EFFECTS OF MIGRATION AND REMITTANCES ON ECONOMIC GROWTH

EFFECTS OF MIGRATION AND REMITTANCES ON ECONOMIC GROWTH

Migration is defined as the movement by people from one place to another with the intention of settling in the new location. The movement is typically over long distances and from one country to another. Remittances on the other hand are defined as transfer of money by a foreign worker to an individual in his or her home country. Many people in developing countries are beneficiaries to remittances they get from their close relatives who work abroad. Remittances just like foreign Direct Investment (FDI) is a form of capital inflow to the receiving nation with the only difference being that its effect is actually felt directly by households. In light of the above reasons this paper therefore serves to assess the impact of migration and remittances on economic growth in developing countries.

INTRODUCTION

Many people around the world migrate for many different reasons, some migrate due to political unrests in their native countries, others due to marriage and others migrate in search of job opportunities to name but a few. In this paper however we will be mainly concerned with people who migrate in search of employment opportunities. Migration and remittances have always played a crucial economic role in our society. Since as early as the eighteenth century many Batswana men left the country in pursuit of greener pastures to work in the mines and Boer farms in South Africa. About 20000 Batswana men were taken each year on contract to the South African mines and given the sharp rise in mine wages since 1974 (Lucas, 1985). Only a few women crossed the borders to also try their luck as domestic workers and some also worked the in farms. It must be noted that at these times the then Bechuanaland protectorate was one of the poorest countries in the southern part of Africa if not the whole world. At independence the country only had a GDP per capita income of about US$ 60 and 13 kilometres of tarred road (Edge & Lekorwe, 1998). The country was frequently hit by drought due to unreliable rainfalls which made both arable and livestock farming unproductive. Agriculture was the main source of food so during droughts there was a lot of hunger and poverty. These conditions prompted many men in the country to abandon agriculture to work in the mines so that they could take a good care of their poverty stricken families.

Overseas capital flows comprising foreign direct investment (FDI), official development assistance (ODA) and migrant remittances have grown significantly over the past 20 years (Nigel & Jones, 2013). The advantage of remittances over FDI and ODA is that they go directly to the households which increases household incomes and as a result mitigates poverty.

figure 1 above shows how remittances to developing countries have been growing overtime from 1990 until 2012 in comparison with other resource flows. Remittances are growing faster than overseas development aid (ODA) as shown by the graph. This is beneficial to the developing countries because remittances have no strings attached which is the case with ODA. The above graph also gives evidence that indeed remittances are not far off from foreign direct investment in terms of influencing economic activity in developing countries as they are the second largest source of funding to developing countries.

LITERATURE REVIEW

This part reflects on some of the opinions shared by different authors regarding the subject matter. According to Natalia C et al (2009), the positives enjoyed by society and family is that remittances contribute to alleviation of poverty by providing capital to fund households investments and savings. On the negative side she states that remittances fuel inflation, disadvantage the tradable sector by appreciating the domestic currency, reduce the labour market participation rates as receiving households opt to live off migrant’s transfers rather than by working.

Chami et al (2003) also added that income from remittances results in the moral hazard problem by permitting the migrant’s family members to reduce work effort.

Richard H and Adams Jr (2005) found out that international migration and remittances significantly reduce the level, depth, and severity of poverty in the developing world.

In their paper Richard H and Adams Jr (2009) sought answers as to what determines international remittances in developing countries. They used variables such as the skill composition of migrants, poverty and interest and exchange rates as their explanatory variables. The results of the paper were that skill composition of migrants was statistically significant and countries which export a larger share of highly skilled (educated) migrants receive less per capita remittances than countries which export a larger proportion of low-skilled migrants. Other results were that the level of poverty in labor sending country does not have a positive impact on the level of remittances received.

Connell et al (1976) also argued that an individual’s decision to migrate is a collective decision, he asserted that other household members play a role in the decision to migrate. In Ravestein’s (1885) laws of migration he argues that individuals move in order to better themselves Todaro (1969) also captures this assertion by Ravenstein (1885) by assuming that migration is the outcome of utility maximization.

METHODOLOGY

The technique used in obtaining relevant data for this research was a critical qualitative assessment of journals and text in the fields related to the study. From each text, relevant data was selected after careful scrutiny and evaluation of its applicability to the topic at hand. Graphs showing remittance outflows to Africa were also used to show a trend of how remittances have been growing over time.

DISCUSSION

The effect of remittances in reducing poverty can be easily recognised in developing countries than in developed countries especially when they are from abroad (Richard, Adams, & John, 2005). It must be noted that even developed countries do enjoy remittances. However they do not enjoy remittances in the same way as developing countries do because generally developed countries have stronger currencies as compared to developing countries’s currencies and as a result they cannot buy as many goods and services as beneficiaries in developing countries would. Major beneficiaries of remittances in the economy are households, especially those that are headed by females. Households normally use remittances for consumption. They are mainly used to pay for school fees, food, and to start small businesses. They also affect the labour supply of households, for instance in Zimbabwe, households with migrants had less cultivated land but tended to be slightly better educated (De Haan, 2000). If extra funds from remittances are saved this could also make households well off as they would gain interest and be used for future consumption.

At a national level remittances from migrant workers are beneficial because they are a way of sourcing funds without any strings attached. Developing countries encounter difficulties when borrowing money because they are considered risky due to political unrests in most developing countries and low levels of productivity in developing countries. Remittances boost local small businesses because recipients of remittances usually buy from them. This shows that remittances have a trickledown effect as the indirectly benefit other people in the economy. This also creates employment in a way and therefore contributes to economic growth. If used well remittances can be very beneficial to developing countries looking at the fact that they have come close to both foreign aid and foreign direct investment in terms of magnitude. If saved remittances can be channelled to borrowers and businesses to invest and expand their production capacity. This would lead to reduction of unemployment and ultimately a reduction in poverty because labour is the factor which the poor have in abundance and therefore are willing to work earn a living. Most migrant workers use informal means to send the money home like retail shops, currency dealerships and sometimes the migrant pays occasional visits to bring the funds. The financial sector therefore misses out on profiting from this form of money transfer which impedes financial development of a country. If this could be rectified these funds would boost the profitability of the financial sector of which government would benefit indirectly through taxation. One way of addressing the issue could be through reduction of financial charges and improving the speed at which the money reaches the recipients in the home country.

DISADVANTAGES OF MIGRATION AND REMITTANCES

Remittances have a tendency to cause a dependency syndrome on a receiving nation. This is not good because the country depends on outside capital flows instead of creating a sustainable local economy. When foreign economies are not performing well, migrants may get retrenched which reduces the inflow of income into the country. The country therefore will have to depend on the global economy staying healthy.

Some migrants are educated and the home country has invested money, time and effort on their education. This is not good in the context of economic development for developing countries (Azam & Khan, 2011).

If migrants decide to return home upon retirement or retrenchment this increases demand for scarce resources on an already strapped economy. Furthermore (Leon-Ledesma & Piracha, 2004) posited that reliance on remittances distorts development and creates inequalities and disparities among the people within the country. This arises from the fact that in most underdeveloped economies the poor hardly attain higher levels of education high education costs.

High inflows of foreign currency tend causes the domestic currency to appreciate. This implies that the domestic price of the foreign currency falls. This tends to lead to increase in imports and a decrease in exports. This results in slow development of the manufacturing sector of the receiving nation. .

CONCLUSION The bottom line is that remittances are an important factor in the global economy, and help drive growth both at home and abroad. It is important for the developed world to provide guidance on the prudent use of those funds, and for developing countries to develop policies that will ensure that growth is efficient and well planned.

References

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