Remittances and their Effects

Historians have always maintained that “many human institutions are the result of human action, but not of human design”. This is the plight of the African continent, nay, the Third World. Languishing in poverty, strife, decaying economies and often worse governance, the Millennium Development Goals (MDGs) might be far from being realized before the targeted 2015.

Often times, citizens have been forced to seek greener pastures, therefore, propelling the migration of the “best” brains or, rather, the ablest of hands to countries with better opportunities. But there seem to be light at the end of the tunnel.

Interestingly, the money that these emigrants and thus, temporary workers in the developed economies send back home are doing the trick. Termed, “the diaspora that fuels development”, these remittances – private aid from the poor to the poorer – are today, the largest, fastest-growing and most reliable source of income for developing countries. It is seen to be larger than Foreign Direct Investments (FDI) and Official Development Assistance (ODA) from all countries combined, - totaling a whopping $167 billion in 2005 – quite more than official aid flows of $166 billion.

In little sums of $188 Zimbabwean emigrants (27% of the 96% that remit) send home, to as much as $1000 Phillipinos receive from relations working abroad, remittances are making the world go round. Today, remittances amount to 2½ times the Haitian national budget, and atleast 20% of its Gross Domestic Product – a country that has such a subsistence economy that most of the money has to go straight to consumption and education.

Evidently, remittances are getting more attention, because of the failure of previous development programmes. This ‘private’ foreign aid is much more likely to go the people who really need it because unlike development loans or private capital, they come without strings. And because no bureaucracy is needed to manage them, bureaucrats can not squander them.

According to a World Bank report, remittances help to stabilize irregular incomes and to build human and social capital. It is also playing a central role in providing basic services where most States have failed. And although its use can be polarized - in the Comoros Island remittances are majorly spent on “anda” wedding ceremonies while in Somalia, it has become a lifeline to survival for the majority - remittances are making a difference.

Another thing about remittances is its effects over foreign aid. Remittances have reduced the level and dept of poverty and countries with higher level of poverty are not necessarily receiving more remittances. And the largest effects of remittances on poverty are observed in countries close to major labour-receiving areas. However, remittances have not translated in to investment growth and robust expansion of manufacturing as much as foreign aid has. It is noted also, that only its securitization can ensure that it raises loans in the international market at concessional rates which does not work out uniformly for all countries especially when the countries does not depend on such loans, for example, India or China.

At the same time, remittance funded investments are often found to be highly inefficient, poorly managed and unsustainable. The World Bank indicates that although private funds from the diaspora have built hospitals and schools, a lack of communications with the government often led to staff shortage in these facilities as seen in the Comoran Islands.

The issue of migration is one thing that has undermined the effects of remittances. By 2005, Nigeria alone had about 22,000 migrant Doctors, working in the United Kingdom. This has subsequently depleted the workers in areas as the health sector that has barely been able to cope with issues like Poliomyelitis, Malaria and the HIV/AIDS prevalence. However, the situation may look relieving for a country where unemployment have been on the rise, although, the quality of new hands expected to take over the vacant spaces is not sure.

The complementarity of remittances to foreign aid is pone way, to bolster development. According to President Tony Saca of El Savador, himself a benefactor of remittances, “the big challenge is to turn our workers abroad in to partners in the country’s progress, so that their remittances leave a legacy of productive investment at home”. This is because the success stories of remittances are individual, not collective. They can keep a lot of people from falling deeper in to poverty, but unless the government does the right things, they don’t lift many in to the middle class.

Remittances if handled and channeled through proper ways can complement the goals of foreign aid programs. If the money is mostly used for food, but also for rent, baptisms, weddings, funerals, gambling, then remittances are also part of our future. There is therefore the need to draw up strategies to quantify remittance income and explore ways to stretch the money to complement foreign aid.

This can be rather difficult, but the sooner it is done in expectation of yielding long-term results, the better. These strategies include, coaxing recipients to open savings accounts so that some of the money can be recycled in to small-business loans; encourage recipients to invest the money directly in community-wide businesses because such ventures can attract outside capital and become engines of prosperity; proper utilization of foreign exchange earnings from remittances in imports, so as to have a deleterious effect on export competitiveness; flexing financial and monetary policies and regulations creating barriers to the flow of remittances and their effective investment.

Securitization of remittances can also make it as much as possible, reliable and transparent in order to limit the potential for abuse. Other strategies are paying more attention to integrating migration policy within the larger global dialogue on economic development and poverty reduction; and entrusting remittance transfer in to the hands of credible financial institutions, so that it becomes part of foreign exchange reserves.