Money Sent Home: A Boost for Many Nations

Study Highlights Role of Migration in Helping Development

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WASHINGTON, D.C., NOV. 26, 2005 ( International migration can be an important tool in helping developing countries, affirmed a World Bank report published Nov. 16. Migrants and the money they send back home, remittances, is the main theme in the annual «Global Economic Prospects report for 2006.»

«The challenge facing policy-makers is to fully achieve the potential economic benefits of migration, while managing the associated social and political implications,» commented François Bourguignon, World Bank chief economist.

Officially recorded remittances worldwide exceeded $232 billion in 2005. Of this, developing countries received $167 billion, more than twice the level of development aid from all sources. The report estimates that remittances sent through informal channels could add at least 50% to the official tally, making them the largest source of external capital in many developing countries. The report considered that it is plausible that in the coming years, official remittance flows will continue to rise at the 7% to 8% annual rate seen during the 1990s.

The countries receiving the most in recorded remittances are India ($21.7 billion), China ($21.3 billion), Mexico ($18.1 billion), France ($12.7 billion) and the Philippines ($11.6 billion). Those for which remittances account for the largest proportion of gross domestic product are Tonga (31%), Moldova (27.1%), Lesotho (25.8%), Haiti (24.8%) and Bosnia and Herzegovina (22.5%).

Remittances were larger than public and private capital inflows in 36 developing countries in 2004. In another 28 countries, they were larger than the earnings from the most important commodity export. In Mexico, for example, remittances are larger than foreign direct investment, and in Sri Lanka they are larger than tea exports.

The United States was the largest source country, with nearly $39 billion in outward remittances in 2004. But the flow of funds is not just from rich countries. Remittances between developing nations make up between 30% and 45% of the total. This reflects the fact that more than half of migrants from developing countries migrate to other developing countries.

There are also benefits for the countries that receive immigrants. The increased availability of labor boosts returns to capital and reduces the cost of production, the report commented. According to an economic model developed by the World Bank, a rise in migration from developing countries sufficient to raise the labor force of high-income countries by 3% could boost incomes of the native population in high-income countries by 0.4%.

Costs and benefits

The World Bank explained that over the past two decades barriers to cross-border trade and financial transactions have fallen significantly, facilitating the transfer of money. At the same time, despite its economic benefits, migration remains controversial. While it brings benefits for some there can be important losses for other individuals and groups. Some workers may see an erosion of wages or employment, for example, due to the increased numbers of immigrants.

Migrants, too, pay a price, even if they reap economic advantages. Many immigrants, the report explained, particularly the irregular ones, suffer from exploitation and abuse. Then there are costs involved, especially those related to the exorbitant fees paid to traffickers. The family members left behind, particularly children, also suffer, while at the same time they benefit from the extra income that migrants send back home to their families.

The gains can be large for the families receiving money from overseas. Wage levels (adjusted for purchasing power) in high-income countries are about five times those of low-income countries for similar occupations. In effect, migrants can earn salaries that reflect industrial-country prices and spend the money in developing countries, where the prices of goods are much lower.

The exact impact of remittances on growth for the developing countries is unclear, according to the report. Remittances do play an important role in reducing the incidence and severity of poverty, however. They increase the income of the recipient, and appear to be associated with increased household investments in education, entrepreneurship and health.

Mexican children in households with migrants completed significantly more schooling, with the largest impact for girls in homes where the mother has a low level of education. And a survey of 6,000 small firms in 44 urban areas in Mexico shows that remittances are responsible for almost 20% of the total capital in urban micro-enterprises.

On the national scale, by generating a steady stream of foreign exchange earnings, remittances can improve a country’s creditworthiness for external borrowing, thus expanding access to capital and lowering borrowing costs.

Remittances might also help smooth out the economic cycles of the recipient country. That is, remittances might rise when the recipient economy suffers a downturn in activity or macroeconomic shocks due to financial crisis, natural disaster or political conflict, because migrants may send more funds during hard times to help their families and friends.

In addition, in some countries low-skilled emigration can raise demand for the remaining low-skilled workers. This can lead to some combination of higher wages, lower unemployment and greater labor force participation. As a result, the report continues, emigration can offer a safety valve when job opportunities at home are scarce.

The World Bank did warn, however, that in the long run the policies of developing countries should aim to generate adequate employment and rapid growth, rather than relying on migration as an alternative to development opportunities.

Losing skills

The situation is different in the case of emigration by those with high levels of skill. It also brings economic benefits, and when the expatriates return they bring with them important overseas connections, which can improve access to capital and technology, as well as business contacts for firms in the country of origin.

But, on the negative side, large outflows of high-skilled workers can reduce growth in the origin country. Education and health services in the countries of origin may be impaired due to the loss of personnel. As well, the country loses its return on high-skilled workers trained at public expense.

The numbers of skilled workers emigrating is on the rise, the report noted. The number of highly educated emigrants from developing countries residing in the country members of the Organization for Economic Cooperation and Development, doubled from 1990 to 2000, compared to an approximate 50% rise in the number of developing-country emigrants with only a primary education.

The report cited a 1999 study that estimated about 12% of developing-country nationals trained in science and technology live in the United States. Another study, published in 2001, calculated that at least 12% of the doctors trained in India live in the United Kingdom.

The World Bank suggested that countries can help to retain key workers by improving working conditions in public employment and by investing in research and development, as well as by taking steps to facilitate the return of those who have already left their country of origin.

The report pointed out that often migrants are obliged to pay high fees when transferring funds. Governments could increase the benefits for economic development of remittances by improving access for poor migrants and their families to financial services.

Suggested policy steps include providing identification cards to migrants, and facilitating the participation of microfinance institutions and credit unions in providing low-cost remittance services. Debt relief and aid often receive the lion’s share of attention when it comes to funds for developing countries. But remittances may be a more important
factor in many countries.

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