Remittances - curse or blessing?

The World Bank's Global Economic Prospects (GEP) 2006 report highlights the importance of migration and remittances to development, noting that officially recorded money sent home by migrant workers 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 GEP authors suggested that remittances sent through informal channels could add at least 50 percent to the official estimate, making remittances the largest source of external capital in many developing countries. However, a note of caution has been sounded, in that remittances from migrant workers "should not be viewed as a substitute for economic development in the origin country as, ultimately, development depends on sound domestic economic policies". The countries for which remittances account for the largest proportion of gross domestic product are all developing nations, Tonga (31 percent of GDP), Moldova (27.1 percent of GDP), Lesotho (25.8 percent of GDP), Haiti (24.8 percent of GDP), and Bosnia and Herzegovina (22.5 percent). Lesotho, a landlocked least developed nation in Southern Africa, has for years depended on the remittances of migrant workers in neighbouring South Africa. However, the rationalisation process in South African mines has resulted in a loss of inflows of remittances from Basotho mineworkers, this has had a devastating effect on the country's economy and has increased vulnerability among the poor. Mpinane Masupha of Lesotho's department of labour noted in a presentation at the launch of the GEP in Johannesburg, South Africa, on Tuesday that "the role of remittances in the economic development of Lesotho cannot be overemphasised". She said that the number of Basotho mineworkers in South Africa has fallen significantly from the highs of the 1990s, "currently the number has declined to approximately 55,000". But a miner's household, in most cases, is more likely to "be above the poverty line as compared say to a household that depends on subsistence agriculture". Remittances from mineworkers had helped transform the rural communities of Lesotho from agrarian economies to money-based economies. "Mineworkers remittances have greatly assisted in improving the living standards within their communities, thus assisting in reducing community poverty," Masupha noted. At the macro level, mineworkers remittances played an important role in boosting the foreign exchange earnings of the country. "With the number of migrants worldwide now reaching almost 200 million, their productivity and earnings are a powerful force for poverty reduction," said Francois Bourguignon, World Bank chief economist and senior vice president for development economics. "Remittances, in particular, are an important way out of extreme poverty for a large number of people. The challenge facing policymakers is to fully achieve the potential economic benefits of migration, while managing the associated social and political implications." Development Bank of Southern Africa (DBSA) policy analyst Caroline Kihato, however, said the extent to which remittances could alleviate poverty was still unclear. "I think it's questionable that a report of that nature should champion remittances as a poverty alleviation mechanism in Africa and other developing societies when it based on very skimpy data. The report itself acknowledges it does not know how much money is remitted [through informal cash transfers], and the scale or nature of [such] remittances. How can an institution say that remittances will reduce or alleviate poverty in Africa without the proper data?" Kihato asked. Migration was a complex issue that involved more than just economic implications "but political and social considerations as well". Given this, "it raises a whole lot of issues; people do not just move because of money, refugees move because they are pushed out of their countries of origin or because they are victims of an oppressive regime. If we see migration only as a transactional process and encourage it, then we don't address some of the political questions around why people move," Kihato added. The Bank's report was framed within an economics focussed "cost/benefit" analysis, yet it was still "unclear that remittances can really alleviate poverty, especially among the most vulnerable households". "It's mostly middle class households that can send somebody abroad - it is very expensive to buy a ticket from Accra [Ghana] to the US or UK - so the remittances are coming back to households lucky enough to have resources to send a member of the household abroad. My argument is that remittances may be increasing the gap between the rich and the poor," she said. The World Bank report did caution that because remittances are private funds, they should not be viewed as a substitute for official development aid. Kihato agreed that it would be "very dangerous to encourage or to focus on a stream of income from private citizens" as a major driver of development. "Sure a household will receive money from a doctor who has left to go to Australia ... but can that money really be put into public investment? African countries require good public institutions, good health systems and education systems. Private investors will not invest in such public [services], that is the role of the state," she argued. While there were examples of villages clubbing together to use remittances to improve community assets, such as building a local clinic, this was uncommon. "We cannot rely on private funds alone, we need the state to invest in public infrastructure," Kihato added. Another downside of migration for developing countries was the loss of much-needed skills through brain-drain, and the concurrent loss in the investments made by states in educating and training migrant workers. "It's very difficult for states to invest in public infrastructure, education and training when it is losing a lot of its skilled personnel. The brain-drain has impoverished Africa through the loss of skills. A lot of public money has been put, either directly or indirectly, into the development of these skills. South Africa, for example, claims to be losing at least R1 billion [US $163.7 million] training doctors who have gone abroad," Kihato noted. "A lot of highly skilled people are trained by the state, or at least some money goes into their training, but their remittances are not replenishing public coffers," she added. Encouraging migration and remittance inflows had positive benefits, but the negatives had to be taken into account. Increased migration of a developing country's skilled or semi-skilled lower to upper middle-class people would result not only in the loss of much-needed skills, but also a vital tax base. "They [the middle-class] are typically the people able to lobby government and hold the government accountable and affect policy change. If you are losing that critical constituency of people then your public institutions and your governments are also suffering," Kihato commented. However, the Bank's report did point out the importance of remittances as a buffer against shocks as they helped to "support household consumption in response to adverse events". To illustrate the point, it was noted that "remittances to Botswana increased with the extent of drought in the migrant's home region, and the responsiveness of remittance levels to drought was greater for households with drought-sensitive assets such as cattle," the GEP said. The report said international migration generated significant economic gains for migrants, their countries of origin, and their countries of destination. It recommended that the most "feasible means of increasing such migration would be to promote joint origin-destination country programmes that combined temporary migration of low-skilled workers with incentives for return". To further boost remittance inflows, the report recommended that governments lower cash-transfer fees. For the full report go to: www.worldbank.org