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Is Remittance The Hidden Engine Of Globalisation?

November 22nd, 2019

Over the last two decades, the world has been witnessing a steady migration of people from developing nations to developed nations in search of well-paying jobs, higher education, and a better standard of living. The count of people living outside their birth country has grown from 153 million in 1990 to 272 million in 2019. And in the same period, global remittances to the home countries have steadily increased.

It may be correct to state that remittances are one of the primary engines that fuel globalisation and growth in the developing world. As per the International Fund for Agricultural Development (IFAD), an estimated 800 million people worldwide are directly supported by remittances. Along with money, transfer of information, ideas, and practices have been able to effect significant changes in remittance-receiving countries.

The global remittance market touched a whopping $689 billion in 2018, as per the world remittance report issued by the World Bank. This figure indicated a landmark change as remittance inflow outstripped Foreign Direct Investment (FDI), private capital inflow, and even international aid, to become the most significant contributor of foreign capital to developing countries.

Cross border remittances represent expats continuous involvement with their family, nation, and community. The sheer volume and consistency of remittance inflow has made it one of the game-changers in the realm of financial development.

How are remittances important to ‘home’ economies?

Unlike FDI or private investments, which deepen during economic expansion and fall during recessionary times, global remittances are generally considered a relatively steady source of foreign exchange. There’s evidence to suggest that they may be counter-cyclical.

During an economic downturn, a chunk of the working population is inclined to migrate abroad, which increases the remittance inflow. Also, those already living abroad would transfer a substantial amount to relatives in the home country to make the most of their money transfers.

Even in times of political crisis or during natural disasters, remittances are the first source of financial help to arrive and consistently so. For instance, remittance inflow to India grew by 14% in 2018, primarily fuelled by NRIs stepping in to rescue the flood-battered southern state of Kerala.

How do remittances contribute to development?

Due to inequality in the distribution of resources, job opportunities, and income levels across the world, the remittance market brings in a certain degree of equilibrium in terms of improved economic opportunities in developing nations. Remittance inflows have been responsible for mitigating poverty and inequality; they have increased access to higher education and healthcare for family members of expats, making an indirect yet positive impact on the country of origin.

Mexico, Nepal, and Indonesia are examples of some nations that have demonstrated a significant reduction in poverty on account of remittance inflow. Similarly, countries like Tajikistan and Moldova, which are trying to rebuild after decades of civil disturbances, are heavily dependent on remittances to counter political instability and poverty.

Alternatively, higher remittance inflow means higher disposable income in the hands of the expat’s family, which in turn results in improved consumption demand. Expenditure on goods and services drive economic growth, by providing an impetus to businesses in the economic wheel.

How do remittances help a country?

The consistent flow of global remittances has a positive effect on macroeconomic growth. The inflow of foreign exchange helps to increase forex reserves, strengthen the currency, improve a country’s balance of payments, and enhance its credit rating, increase investor confidence, and lower borrowing costs for the government as well as local businesses and households.

Low cost of funds means cheaper loans for businesses, affordable housing, better educational facilities and more employment. Overall the country is better equipped to develop policies that promote stable growth.

Countries like the Philippines, Nigeria, and Egypt rely heavily on remittance as a source to balance their current account deficits. The remittance inflow of $34 billion into the Philippines in 2018 has been able to bring down its current account deficit from 10% to just 1.5% of the GDP.

Other benefits

Remittances have had a positive impact on social norms too. The increasing share of women in international migration has initiated a shift towards creating an equal playing field for expats.

The road ahead

The World Bank expects over 550 million people from low- and middle-income countries to join the workforce between now and 2030. The income gap ratio between high- and low-income countries presently stands at 54:1 ($43,000+ vs $800 or below).
As the income disparity between developed and low-income nations persist, job opportunities abroad will continue to be attractive.

Remittances represent a large part of the GDP in many countries. For some countries in Eastern Europe and Central Asia, remittance inflow is equivalent to 25% or more of all economic output. As per estimates, 1% increase in remittance inflow raises the real GDP of a country by approximately 0.07% in the long run; thereby reiterating our firm belief that the small yet mighty trail of expats will continue to play a pivotal part in the cycle of global capital circulation.

Also, Read: What Drives the World’s Top Remittance Corridors?