aware of the complexities involved.

    The paper is organised as follows: first, the microeconomic logic of remittance recipient households is explored in determining the expenditure prioritisation and conditions for a greater developmental impact at the household level, as well as some experiences maximising the developmental meso-economic impact at the municipality level, with a view to examine lessons learned. Second, consideration is given to the issue of remittance transactions costs and the rationale for preferring formal or informal transfer channels. Third, from a macroeconomic perspective, emphasis is placed on mechanisms to enhance the developmental financing potential by accessing international capital markets through collateralisation of remittance future-flows and diaspora bonds, as well discussing broader macroeconomic issues posed by remittances, including some general considerations on the relationship between migration and remittances. Finally, there is a summary of conclusions and recommendations.


    Microeconomic impacts

    The functionality of remittances to the recipient households has been well documented. They directly reduce poverty (4), spur an increase in education and health expenditures, insure against adverse shocks and finance housing and capital investments (for ample evidence on Africa, see Ratha et al., 2011).

    More analytical studies done for non-African developing countries for remittance receiving households attempt to describe the rational behaviour of recipient households in the allocation of remittances to poverty alleviation, including basic consumption, education and home improvements; productive activities; and even the provision of 'public' goods (water and sanitation). They also conclude there is evidence of income smoothing and risk management with regards to macroeconomic shocks, political strife and climate change consequences. The logic for such effects is explored below in order to introduce the discussion on the conditions under which there is a greater microeconomic-level developmental impact. These refer primarily to public policy lessons.

    A study back in 2005 (Mariano and Massey), attempted to test expectations consistent with the New Economics of labour migration and the historic structural approach to migration based on household surveys in Mexico, the Dominican Republic, Nicaragua and Costa Rica. The analysis focused on three explanatory variables: household composition, family members abroad and community context. The New Economics of labour migration assumes an implicit contractual arrangement between the migrant and the family members in which remittances are to be used for productive investment and risk diversification. The alternative approach assumes that migrants are 'expelled' from their native countries for lack of opportunities and migration becomes a survival strategy. In such a strategy, recipient households use remittances for family maintenance or as income supplements for household needs. The results show weak and moderate regression coefficients for the expectations of both models in all four countries. However, results became much more significant once the Mexican and Dominican households were analysed separately.

    Mexican remittances seem consistent with the New Economics of labour migration logic as a household strategy of risk diversification, whereas Dominican Remittances seem to follow the historic structural approach of lack of opportunities and household need. Mariano and Massey (2005) argue that the Mexican patriarchal and cohesive family structure is more conducive to New Economics of Labour Migration based migratory decisions. Migrants are mostly male, temporary, goal oriented and likely to honour contractual arrangements. Remittances are positively associated with the degree of development of...

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