Remittances Boost Emerging Economies

Nick Louth - Tue 15 Jan, 2008

What has never been exactly charted until very recently is what a powerful effect this kind of work has on the economies that migrants leave behind, and how the whole process exerts a far more powerful gravity on the global economy than we might have expected. It has been known for years that most economic migrants send money home. But a recent study by the United Nations Agriculture Fund shows that these remittances are far more important than was ever guessed...

When I lived in New York a decade ago, I was amazed to see how many Mexican immigrants were employed to cycle up and down Manhattan's streets delivering pizza, salads and even fried eggs to residents who were either too busy or too idle to get it themselves.

That was big business for the restaurants, a convenience for the customer and a wage for the migrant. But it was actually much more than that. It is a perfect demonstration of the power of Adam Smith's 'invisible hand' in free labour markets. The $1-$2 tip for a typical lunch delivered to the desk of an investment banker while he worked the phones, or a trader at her screen is nothing to the customer, but allows hundreds or even thousands of dollars of business activity to continue uninterrupted. The hard-working migrants of Mexico, Guatemala, Honduras and many other countries who hurry to deliver the food may not be well-educated themselves (though some are), but they increase productivity at the very apex of the labour value chain.

The value of this substitution is familiar to us all in child-minding, cleaning, gardening and household repairs. We may not be quite as workaholic as our desk-bound friends in Manhattan, but we know what it means to be freed up from chores to do what we do best. We also know that here in Britain when labour is short, Polish plumbers, Portuguese agricultural workers, Filipino hotel staff, Turkish mini-cab drivers and Bangladeshi waiters keep a service or product available at a lower price than we might otherwise pay.

However, what has never been exactly charted until very recently is what a powerful effect this kind of work has on the economies that migrants leave behind, and how the whole process exerts a far more powerful gravity on the global economy than we might have expected. It has been known for years that most economic migrants send money home. But a recent study by the United Nations Agriculture Fund shows that these remittances are far more important than was ever guessed.

In 2006, this study shows, the world's 150m migrants sent home $300bn, about $2,000 each on average. This figure dwarves the same year's $104bn total of international aid. It even doubles the $167bn of foreign direct investment in emerging market economies, the money flows which were for so long presumed to be the engine of emerging market expansion.

The largest recipients of remittances were Asia, with $114bn, Latin America and the Caribbean with $68bn, and eastern Europe with $51bn. Of individual countries, India received $24.5bn, followed by Mexico with $24.2bn, China $21bn, the Philippines $14.6bn, and Russia $13.7bn.

Hard though it is to fathom, the dollars wired home in 10s and 20s via MoneyGram or Western Union by Mexicans in America, the cash sent home by Poles driving buses or working behind bars in Britain, and the savings earned by Bangladeshi and Filipino engineers from the oil-swollen Gulf economies are vitally important. Indeed, they are much more important in powering the receiving economies than the big dollops of cash invested by foreign companies looking for new markets or offshoring existing operations.

Not only are remittances more dollars, but they are better dollars. The route that the money takes within families, direct from foreign-based producer to local consumer means that it has, dollar for dollar, a greater benefit for the receiving economies.

Compare this with aid. Most aid, 58% according to the OECD, is still tied to export purchases from the donor country, so the recipient gets not what it needs but what the donor wants to give. Almost all passes through official channels. Corrupt officials, bureaucratic delays, and poor value prestige projects all take the edge off the economic effectiveness of that aid money in alleviating poverty.

By contrast, money remitted home by migrant workers is highly effective because it goes straight to the families who need it. A landmark study in the Philippines during the emerging market currency crisis in 1998/9 showed just how important remittances were. When the Philippine peso, along with many other Asian currencies, fell in value the value of remittances in strong currencies was worth more locally, and economists had a rare opportunity for an 'all other things being equal' study of its effect on affected families.

This study showed a 25% increase in the value of remittances sent by Filipino family members from strong currency countries. This typically added 6% to the household income. It boosted education spending by the family from 5.4% of household income to 6.1%, raised the chances of its children completing school, and improved the chances of other family members being able to become self employed by providing capital. Not least, it raised the chance of the family being able to afford a refrigerator, car or TV.

This reinforces the case, eloquently made by microfinance pioneer Mohammad Yunus, for the life-changing quality of small loans to small businesses in the developing world. While Yunus's Bangladesh-based Grameen Bank has formalised the business of turning the poor into entrepreneurs, remittances from relatives overseas are already a much bigger source of the same kind of capital.

For the Philippines, this quiet micro-economic inflow has huge macro-economic implications. The country has around 5% of its entire population working abroad, and 28% of those are in Saudi Arabia. For a country with no oil of its own, remittances from the Middle East are thus a useful offset to higher oil import prices.

Best of all for the developing world, remittances are likely to continue soaring as labour moves more freely. One of the factors fanning this is a continuing fall in transaction charges as the money transfer business opens to competition. For example, the Inter-American Development Bank calculates that commission rates on wired money from the US into Latin America have fallen by two thirds in seven years. As the IADB says commissions are currently 5%, they must have been an obscene 15% in 2000. How the Mexican delivery men must have ground their teeth to pass $300 to a middleman in order to get $2,000 to their families.

In 1980, remittances by migrants were officially recorded at $18.4bn, though they were probably in reality double that. Still, the increase to $300bn in a generation is nothing short of astonishing.

The power of the remittance stream forces us to some interesting conclusions. One, it makes much more sense for emerging nations to educate their populations to be ready for a world labour market than it does to merely try to build skills to be competitive for goods produced at home. Two, Western countries’ overseas aid goals may be met more easily by circulating in foreign workers, and particularly by educating foreign students, than by direct payments.

Most of all, it shows that the same spirit of enterprise that drove emigrants from Europe to build the United States is still alive today and benefiting not only the place they come to, but the land from which they departed. No longer need we pity the 'poor and huddled masses' who arrived at Ellis Island in Manhattan in the 19th century. Today's much reviled and misunderstood economic migrants are perhaps the most efficient of all the forces of globalisation, showing that hard work, freely traded, can transform rich and poor nations alike.