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Wednesday, September 28, 2022

Introduction to Remittances

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Most countries rely on migrant workers, defined as someone who has migrated from their home country or another country for employment purposes. Migrant workers can be found in nearly every country in the world.

The life of a migrant can be difficult, and many lack unions, social connections, and lack the language skills of the countries they work in. While some migrant communities may thrive, others are at risk for shoddy labor and living conditions.

Immigration is often a hot-button topic in domestic politics, and parsing out fact from fiction when it comes to the economic effect of foreign workers can be difficult. Each year, billions of dollars are sent by migrant workers to their home countries. According to the World Bank, in 2021, the total value of remittances reached $630 billion. For some countries, remittances make up a sizable portion of GDP. How do remittances work, and what are some of the pitfalls that developing countries face when dealing with such large cash inflows?

Key Takeaways

  • Migrant workers can be found in factories and fields (and elsewhere) around the world.
  • Remittances are a large part of a country’s GDP due to billions being sent back to home countries by migrant workers.
  • Inflation causing a rise in goods and services can impact the amounts of remittances being sent home.
  • Unlike oil revenues, which are typically held by the state, remittances are sent to individuals in charge of spending.
  • Remittances are often sent home to families who in turn spend those dollars for shelter, food, and other necessities of life.

Remittances and Developing Nations

Remittances are funds transferred from migrants to their home country. They are the private savings of workers and families that are spent in the home country for food, clothing, and other expenditures, and which drive the home economy. For many developing nations, remittances from citizens working abroad provide an important source of much-needed funds. In some cases, funds from remittances exceed aid sent from the developed world and are only exceeded by foreign direct investment (FDI).

Governments in the developing world may need more assistance in managing their remittances. Remittances give countries the ability to fund development in their own way and learn how to effectively use remittance funds. If it is to efficiently use these funds the country must first develop policies that promote smart, stable growth and ensure that growth is not solely concentrated in the cities.

Issues Facing Migrant Workers

An example of how a group of migrant workers became part of the U.S. can be found by examining what was called The Bracero Program from 1942 to 1964, which came to life from a series of bi-lateral agreements between the U.S. and Mexico, allowing millions of Mexican laborers to come to the U.S. to work on farms and other agricultural jobs using short-term contracts.

But migrant workers live all over the world and their presence is often found in laborious jobs like picking fruits and vegetables, working in factories, and as building laborers. Most migrant workers travel from place to place for short-term jobs. Some of the most vulnerable migrant workers are those who are undocumented or those who work illegally.

When abuse occurs on the job, these workers may be too afraid to report it to the authorities. When employers hire migrant workers, there are ethical concerns, including if they are paid less than national workers in the country where they earn their living and if they receive benefits.

Often whether or not migrant workers receive decent pay and benefits remains at the mercy of the employer. While most migrant workers do not belong to unions, others may have access to the protective umbrella of national workers’ unions, at least via workers’ representative committees.

Country Effects

It is difficult to track how remittance funds are spent because they are private transfers. Some economists believe that recipients use the funds to purchase necessities such as food, clothing, and housing, which ultimately won’t spur development. These purchases are not investments in the strictest sense (buying a shirt is not the same as investing in a shirt production factory).

Other economists believe that funds from abroad help develop a domestic financial system. While remittances can be sent through wire transfer businesses, they can also be sent to banks and other financial institutions.

Depending on restrictions on the movement of capital around the country, these funds can help individuals pay for the consumption of goods and services and be used to make loans to businesses if they are saved rather than spent. Some banks may even seek to establish branches abroad to make the transfer of remittances easier. Research has also shown that migrants returning from working abroad have a higher propensity for developing their businesses. They have seen how businesses are run in developed countries and can recognize trends within their home country and create a company to take advantage of opportunities.

The inflow of money from remittances has been compared to the windfall that countries with high-demand resources, such as oil, receive. The governments of these countries, flush with cash, often spend lavishly on social programs or poorly-planned projects and find themselves in trouble when demand for a particular commodity slows down.

In addition, the social networks created by foreign workers can increase the reach of developed countries and can foster a more integrated cultural understanding through interactions with the local population.

Remittance Problems

While remittances are an important lifeline in many developing countries, they can also foster a dependency on outside flows of capital instead of prompting developing countries to create sustainable, local economies. The more a country depends on inflows of funds from remittances, the more that it will be dependent on the global economy staying healthy.

Remittance flows can be negatively impacted by a downturn in the global economy. Workers employed abroad may lose their job if they are in heavily-cyclical industries, such as construction, and may have to stop sending remittances. This has a two-pronged effect. First, the home country may see a significant portion of its income dry up, and thus not be able to fund projects or continue development. Second, workers who moved abroad may move back home, exacerbating the problem by increasing the demand for services in an already strapped economy.

Remittances in smaller amounts of money may be hit with high fees when the funds are transferred to a home country, and this can cut into the amount of money that reaches the recipient.

Macroeconomic Effects

Large inflows in foreign currency can cause the domestic currency to appreciate, often referred to as Dutch Disease. This, in turn, makes the country’s exports less price competitive since goods become more expensive to other countries as the domestic currency rises. Because the domestic currency is valued higher, consumption of imports begins to rise. This can snuff out the domestic industries of developing countries. However, the inflow of cash can also help the recipient country reduce its balance of payments.

It is important to note that migrants do not only travel to the largest world economies for work; instead, they go where the likelihood of work is the highest. While construction-related jobs are often considered the job of choice, many workers flock to countries that are developing their economies. Commodity-rich countries have a high demand for labor as the prospect of rising commodity prices continues to remain a constant.

According to a report by the United Nations, 3.6% of the world’s population resided outside their home country in 2020. A more integrated and globalized world has allowed labor movements between countries to become more fluid, with more and more workers moving abroad to seek ways to provide for their families. Thus, immigrants who seek to send back remittances have become an integrated part of the economy.

The funds sent back home by immigrants keep wire transfer companies in business and allow the home country to purchase imports. Immigrants consume the goods and services provided by domestic workers. The presence of foreign workers can help alleviate labor shortages. The role of these workers is more of a partnership, with immigrant workers helping developed countries continue to expand while sending a portion of their incomes home as remittances.

Which Countries Receive the Most Remittances?

In 2021, the top five largest countries to receive the most remittances were India, Mexico, China, the Philippines, and Egypt.

Why Are Remittances Important?

Remittances are important because the act of sending money by migrant workers to their families and other individuals is typically spent in full on gross domestic products in their home countries.

What Is an Example of a Remittance?

Since remittance is the act of sending funds to pay for something, one example of remittance would be a check sent to a family member to pay for groceries or rent.

What Are the Steps for a Remittance Transaction?

First money is earned, then a remittance can be money sent via a wire transfer to another person’s bank account or to directly pay for a bill, like utilities or a mortgage. When the money reaches the recipient, it is used to pay for goods or services, and the money goes back into the local economy.

How Much Does a Remittance Cost?

According to the World Bank, in the second quarter of 2022 (the most recent figures) the global average cost of a remittance was 6.01%. 

The Bottom Line

Remittances are an important factor in the global economy and help drive growth both at home and abroad. If developing countries develop policies that can protect and provide assistance to their migrant workers, it may help support the growth of other countries, which are (in some ways) the recipients of migrants’ remittances.

While incomes are on the rise in some industries, many in the U.S. do not have salaries that are keeping pace with 2022 inflation on goods and gasoline. For hourly workers, like migrants, the rise of inflation may mean their wages might not stretch as far as needed to enable them to send funds home and afford to live abroad.

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