The Impact of Remittances on Economic Insecurity

Abstract

There is scattered evidence suggesting a positive impact of international remittances on economic insecurity, at both a macroeconomic and household levels. However, there has not to date been a comprehensive and systematic analysis of this issue that takes into account the various complexities and nuances. This paper illustrates that cross‐country generalizations about the impact of remittances on economic security are useful only up to a certain point; beyond that their effect can be influenced by the interplay of various factors relating to the motivations and characteristics of migrants, economic/social/political conditions in the country of origin, immigration policies and conditions in the host country, and the size and concentrations of the remittances. The policy implications outlined in the paper include the need for caution and retrospection in certain instances as well as action and international collaboration in other areas.

Key words:

• Remittances
• Macroeconomic insecurity
• Consumption
• Poverty
• Income distribution
• Savings
• Investment
• Incentives

Acknowledgments

The author would like to thank Ko Woon Oh for her valuable research assistance and Manuel Montes for his comments. He would also like to acknowledge the assistance provided by Ann de Lima, Vajinder Singh, Valerian Monteiro and Cordelia Gow. The views expressed herein are those of the author and not necessarily those of the United Nations.

Notes

1 In the case of Jordan, it is also possible that output drops may have been caused by drops in remittances since, with remittances taking up close to 20% of GDP during 1990–2003, the country suffered a severe drop in migrant financial inflows during the 1991 Gulf War as many workers in Kuwait and Saudi Arabia lost their jobs.

2 The studies cited include those by Stahl and Habib (1989) referring to Bangladesh, Nishat and Bilgrami (1991) referring to Pakistan, and Adelman and Taylor (1990) focusing on Mexico.

3 The share of the population whose income or consumption is below the poverty line.

4 It has been argued that a possible reason for the unclear empirical evidence on the impact of remittances on inequality is because the Gini coefficient does not adequately capture the effect of mobility between the income categories—thus it remains unchanged if a household moves up a level while another moves down.

5 According to experts from the World Bank, this exodus happened in Nicaragua when the Sandinastas took power, while in Peru this took place in the wake of economic problems, such as hyper‐inflation, during the first Alan Garcia administration in the 1980s. By contrast, in Mexico a larger proportion of migrants are from poorer households (and come from the border areas with the USA).

6 In fact, the increased flow of remittances in the face of adverse shocks may allow households to sustain funding for key investments in areas relating to business working capital, education and health.

7 These conditions, together with other factors such as skilled migration rates, also influence the broader issue of whether remittances can compensate for the ‘brain drain’ created by the departure of skilled workers. Without going into the intricacies of this issue, which deals with the broader impact of migration, it suffices to say here that this would vary by country (Docquier and Marfouk, 2005).

8 The likelihood of remittances triggering business development is greater for low‐income to middle‐income households that have the requisite skills to operate a business but are likely to face credit constraints.