Remittances

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					REMITTANCES



    Econ 490             Ivan Camacho
    Professor Castillo    Arthur Cho
What Is Remittance?
   The transfer of money by a foreign worker to
    his/her home country.
Overview
   Major roles of remittances      Microeconomic Determinants
   Key statistics                  Macroeconomic Determinants
   Global Impact                   Macroeconomic Impacts
   Advantages/Disadvantages        Microeconomic Impacts
   Policymaking
   Trend of Remittance flows
   Causes of Remittances
Major roles of remittances
   Count as the 2nd largest source of capital inflow to many developing
    countries.
   Only foreign direct investment account for more sources of external finance.
   Remittances exceeds inflows that come from international aid.
   Receiving countries become more dependent on global economies rather
    than sustaining their own local economies.
   Promotes economic growth in developing countries.
Key Statistical Data
   Developing countries receive the highest amount of remittances.
   One-third of remittances to the developing world go to India, China, and
    Mexico.
Statistical Map
Global Impact
   In the past, remittances received little attention from governments and
    financial markets because they were usually sent in small amounts.
   Now they are large in the aggregate and are important to developing
    countries.
   World Bank estimates $240 billion in total remittances in 2007, a
    staggering jump from only $31.2 billion in 1990.
   Remittances exceed all other imports of private and public capital in 36
    developing countries.
Advantages
   Finance much needed investment in recipient countries to contribute to
    increased productivity.
   Believed to reduce poverty. Mainly due to the poor that migrate and send
    back remittances.
   Increase of income in households also increase consumption.
   Remittances do not have to pay interest.
   More stable than foreign direct investment or foreign portfolio investments.
    These are highly volatile in developing countries.
   Unskilled workers may return to their home countries with useful skills
    acquired abroad.
   Recipients have a higher propensity to own bank accounts.
Disadvantages
   Promotes idleness among the recipients.
   May cause appreciation of receiving country’s currency. Thus leading to
    lower net exports and negative economic growth.
   Some emigrants may be educated or highly skilled causing what commonly
    known as “brain drain”.
       Loss of human capital lowers productivity and economic growth.
       Home country invested time, effort and money on their education.
       Migration of skilled workers worsens the distribution of income between rich and
        poor countries.
Policymaking
   Policymakers in developed host countries have become interested in the
    large flow of remittances.
       Channel remittances into productive investments
       Encourage banks to offer remittance services to migrants in host countries
   Supervise and push remittances to be sent through official channels.
   Increases in remittances have spawned many private money transfer
    businesses.
       MoneyGram
       Western Union
Trend of Remittance Flows
   Most of the developing world has been increasing flows of remittances by
    double digits annually between 1990-2005.

   Source: Global Economic Prospect 2006, and World Development Indicators, 2007, Washington DC: World Bank.
Causes of Remittance Growth
   15.1% growth in Eastern Europe and Central Asia
       1990s changed to free market economies
       Permitted labor migrations to oil-rich Middle East and industrialized Western
        Europe

   17.3% growth in East Asia and Pacific Region
       Expansion of economic activity caused labor shortages in Japan, South Korea,
        Hong Kong, Taiwan and Singapore in the 1990s
       Increased migrant labor originating from Thailand, the Philippines and Indonesia
Causes of Remittance Growth (cont.)
   12.2% growth in South Asia
       Implementation of an economic liberalization program in India.
          Lifted regulations to foreign exchange and travel abroad for work

       Explosion of information technology industry in the US attracted large numbers
        of South Asians, mostly Indians.


   14.0% growth in Latin America and Caribbean
       The implementation of NAFTA and the economic boom of the 1990s sharply
        increased the demand for workers in the US and Canada.
Microeconomic Determinants
   Migrants care about the households well being and remit to improve living
    conditions (Altruism). Ex: Household Consumption


   Self interest motives. Ex: Investment in home country


   Insurance purposes. Ex: Emigrant/Household income risk.


   Implicit loan arrangement. Ex: Emigrant is paying back to the household for
    the investment made.
Macroeconomic Determinants


   Depreciations of the home currency can increase the purchasing power of
    remittances in the home country. Ex: Migrants who settle in the U.S. earn money in
    U.S. dollars, but their transfers to family and others back home are usually
    converted into the domestic currency.


   Take of advantage of the depreciation by investing more in the home country if the
    immigrant has investments in both countries, but plans to return eventually to the
    home country.
Macroeconomic Impacts
   Augmentation of the capital stock through financing investment are conducive to
    growth.


   Decrease in labor supply and a negative impact on the tradable sector have
    adverse consequences for the receiving country.


   Economic development is that remittances are often used for investment in the home
    country.


   Inflationary pressures or cause a phenomenon. This can appreciate the local
    currency and crowd-out exports.


   Distribution of income increases inequality.
Microeconomic Impacts
   Increase in remittances shifts the receiving household’s budget constraint outward by
    the amount of the transfer and therefore should have a positive impact on
    household consumption.


   Remittance receiving households spend more on education, health, and housing.


   Remittance-receiving households devote a larger proportion of current expenditures
    to investment and savings, and have lower income elasticities for current consumption
    and for durable goods.
Microeconomic Impacts
   It is possible that after receiving remittances the labor supply of some household
    members decreases.


   Remittances can give the household the initial capital necessary to start a small
    business.


   May increase the education of children in the household.
Impact of Economic Downturn
   http://www.youtube.com/watch?v=7IdufxY0wLg
Sources

   GRABEL, ILENE. "Remittances: Political Economy and Developmental Implications." International Journal of
    Political Economy 38.4 (2009): 86-106. Business Source Premier. EBSCO. Web. 1 Mar. 2011.


   Pradhan, Gyan, Mukti Upadhyay, and Kamal Upadhyaya. "Remittances and economic growth in developing
    countries." European Journal of Development Research 20.3 (2008): 497-506. Business Source Premier.
    EBSCO. Web. 1 Mar. 2011.


   Ruiz, Isabel, and Carlos Vargas-Silva. "To Send, or Not to Send: That is the Question. A Review of the
    Literature on Workers' Remittances.“ Journal of Business Strategies 26.1 (2009): 73-98. Business Source
    Premier. EBSCO. Web. 1 Mar. 2011.


   Solomon, Blen. "The Impact of Risk and Uncertainty on Remittances into Latin American Economies." Journal
    of Business Strategies 26.1 (2009): 99-117. Business Source Premier. EBSCO. Web. 1 Mar. 2011


   Zarate-Hoyos, German A. "CONSUMPTION AND REMITTANCES IN MIGRANT HOUSEHOLDS: TOWARD A
    PRODUCTIVE USE OF REMITTANCES." Contemporary Economic Policy 22.4 (2004): 555-565. Business
    Source Premier. EBSCO. Web. 1 Mar. 2011.
Questions?