Free Economics Dissertations - Migrant Economic Africa
The Effect of Migrant Remittance on Macro-Economic Development of Sub-Saharan Africa
Chapter I: Introduction
Economic development in Sub-Saharan Africa is on the minds of many of the world’s greatest thinkers and since the end of colonialism in Africa, the World Bank, the International Monetary Fund, the United Nations, and individual countries have seen large-scale aid as the solution to Africa’s underdevelopment.
However, in recent years there has been a paradigm shift as more and more development economists have looked to alternatives such as microfinance and the role of migrant remittances. This thesis will explore the macro-economic impact of remittances on the developing economies of Sub-Saharan Africa. Since Sub-Saharan Africa has the fewest reported remittances and is the least understood region regarding Diaspora contributions to development, this thesis will hopefully help to elucidate the potential impact of remittances in the region and explain the critiques found in the literature review.
It will present the current state of research on this field and then examine three case studies to determine what role it can play in national and international financial calculations. The case studies presented in this thesis are Ghana, Senegal, and Nigeria. These West African countries are at different levels of development but all have large international Diasporas which make them suitable for a discussion of migrant remittances.
Remittances are an emerging field of development economics because they are growing both in volume and in potential and real influence on the recipient countries’ economies. Gupta et al. (2007) report that “In 2005, they totalled $188 billion—twice the amount of official assistance developing countries received.” This is a staggering amount of foreign exchange flow, and it is likely that the number is under representative of true remittances because of the informal sector and the lack of reporting in many countries.
Although Sub-Saharan Africa is far behind other reported remittance receipts, Gupta et al. (2007) report that “Between 2000 and 2005, remittances to the region increased by more than 55 percent, to nearly $7 billion, whereas they increased for developing countries as a group by 81 percent.” Despite the eagerness of the development community to embrace the long-term development potential of remittances, this is largely shaped by what remains after the basic consumption needs of families receiving poverty relief are met.
Much of the focus of research on remittances and their impact on development are on Latin America and South Asia, where most of the remittances go and there is a large amount of data. My interests lie in exploring whether migrant remittance flows can be put to use in expanding the macro-economic development of Sub-Saharan African countries and what the current state of Diaspora remittances indicates about the possibility of remittances making a significant contribution to the achievement of wider development goals.
This research is driven by several research questions: What is the overall impact of remittances worldwide? How do migrant remittances fit into the achievement of development goals? Do remittances disturb aid and upset economic equilibriums? How does ‘brain drain’ negatively affect the possibility for macro-economic growth, despite the potential impact of remittances?
This introductory chapter presents a literature review and the methodology used to explore the research questions that drive this paper. After a discussion of the literature in development economics, aid and development, Diasporas, and remittances, the first section of the paper focuses on the argument that it is not Diaspora variations that cause the different results of remittance contributions to development goals, but the internal fiscal and regulatory structures in place to help families use remittances for community growth.
This section will examine a number of different areas and worldwide trends to explore this argument further. It posits that there are certain kinds of Diaspora situations that can set up a recipient country for success, but only if that recipient country takes the appropriate measures to encourage growth and development from a micro-economic, bottom-up approach.
In the second section I argue that the West African countries of Senegal, Ghana, and Nigeria represent excellent cases for remittance contribution to macro-economic development because they have wide ranging and wealthy Diasporas. This section will discuss the individual economic indicators for these countries, their major areas of industry and potential growth areas. It will further explore the current role of remittances in their economic system.
Despite the potential for macro-economic growth presented by the level of high education migration from these countries, they have not seen great growth due to remittances, unlike some similar examples in other parts of the world. However, because of the political, financial, and regulatory structures in place, remittances cannot be as useful to macro-economic development as they would be elsewhere.
The third and final section examines the West African case studies in light of the worldwide trends and literature review to generalize about the role of remittances in the development of Sub-Saharan Africa. It presents the conclusions of the paper and argues that a combination of ODA and remittances, as well as microfinance, can help create a holistic development agenda in line with current development model trends.
Literature Review
Development Economics
This section will examine the current state of the literature on the role of development aid in macro-economic growth in developing countries. This will establish the official development aid (ODA) paradigm which is being challenged by the new focus on remittances, private foreign investment, and microfinance in economics and a focus on total growth that takes into account health, education, family structure, and cultural developments as well.
Todaro and Smith (2003, p. 17) write that development should be “conceived of as a multidimensional process involving major changes in social structures, popular attitudes, and national institutions, as well as the acceleration of economic growth, the reduction of inequality, and the eradication of poverty.” They also argue that the core values represented by self-esteem, sustenance, and freedom must grow alongside economic development in the Least Developed Countries (LDCs).
Development growth is dependent on both financial and non-financial factors and a country’s macro-economic status can be influenced by changes on the micro-level. Gunnar Myrdal’s ‘modernizing ideals’ are necessary for total sustainable development. These include rationality, economic planning, social and economic equalization, and improved institutions and attitudes (Todaro and Smith, 2003). Streeten (1972) agrees with a broader picture of what ‘development’ means, writing that growth and decline aggregates do not provide a sufficient measure of a country’s development, which is also measured by changing attitudes and institutions.
Neither, according to Sen (1999) does consumption act as a measure of economic success, but rather it is the functionings of these commodities within the society. Without clean water, the ability to buy a toothbrush is meaningless. The current trend is moving away from purely economic indicators to determine development.
Health and education, under Sen’s reasoning, become crucial aspects of determining well-being, far beyond wealth measures. Sen (1999, p. 5) argues that “what people can positively achieve is influenced by economic opportunities, political liberties, social powers, and the enabling conditions of good health, basic education, and the encouragement and cultivation of initiatives.” Development economics in recent years has taken on his work and expanded the assessment of development with this in mind.
It is important to ask what causes development because this in turn directs the choice of projects and countries that receive aid. Todaro and Smith (2003, p. 88) cite the argument that “technological progress, including the upgrading of existing physical and human resources, accounts for most of the measured historical increase in per capita GNP.” Technology transfer within the LDCs can have a significant impact on the rate of economic growth. So too can the historical patterns of technology assimilation, education, bureaucracy, and the development of social institutions and networks.
Kuznet and the World Bank have come to the conclusion that “total factor productivity growth is what determines the rate of growth in developing countries” (Todaro and Smith, 2003, p. 86). The question of what causes macro-economic growth indicators is the fundamental question that drives development economics and is at the heart of the theories and models discussed here. Because of the role of historical forces and indigenous institutions in development, it is very difficult to form a single-cause theory that takes into account the circumstances of every developing country.
This represents one of the major flaws in the application of development theory, as will be discussed later in the paper. The single-minded focus of development agencies since World War II, however, has begun to be challenged by new paradigms of indigenous growth and Diaspora contributions brought about by increasing globalization.
Foreign aid has long been seen as a method of overcoming the hurdles to development in poorer nations. Foreign aid is made up of both governmental public transfers and private, nongovernmental organisations (NGOs) aid. As Todaro and Smith (2003) emphasise, only public transfer – known as Official Development Assistance (ODA) – counts as aid when it is based on a non-commercial motive and has concessionary borrowing terms. Private foreign investment (PFI), remittances, and microfinance do not count as aid because it usually is based on normal economic and commercial considerations.
The World Bank and IMF are international banks that give aid directly to LDC governments in the form of loans for structured economic adjustment. Non-governmental organisations often receive private funding and work on smaller projects within the countries, often giving both time and money as aid to replace the government in fields such as emergency medical assistance, famine relief, or education.
Hansen and Tarp (2000) write positively of the impact of aid on development. They argue that their empirical analysis conducted over three generations of data revealed a consistently positive correlation between aid and growth. They write (2000, p. 122) that “aid increases aggregate savings; aid increases investment; and there is a positive relationship between aid and growth in reduced form models.”
However, despite some of these positive empirical findings, the tide is turning against massive aid projects and government-to-government solutions for macro-economic development in favour of more locally based, community driven efforts. The success of international aid in redressing the ills of poverty and underdevelopment has been mixed. Streeten (1972) argues that aid is often ineffective in achieving development, and several other development economists agree.
They find that there is little correlation between aid and development because of “confused objectives, bad selection of projects, allocation to the wrong sectors, and corruption” (Streeten, 1972, p. 304). Similarly, Robinson and Tarp (2000, p. 5) conclude that while “aid is effective at the project level, no macro impact can be found.” This is important because it is traditionally assumed that only development aid directly to government can have macro-economic results.
Others, like Muyoya (2000, p. 194) blame international aid sources such as the IMF and the World Bank for the discrepancy between aid and real economic development, arguing that “aid policies, as they stand, offer no real hope for economies” in LDCs. Muyoya (2000) also argues that what is needed is a national plan within developing countries for the development of economies and institutions. The plan should use aid efficiently and effectively to develop sound policy and better financial and regulatory institutions.
Diasporas and Migration
Before moving on to discuss the development agenda in Africa and the literature on the success or failure of remittances to bring about macro-economic change, a better understanding is needed of the state of migration and the creation of Diasporas. Newland and Patrick (2004, p. 1) emphasize that “migration does not always result in the formation of a Diaspora community; and development does not always lead to poverty reduction, at least in the short-to-medium term.” Therefore, for a better understanding of the role of migration and remittances in the development literature, we should begin with a comprehensive definition of migration and Diaspora. Newland and Patrick (2004, p. 1-2) write that “’Diaspora’ is often used as a collective noun… referring to a dispersed people, but it is also used in the plural, as there are many different peoples who are dispersed among different countries, and as an adjective… also used to refer to migrant communities even if they do not share the attributes of forced dispersal, residence in many countries over several generations, and a longing to return.
It does, however, imply a settled community, rather than a group of temporary migrants with the intention and ability to return to their country of origin.” While this is a broad definition, it helps to explain both the commonalities of Diaspora communities and account for the variations caused by national or ethnic differences.
The interaction of Diasporas with their home countries often dictates the value and contribution of remittances to development goals. Diaspora involvement can be influenced by awareness of the problems of their home countries, continued participation in life there through family, social or moral obligations, and the availability of technology.
Tebeje (2005, p. 2) writes that “virtual participation has tremendous potential to channel the untapped intellectual and material input from the African Diaspora. Moreover, it recorded a growing awareness among the African Diaspora of its moral, intellectual, and social responsibility to contribute to Africa’s development efforts.” Kuptsch and Martin (2004, p. 1) write that there are two ways that migration and development interact:
- “Migration affects development, in the sense that the 3 R.s of recruitment, remittances, and returns shape who goes abroad, how much money they send home and how its spending affects development, and whether and when migrants return
Development affects migration, in the sense that closer economic integration symbolized by freer trade and investment can speed up change in developing countries, including displacing workers in formerly protected industries and accelerating rural-urban migration.”
The impact of migration and Diaspora on development will be explored further in the next section on the role of remittances.
Before moving on to the role of remittances however, it is important to discuss the difference between highly skilled and low skilled migration. High skilled migration is often referred to negatively as ‘brain drain.’ Kusnetsov and Sable (2006, p. 3) define brain drain as “the migration of human capital from less to more developed economies.” The implication is that high skilled workers leaving for another country is bad for the economic development of the home country.
Docquier et al. (2005) conclude that migration patterns in Africa follow high selection bias related to ethnic fractionalization, colonial ties, and relationship to the ruling regime. Because of these factors, brain drain in Africa is often caused by political unrest, a factor which will equally impact on the effect of remittances to that country. This might create different Diaspora dynamics for countries in Africa than those in Latin America and South Asia, where these biases seem to be less prevalent.
However, equally, the relationship between political unrest and brain drain in Africa means that there are selection factors that keep many high skilled workers in the country – relationship to the ruling regime, membership to the ethnic majority – and which in turn bias those remaining in the country against the facilitation of remittance capital flows.
Both high and low skilled workers can contribute to capital flows to their country of origin. In fact, Lucas (2001, p. 23) writes that “Remittances from either skilled or unskilled emigrants may serve to counter some of the potential negative impacts of emigrant departure, particularly in contexts where foreign exchange has a high social value.” This may mitigate the impact of brain drain. Aside from the remittance factor, highly skilled migrants can help to direct capital flows to their native countries in several ways outlined by Lucas (2001, p. 24):
- Emigrants may be relatively likely to invest in their own country of origin, because they are better placed to evaluate investment opportunities and possess contacts to facilitate this process.
Emigrants may also encourage investments in their country of origin by foreigners… Emigrants are well placed to identify more trustworthy and competent partners.
Exposure to nationals from a particular country may alter perceptions of doing business with that country, again encouraging foreign investment.
Diasporas of high and low skilled migrants can contribute to network building outside of the home country, but also have the ability to significantly contribute to capital flows within and into that country through capital investment, remittances, and lobbying on behalf of the country to development aid organizations.
Remittances
The focus of this thesis is the role that these Diasporas can play specifically in macro-economic development through remittances. Kuptsch and Martin (2004, p. 1) define remittances as “the portion of migrant incomes abroad that are sent home” citing that “in recent years, foreign direct investment and capital market flows to developing countries have decreased; remittances are the only financial flow to developing countries still on an upward path.” Maimbo and Ratha (2005, p. 332) write that “in the decade to 2004, remittances have emerged as the second largest source of net financial flows to developing countries.” Gupta et al. (2007) write that “At their core, remittances are private intrafamily or intracommunity income transfers that directly address the single most relevant challenge for SSA countries: poverty.”
Maimbo and Ratha (2005, p. 332) write that “the total volume of remittances to developing countries in 2001 was US$72.3 billion, nearly one-and-a-half times net official development assistance (ODA) in that year of US$57.5 billion.” Clearly migrant remittances are having a significant effect on the economies of these countries. However, these figures mostly pertain to Latin America and South Asia, which have the highest reporting of remittances.
Gupta et al. (2007) write that of the total reported remittances, Africa makes up only 4 percent, while “in contrast, countries in Latin America and the Caribbean receive about 25 percent of all remittances as do countries in the East Asia and Pacific region.” The only Sub-Saharan African (SSA) country to fall in the top 25 remittance recipients was Nigeria, one of the case studies for this thesis.
While remittances have overtaken foreign direct investment as the major source of non-official development assistance (ODA) money flowing into African countries, ODA continues to be the major external investor in African development (UN OSSA report, 2005). Maimbo and Ratha (2005) show that in SSA, private flows account for 11.6 percent, official flows 10.2 percent, and remittances only 2.4 percent, which means that remittances only account for 10 percent of the net flow to the region.
Although it is difficult to track remittances because of the many unofficial channels they can travel through, and the general underreporting problem, the impact they have on their recipients can be tracked based on the reported cases. While reported remittance levels are low in SSA, the common trends in South Asia and Latin America can be extrapolated to understand the general impact of remittances on the local and national economies of developing countries. The World Bank Group (2003, p. 1) reports that “Remittance receivers are typically better off than their peers who lack this source of income.
At the national level, remittances have a substantial effect on the balance of payments and on foreign exchange revenues.” The positive impact of remittances on individual finances and in poverty reduction is, however, limited to those families with a relative abroad. Development aid agencies and development economists see the potential for remittances to be put to better use in developing national economies.
One problem for the translation of family and community-based remittances into macro-economic development is the lack of cooperation on the state level. Sander and Maimbo (2003) point out a number of policies and regulations that hamper the sending and investment of remittances in Africa.
They list foreign exchange restrictions, requirements that all financial transactions pass through a state bank, restrictions on bank operating rules, restrictions on foreign exchange holdings that reduce the impact of foreign exchange investments, denial of savings repatriation, taxation of remittances, and bureaucratic obstacles to foreign investment or establishment of businesses. Low level corruption also reduces the impact of remittances, with bribes and ‘taxes’ skimming off the top of the money sent back.
Another significant constraint on the impact of remittances is the imposition of new money laundering rules for money transfer services (Sanders and Maimbo, 2003). In order to facilitate the development agenda through the use of Diasporas, Kuptsch and Martin (2004) suggest three tools for both home and Diaspora countries to adopt:
• Maintain links through dual citizenship.
• Foster trade between Diaspora countries and home countries.
• Sheltered returns for highly skilled migrants to the home country.
The focus on what countries and aid organizations can do to encourage remittances stems from the realization that there is a wealth of capital flowing into these developing countries that could be better directed at enacting macro-economic effects, but which is currently diffuse and mostly unrecorded.
Many development economists see the potential for a more streamlined and efficient approach to remittances that could enhance employment opportunities, small-level capital improvements, and – most exciting for many who see the development aid agenda as a failing paradigm – reduce the role of state actors in economic development.
Donor countries and aid organizations are increasingly looking towards the potential impact of low level capital flows through such tools as migrant remittances and microfinance. Newland and Patrick (2004, p. vi) write that donor interest in remittances “has coalesced around lowering transaction costs, improving data collection, extending the availability of financial services to poor people and rural areas, encouraging collective remittances to support community development and employment generation, and sponsoring research on the patterns and uses of remittances.”
Donor countries and aid organizations see remittance flows as a new possibility for fixing the problems of the development aid networks discussed above. Zarate-Hoyos (2005, p. 159) writes that “more recent studies have started to focus on the impact of labor and remittance flows on macroeconomic variables such as output, employment, and capital formation.”
Remittances, like microfinance, are praised as a tool for helping developing nations help themselves set up a truly functioning capitalist economic system from the ground up. Kuptsch and Martin (2004, p.2) describe the three development goals directing donor countries’ interest in remittances:
“Maximizing remittances. The best tool to maximize remittances is to have appropriate exchange rates and economic policies, but ease of access and cheaper money transfers can increase the volume of remittances and the share that flows through formal channels-- governments can more easily monitor official flows and can sometimes borrow against expected remittances at lower-than-normal costs.
The carrot is better than the stick in encouraging remittances forced savings programs are very unpopular with migrants, as are programs in which migrants are sent abroad as employees of home country employers and their wages are remitted to families at home in local currency.”
“Maximizing Impacts. Most remittances are spent by recipients on items needed for daily living. Since remittances often exceed what the breadwinner would have earned at home, some portion is usually spent on other items, including housing, education, health care etc.
There is a multiplier effect of remittance spending, so that each $1 in remittance spending can generate $2 to $3 in local economic activity, meaning that non-migrants can benefit indirectly from migration, especially if remittances are spent on locally produced goods.”
“Fostering Investment. The goal of most migrants and governments is to create conditions so that migration is unnecessary, which generally requires investment to create jobs. Programs that steer, match or otherwise encourage investment can lead to stay-at-home development, either in migrant areas of origin or elsewhere within the country. There is generally no need for special rules to encourage migrant businesses; the trick is to create conditions that foster all small investments.”
However, not all economists are optimistic about the role of remittances in the development of macro-economic growth in these countries. Chami et al. (2003, p.1) write that “Because remittances take place under asymmetric information and economic uncertainty, there exists a significant moral hazard problem.” They present results which “indicate that remittances do have a negative effect on economic growth, which indicates that the moral hazard problem in remittances is severe” (Chami et al., 2003, p. 1).
The World Bank Group (2003, p. 1) reports that “throughout Africa, financial and monetary policies and regulations have created barriers to the flow of remittances and their effective investment.” Maimbo and Ratha (2005, p. ix) also caution that “remittances complement efforts by governments in developing and developed countries, but are not a substitute for sustained assistance.” Another potential problem for the effectiveness of remittances in development situations is the behaviour of the Diaspora.
Newland and Patrick (2004, p. vi) write that “differences within and among Diaspora groups will influence the nature and scale of their capacity (and willingness) to act as agents of poverty reduction.” The differences in regional Diasporas are one of the major themes of the literature on remittances in development, mostly because of the regional variations described above.
Another critique of the remittance argument for macro-economic change is presented by Kuznetsov and Sable (2006, p. 4) who argue that they “are somewhat sceptical that remittances and other financial transfers by migrants can ever have a significant development impact, although they are certainly an important tool of poverty alleviation.”
These critiques all posit that the small amounts, the diffuse networks, the government regulations, and the remittance usage patterns all add up to form a picture of small economic adjustments, but little macro-economic impact.
Another group of critics point out that while remittances might have a positive impact on the growth of the financial sector, “they might directly lead to a lower demand for credit and have a dampening effect on credit market development” or, if the remittances are “channelled to finance governments” then they may not have any impact on the private sector (Aggarwal et al., 2005, p. 4).
They also point out that the mechanisms for studying remittance impacts can be altered by the effects of remittances, thereby biasing significant research. For example, they point out that “Better financial development might lead to larger measured remittances either because financial development enables remittance flows or because a larger percentage of remittances are measured when those remittances flow through formal financial institutions.
In addition, financial development might lower the cost of transmitting remittances, leading to an increase in such flows” (Aggarwal et al., 2005, p. 4). These are some critical factors to keep in mind while examine the potential impact of remittances on economic development.
Methodology
This thesis will examine macro-economic data from the three case studies, exploring the development strategies currently in place, the current level of migrant remittances to these countries, and the potential for increased growth from remittances. The SSA region was chosen because it is the least studied of the developing nations as far as the impact of remittances.
Much of the literature on remittances explores the role of the Diaspora and family in creating a steady flow of remittances. This is the reason why Ghana, Nigeria, and Senegal were chosen: they have some of the most extensive SSA Diasporas, as well as strong family and religious ties.
Case studies seemed to be the most effective way of examining the potential impact of migrant remittances because of the diverse variations of migrant networks and political and economic factors influencing the success of macro-economic development. This thesis proposes that it is not the extent of the Diaspora that determines the impact of remittances on a country’s development, but the financial and regulatory structures within the countries that determine how effective remittances can be in enabling macro-level change.
To demonstrate this point, the counter examples of Mexico and Bangladesh will be discussed in the next chapter. This comparison will provide a useful analytical tool for understanding the role that migration remittances can and cannot play in achieving macro-economic growth.
This chapter has reviewed the literature on development economics, ODA, Diasporas and migration, and remittances. The literature review presented both the widely held assumptions of these fields and some common critiques and challenges to the traditional views. The next chapter will present the data on the worldwide impact of remittances and a more in depth look at how these have been used in a variety of ways to further development goals.
The chapter will present some positive and negative examples from outside of the case study group to demonstrate that there are a number of factors that determine the success of a remittance-driven development agenda. These include Diaspora networks, high and low skill migration, national indicators, and, in particular, the impact of regulations within the recipient country.
The third chapter will present the case studies of Senegal, Nigeria, and Ghana, with an introduction to each of these Diasporas, the national indicators and current development standing of these countries, and the role that remittances currently play and can in the future expand to in these individual economies.
Finally, in the conclusion, there will be a summary of the impact of remittances on macro-economic development goals, a comparison of the case studies to the literature and the worldwide trends in remittances, and a summary of the findings of this thesis.
Chapter II: Economic Overview and World Outlook
Introduction
The theoretical discussions on the flow of migrant remittances and the role of Diasporas in development were discussed in detail above. This chapter will attempt to uncover some of the empirical realities of remittances and how they have impacted macro-economic development in a number of different world regions – particularly Latin America and South Asia.
Following on the themes laid out in the previous chapter, this investigation will involve an examination of the types of migration and the Diaspora networks they create, as well as the role that different migratory patterns – high skill, low skill, permanent, recurrent, or temporary – play in the distribution of remittances. Next it will examine the role of remittances and other non-aid based capital flows in different LDC regions.
This section will look at both national indicators and case studies where necessary to uncover the common trends and develop a deeper understanding of effective remittances. It will also examine several different examples of positive and negative government regulations that impact the effectiveness of remittances in creating long-term, macro-economic change. This will set up the argument to be pursued in the following chapter with regard to the specific SSA case studies.
Types of Migration and Influence on Remittance Flows
While the focus of this thesis is on the impact of remittances on macro-economic growth, remittance flows stem from a micro-level interaction, usually dependent on family or other similar relationships. Zarate-Hoyos (2005, p. 167) reports that in Mexico, “23 percent of households receiving remittances do not have a migrant from the household.
This indicates that a significant number of households may be part of extended families that receive remittances but lack working-age adults who can use remittances for productive investment.” This means that many use the remittances for basic subsistence and consumption needs. Even more interestingly, “the majority of households with migrants… do not receive remittances” (Zarate-Hoyos, 2005, p. 167).
In Africa, where the majority of migrants are mine workers and others employed in neighbouring countries, rather than in extremely wealthy countries like the US-Mexico example, the rate of remittances and their size is likely to be even lower due to both the level of earning and the ease of monetary transactions. Those who do migrate outside of Africa tend to be highly skilled and permanent migrants, which affects the nature of their remittances.
Hatton and Williamson (2005, p. 249) write that “African migrants often view their move as temporary. Surveys indicate that most intend to return to their rural (or, increasingly, urban) origins within a few years of migrating or upon retirement.” As Zarate-Hoyos (2005) indicates, once a migrant has permanently settled outside of the home country and has taken their family with them, remittance patterns change significantly. Although remittance flows continue, they tend to be used by different people or for different purposes.
This difference has been noted in a number of cases. Zarate-Hoyos (2005, p. 166) writes that “some studies propose that the type of migration – temporary, recurrent, or permanent – affects the variability of remittance flows…others suggest that the type of migration impacts how remittances are used.” Type of migration has been linked to consumption versus investment patterns of remittance use.
While permanent migrants might help the macro-economy more by investing in projects and large scale businesses, temporary or recurring migrants are more likely to send more frequent remittances to relatives and friends, helping to immediately alleviate problems of poverty. These differences are of the utmost importance for this study because the type of migration – high skilled, low skilled, permanent, or temporary – has the potential to significantly change the impact of remittances on macro-economic growth.
Similarly, the use of the remittances once they arrive tends to depend on the wider economic situation. As cited above, Gupta et al. (2007) write that “At their core, remittances are private intrafamily or intracommunity income transfers that directly address the single most relevant challenge for SSA countries: poverty.”
At these low levels, and especially in countries with insufficient banking or investment mechanisms and corruption in the government bureaucracy, it is easy to see that families would want to put their remittance payments to immediate poverty relief, rather than saving for an unstable future.
Worldwide Trends in Macro-economic Growth through Remittances
This is a developing field, and as such, there has been relatively little research done on the worldwide impact of remittances. However, some regional studies in recent years have contributed to a growing understanding of the growth potential of remittances. One region which has seen positive macro-economic change as a result of remittance flows is Asia.
This example holds up the argument set forth in the previous section that different types of migration and Diaspora communities can change the use of remittances. Lucas (2001, p. 25) writes that “Investments throughout Southeast Asia by the Chinese diaspora have a long history… from the revolution in 1949 until Deng Xiaoping’s ‘open door’ policy initiative in 1978, mainland China remained closed to foreign investors….By 1995, 58.8 percent of the accumulated foreign direct investment in China came from Hong Kong and Macao, and a further 8.7 percent from Taiwan.
Indeed, this role for the Chinese diaspora has led some observers to suggest that their influence has also been critical in promoting economic reform within China.” Asia has benefited significantly from long-term or permanent migration which produces remittances in the form of formal investment and the encouragement of PFI. This in turn seems to have a meaningful impact on the macro-economic development of the region.
Government policies have also helped encourage remittances. In Bangladesh, banks are encouraged by the government to work with international financial institutions and remittances are tax free, which encourages formal transfer and savings and investment.
On the other hand, macro-economic factors are neglected in situations where temporary and recurrent migration has occurred. For example, research on remittances to Mexico, one of the largest recipients of these capital flows, indicates that “only a small portion of remittances is spent on productive activities, and when remittances have been directed to productive activities, they have failed to generate significant employment” (Zarate-Hoyos, 2005, p. 160).
Considering the high rate of remittance flows between the US and Mexico, this is a disheartening figure. Rather than encouraging macro-economic growth through the establishment of industry or even the creation of employment on a lower level, remittances to Mexico appear to be used solely for poverty alleviation.
This may reflect the unstable nature of Mexican migration, which is often temporary and frequently illegal. With no guarantee that payments will continue, there is little incentive to invest in a long-term project.
Macro-economic Indicators
There are several empirical studies of the impact of remittances on macro-economic development. Rapoport and Docquier (2005, p. 48) write that the Keyenesian model has traditionally been used for predicting short-term effects of transfers on macro-economic growth: “under the assumptions of sticky prices, fixed exchange and interest rates, and in the absence of supply constraints, this model shows that any shock on the demand side has a disproportionate effect on the national output.”
Rapoport and Docquier (2005) do point out that the propensity to use the income for poverty alleviation is often predicated on the expectation of future remittances. Rather than expecting increased savings and capital investment, many development economists pin their hopes on the distributive effect of remittances, which ultimately help the extreme poor to move out of poverty through their income-supplementing effects, and thereby reducing the overall level of poverty within the LDC.
This confirms what was suggested above in the analysis of different migrant types: while temporary migrants are most likely to send high levels of remittance to family and friends, the recipients are also most likely to use the remittances for immediate consumption.
Using the remittances for consumption does not necessarily reduce the macro-economic impact of the remittances, since it fulfills the function of reducing overall poverty levels in the country and potentially generating low-level growth through increased local consumption. However, these are not the only possible outcomes on macro-economic development caused by migrant remittances.
Gupta et al. (2007) write that remittances are a rather stable form of inflow and their stability “opens up an opportunity for developing countries to lower borrowing costs in international capital markets by securitizing future flows of remittances.” They suggest that the macro-economic effect of the inflows will not destabilize the real exchange rate because of the diffuse nature of the remittances.
Other macro-economic effects include remittances “effect on the current account of the BOP. Remittances help in raising national income by providing foreign exchange and raising national savings and investment as well as by providing hard currency to finance essential imports thereby curtailing any BOP crisis” (Addison, 2004, p. 20).
The idea is that a successful remittance policy would encourage remittance recipients to save their money in banks, increasing their available resources, banks’ available capital, and the ability to invest in entrepreneurial enterprises that could increase production and GDP. In these LDCs, where access to credit is scarce, savings from remittance receipts can help form the basis of entrepreneurial growth.
Financial Regulation and Government Cooperation
Some governments have already begun to take advantage of the perceived benefits of migrant remittances. These governments have responded positively by changing their regulations and aligning incentive schemes with the needs of migrants. Sander and Maimbo (2003, p. 29) write that “While the majority of African governments and regulators remain conservative on the question of financial services, some, recognizing the contribution of remittances to their country and people, have sought ways to facilitate them. Mali and Sudan, for example, are actively engaged in attracting remittances or in creating incentives to invest. Other schemes are offered by host countries as incentives for migrants to return home.”
Within Africa, few governments have created the regulatory incentive structures to draw efficient use of remittance flows. However, there are some notable exceptions. Mali for example has set up an expatriate ministry to attempt to draw highly skilled Malian emigrants back to the country to act as researchers or professors and facilitate knowledge transfer. Sudan, meanwhile, has created an incentivized exchange rate for the transfer of remittances.
They have also established a ‘nil value’ custom policy, described by Sander and Maimbo (2003, p. 29): “holders of hard currency deposits remitted from abroad and retained in special accounts over six months have the right to use the funds for imports, with customs relief of up to $14,000.” These incentive schemes recognize the value of the Diaspora to contribute to the home country’s economic growth through both their skills contributions and their financial resources.
Conclusion
This chapter has identified the worldwide trends in migrant remittances and the macro-economic factors that can be influenced by remittances. It demonstrates the difficulty of making broad-sweeping generalisations about the impact of remittances on macro-economic development in LDCs.
A number of factors seem to influence the difference that remittances can make: Diaspora involvement; types of remittances; length of migrant stay; and most significantly, government financial regulations. The next chapter will examine these factors and the macro-economic impact of migrant remittances in three specific SSA case studies to determine what influences the effectiveness of remittances in economic development.
Chapter III: Case Studies
Introduction
This chapter will examine macro-economic indicators for three SSA LDCs – Ghana, Nigeria, and Senegal – to determine whether their approach to migrant remittances will have any impact on development. West Africa was chosen for the case studies because, as Gupta et al. (2007) point out “the strong sociocultural ties in West Africa...encourage labor mobility.”
There is significantly less data and fewer empirical studies on the rate and impact of remittances in SSA countries. One reason for this is the different reporting mechanisms and the formality/informality of developed-to-LDC migration as opposed to LDC-to-LDC migration.
These three West African countries all have well-documented developed country Diasporas, with links to the UK (Nigeria and Ghana) and France and America (Senegal). LDC-to-LDC tends to be less reported and therefore less understood. However, Gupta et al. (2007, p. 4) argue that “informal remittances to SSA are relatively high at 45-65 percent of formal flows, compared to only about 5-20 percent in Latin America” which indicates that they could be having a wider impact than is usually recorded.
They report that “in 2005, remittances to the 34 SSA countries reporting are estimated to have been about US$6.5 billion” but this accounts for only 4 percent of the reported remittance flows to LDCs (Gupta et al., 2007). Despite this relatively small perceived impact of remittances on inflows in SSA, Gupta et al. (2007, p. 6) qualify that although aid has been increasing at a higher rate than remittances since 2000, “during the 1990s, when aid flows to the region were more or less stagnant, remittances grew annually at more than 13 percent.”
This has wider implications in a field where the conventional wisdom is turning to a new, less aid-based paradigm for development. Since remittances appear to be stable income in SSA compared to aid and other inflows, they may provide a good alternative source of development income than aid or PFI.
Sub-Saharan Africa contains 10 percent of the world’s population, but per capita, receives incomes of only 10 to 20 percent of OECD countries (Hatton and Williamson, 2005). Despite these rather dire economic circumstances, migration out of SSA countries is relatively limited.
Hatton and Williamson (2005, p. 248) write that “first, poverty constrains migration more in Africa than elsewhere in the world simply because there is more of it...second, immigration policies in the developed world have made it particularly difficult for Africans to gain access to high-wage labor markets...third, as a consequence of poverty and policy, the African migrant stock overseas is still too modest to produce a friends-and-relatives effect sufficiently powerful to loosen the poverty constraint.”
On the other hand, violent civil wars and demographic transitions have made the younger generation more mobile very recently. Thus the impact of remittances can be expected to grow over the next quarter century. Similarly, if there is a growing disparity in wealth within the continent, inter-African migration can be expected as a result (Hatton and Williamson, 2005).
This chapter will investigate the economies, migration trends, and effects of remittances in Nigeria, Ghana, and Senegal in order to better understand how macro-economic effects can be influenced by migrant remittances.
Nigeria
Nigeria is the only SSA country in the top twenty-five in receipts of remittances (Gupta et al., 2007). With a high migration level, a professional and permanent Diaspora in the UK and United States, Nigeria benefits from high rates of formal remittances. In fact, remittances to Nigeria are believed to be the second largest source of foreign income for Nigeria after oil exports.
With ODA almost non-existent as a source of foreign exchange, Nigeria depends on PFI, oil exports and remittances. For example, The Economist country report for Nigeria predicts that “Exceptionally high export earnings will result in current-account surpluses in 2008-12, despite strong growth in imports and invisible debits. Foreign direct investment, mainly in the oil sector, will remain high over the forecast period, at over US$2bn per year.” Despite these high levels of capital investment, however, true development has been slow to follow.
Corruption and financial mismanagement have reduced the impact of these inflows on the Nigerian economy. The Nigerian parallel economy is driven by the government’s parallel exchange rate, through which it auctions off foreign exchange, often at a discount; “the premium on foreign currencies transacted in the parallel market is often interpreted as a means for taxing private exporters, with a view to implicitly subsidizing government imports” (Azam, 2007, p. 69).
Although this practice has slowed since 1995, it demonstrates the obstacles facing foreign exchange inflows into Nigeria. It is likely that a similar problem has developed with migrant remittances.
Chukwuone et al. (2007) suggest that because there has been no attempt to understand the impact of remittances on the Nigerian economy, no formal policy has been undertaken by the government or financial institutions with regard to encouraging their use for macro-economic development.
The Nigerian economy is fairly unstable. Despite high remittance rates and the positive impact of oil exports on the country’s balance of payments, Nigeria is still a poor country and recipient of ODA. Nigeria’s key economic indicators show GDP growth over the past few years (real GDP growth 6.2% in 2007, 6.8% in 2008), but also reveal a jump in inflation (consumer price inflation 5.4% in 2007, 8.2% in 2008), about which The Economist says “Although inflation has fallen substantially over the past two years, it will be difficult to maintain it at such low levels, given the high level of excess liquidity in the economy, rising government spending and strong growth.
After increasing to over 8% in 2008-09, it is only expected to start to come back under control from 2010.” Commercial banks’ prime rates have also increase from 16.9% in 2007, to 18.0% in 2008. According to The Economist’s country briefings “The new government is expected to announce a detailed economic policy document in the near term: early indications are that any new policy will not differ greatly from the National Economic Empowerment and Development Strategy (NEEDS), which expired at the end of 2007.”
The recent rise in oil prices may yield an increase in income, and “Although real GDP growth will be held back by unrest in the Delta region, growth should remain robust, at over 6% per year, in 2009-12. We believe that the government will make progress with economic reform and we expect growth in the non-oil sector to remain strong during the forecast period” (The Economist country report).
Despite this optimistic forecast, the day to day reality of Nigerian life is still mired in poverty. Nigerian economic growth has been negatively impacted by poor fiscal policies and the government’s policy of operating an official and parallel foreign exchange market (Azam, 2007).
Eade and Sayer (2006, p. 81) also report on “the huge rents that Nigerian military governments have received over a number of decades from Shell’s operations in the Niger Delta.” The government has frequently used the foreign currency income for military purchases and political control, rather than for the achievement of development goals. The World Bank and United Nations both report that the national poverty rate in Nigeria has increased from 46.3 percent in 1985 to 70.0 percent in 1999, with more than 70 percent of Nigerians earning less than US$1 a day.
Migration from Nigeria has been high since the early 1980s when economic stagnation began as a result of an oil slump and political instability (Hatton and Williamson, 2005). Both highly skilled and unskilled men are expected to migrate to find work, and Chukwuone et al. (2007, p. 3) write that “in southern Nigeria, for example, between 20 and 80 percent of households have at least one migrant member.” The impact of the high rate of migration is the largest rate of remittance in SSA, and Chukwuone et al. (2007, p. ) suggest that “inflows from abroad have been a key factor to the stability of Nigerian naira against other international currencies” in the years leading up to the publication of their study.
However, “in spite of the recognized advantages of a well articulated remittance management regime to aid growth and development by providing much needed foreign exchange, and as a source of liquidity and a palliative for its balance of payment deficit, Nigeria does not put remittance of migrant workers to their best use” according to Chukwuone et al. (2007, p. 4). They write that the financial structures for handling migrant remittances are inefficient and limited, causing “a lot of remittances [to] go through informal channels and discourage their use for savings and investment” (Chukwuone et al., 2007, p. 7).
It appears from Chukwuone et al.’s (2007) report that remittances are used almost exclusively for poverty reduction and the funding of further migration – either out of rural areas or out of the country entirely. However, as discussed in the previous chapter, the non-productive use of remittances does not mean that they play no part in the macro-economics of a developing country.
In Nigeria, the high rate of poverty means that remittances act as a distributive effect, which ultimately helps the extreme poor to move out of poverty through their income-supplementing effects. This has the macro-level effect of reducing the overall level of poverty within Nigeria.
Using the remittances for consumption does not necessarily reduce the macro-economic impact of the remittances, since it fulfills the function of reducing overall poverty levels in the country and potentially generating low-level growth through increased local consumption or the ability to afford education or other advancements.
Nigeria’s active Diaspora also plays a crucial role in the development of the country through remittances, despite the policy obstacles presented by the Nigerian government. The creation of church-based and town-based remittance groups ensures that the inflows can be put to development purposes in building, education, and poverty reduction.
Okome (2007, p. 168) writes that “Nigerian and Ghanaian ethnic associations and HTAs fundraise for provision of potable water and building community centers.” Chukwuone et al. (2007, p. 7) argue however, that “poor access to finance is among the constraints to Nigeria’s economic growth and competitiveness and hence poverty reduction”; therefore, any long term economic growth and poverty alleviation initiatives will require government facilitation of remittances for their productive use in the creation of small business and employment and investment opportunities.
Financial facilities and access to credit are necessary in order that Nigerians do not become dependent on migrant remittances as an alternate to internal employment creation and entrepreneurship.
While the migrant remittances to Nigeria have had a macro-economic impact through poverty alleviation and the provision of foreign exchange, this has not had an impact on economic development in the country because of government fiscal policies and an under-utilization of remittance potential.
Ghana
Ghana actually has a very good structure for accepting and productively utilizing migrant remittances. However, this has not always been the case. Addison (2005, p. 10) points out that “The distortions in the economy with inappropriate exchange rates, however, meant that very little of actual transfers into the Ghanaian economy went through official channels.
As the economy became more liberalized, certain reporting requirements were relaxed, leading to the gradual loss of information on this variable for the accounts.” In order to counteract this loss of information, especially since there was a sense that much of the capital inflow was going unreported, “The Bank of Ghana therefore, put in place a reporting format for the banks, and other licensed non-bank financial institutions to report the quantum of transfers as part of their prudential reports to the Banking Supervision Department of the Bank of Ghana” (Addison, 2004, p. 10).
Because these tools for remittance reporting are relatively new, the comparative data does not go back to independence. However, there is still quite a significant pattern of remittances emerging for Ghana. As far as the potential impact of remittances, Addison (2004, p. 13) reports that “Whereas private unrequited transfers maintained a relatively stable upward trend, ODA exhibited a rather unstable trend.
Another interesting observation is that private unrequited transfers have over the years stayed above FDI as a percent of GDP.” In comparison to key macro-economic variables, “remittances as a percentage of GDP increased from 2.24 percent in 1990 to almost 13.4 per cent by 2003.
As a percentage of total exports, remittances rose from 22.0 per cent to 39.7 per cent over the same period. This observation suggests that over the period remittances have been increasing more than proportionately compared to GDP, exports and imports” (Addison, 2004, p. 14). Despite these clear trends, it is unclear what impact remittances are making on the formal economy.
Ghana had a very strong economy in the post-independence period, with mining, logging, and cocoa production as its primary industries. The country experienced growth from 1957 to 1965 and 1970 to 1975, but a series of coups and drought brought inflation and an increasing national debt in the late 1970s and 1980s. Hatton and Williamson (2005, p. 253) write that “these swings in political and economic conditions in Ghana greatly influenced migration movements, both internal and international” with economic boom drawing labour from neighbouring countries, and periods of decline driving migration to other ECOWAS countries like Nigeria.
In order to recover from these economic woes, the Ghanaian government began a gradual programme of recovery in 1983: they eliminated price subsidies, reduced inflation, corrected the foreign exchange imbalance, and instituted a structural adjustment programme (Hatton and Williamson, 2005). Hatton and Williamson (2005, p. 255) write that “by the mid-1990s, real wages in Ghana exceeded those in West Africa” which put a damper on the need to migrate to neighbouring countries for employment.
Significant out-migration to OECD countries did take place at several points in Ghanaian history – post-independence, when trade liberalisation replaced protectionism in the late 1960s and again in the period of globalization, and during periods of political instability.
Hatton and Williamson (2005, p. 263) write that “in low income countries like those in sub-Saharan Africa, trade liberalization increases the pressure to emigrate (largely because of the fall in the real exchange rate).” The drivers for migration – instability, economic decline – send Ghanaians both to OECD countries and to neighbouring West African countries, the remittance effects of which have distinct implications for Ghanaian macro-economic growth.
They also have a very active Diaspora. One of the key features of the Ghanaian Diaspora is the large amount of remittances sent by groups. Henry and Mohan’s (2003) case study on the Ghanaian Diaspora, as well as macro-economic data on Ghana, and some studies that have examined the role of Ghana’s government in the country’s finances will inform this case study.
Henry and Mohan’s (2003) study of the UK Ghanaian Diaspora focuses on the Milton Keynes Ghanaian community. Their results are relevant to this research because they examine the second generation of the Diaspora, and a socio-economically advantaged section of it.
They write that “inter generational distance from the ancestral hometown, renegotiation of relationships with the UK Ghanaian communities and the strength of non Ghanaian ties, have important impacts on how they orient themselves to other Ghanaians and to different locations in Ghana” (Henry and Mohan, 2003, p. 617). This is important because it helps to illustrate the differences described in the previous chapter between temporary and permanent migrants and the varying impact of their remittances.
More permanently settled Ghanaians – those with professional degrees, families, and who have moved beyond the Ghanaian community they initially moved to – are less likely to support community/Diaspora efforts in favour of support of individual family members.
Hatton and Williamson (2005, p. 264) suggest that the real power of these remittances is not in economic development in the recipient country, but that “loosening through remittances the poverty constraint and enabling larger numbers to migrate through family reunification schemes” migration will feed further migration.
Addison (2004, p. 22) writes that one way to combat these effects is the formation of remittance associations: “it is significant to note that the positive macroeconomic or developmental effects of remittances could become more prominent if migrants form associations” to “help in supplementing government savings to finance small community projects” just as they have done in the London Ghanaian community.
As was indicated in the previous chapter, Ghanaians who are permanent UK residents also look to investment opportunities rather than pure subsistence. Henry and Mohan (2003, p. 618) write that “all the migrants we spoke to were in the process of constructing homes back in Ghana, usually in Accra rather than the hometown. This reflects a desire to eventually return to Ghana.”
However, rather than the return being part of a recurring migration pattern, it is tied to family obligations and the idea of investing earned wealth in something tangible for the family. Investment and asset building are encouraged by financial policies that both discourage transfer of foreign currency within Ghana (high rates are changed for these transfers on both the remitter and recipient sides of the transaction) and encourage tangible assets that will not be affected by inflation.
Addison (2004, p. 19) reports that “Whereas banks use interbank foreign exchange rate for the conversion of remittance proceeds other financial houses use Forex bureau exchange rates, which are higher thus making them the preferred channel for remittance transfers for some market participants (e.g. for small transaction).”
This reduces the impact of foreign currency on the Ghanaian economy in an attempt to prevent the development of a currency black market or sudden change in the exchange rate. These policies have also helped concentrate the remittance flows in a way that drives productive effects as well as poverty-alleviation. Addison (2004) explains that remittances in Ghana are often used for the establishment of small enterprises, but that government needs to do more to offer incentives for migrants to invest in these businesses.
Since “It is evidenced in Ghana that remittance-receiving households usually save a portion of their money, which serves as insurance against future contingencies as well as for investments” it is clear that Ghana is in a position to put its remittances to work building macro-economic growth through small scale productive enterprises (Addison, 2004, p. 24).
Senegal
Senegal is another developing economy in West Africa that has high levels of migration and steadily increasing levels of remittances – it is the fourth largest SSA recipient of remittances (UN). Senegal has an active Diaspora and a high level of remittance receipts. Although the government has not put into place the policies that would encourage remittance, the Senegalese financial community within and outside of the country has been active in seeking formal and informal means of transferring money.
Senegal’s national economic indicators are not as dire as Nigeria’s. Although there is a great income disparity between the wealthiest twenty percent of the population and the poorest twenty percent, the national poverty rate is 33.4 percent compared to Nigeria’s 70 percent (Earthtrends, 2003). The annual GDP growth between 1991 and 2000 was 3 percent, which was above the SSA average of 2 percent (Earthtrends, 2003).
However, Senegal still has a sizeable negative balance of trade, with exports only accounting for 31 percent of GDP in 2000. This means that the impact of recorded remittances and a policy more conducive to remittance savings and investment could have a significant impact on the balance of payments by increasing the amount of foreign currency inflows. Also, the percentage of GDP made up by manufacturing and industry is relatively low at 27 percent in 2000, which indicates an opening for light manufacturing investment (Earthtrends, 2003; Ndiaye, 2008).
Unfortunately, at the moment, Senegal’s financial policies mean that only formal, regulated banks can handle international money transfers, which reduces the impact of remittances since migrants send them through informal channels instead. After independence, the country heavily favoured tight regulation and public ownership, which Ndiaye (2008) says caused rent-seeking behaviour that negatively impacted Senegal’s growth.
The country’s monetary policy was set up to support this and is therefore unsuited for small, private entrepreneurial ventures. There have been recent reforms, but “the cost, access, and availability of credit is still a constraint on the growth of the private sector cited by private entrepreneurs...Banks continue to be significantly more likely to engage in short-term trade-related lending than in longer-term finance” (Ndiaye, 2008, p. 414).
Additionally, Ndiaye (2008, p. 414) points out that “access to credit is also problematic for smaller enterprises due to the conservative bias against them in favour of public enterprises.”
The World Bank estimates that workers’ remittances to Senegal have increased from US$179 million in 2000 to US$563 million in 2004 (World Bank Migration and Remittances Factbook). In 2006, inflows from remittances made up 7.6 percent of Senegal’s GDP (World Bank Migration and Remittances Factbook).
In terms of per capita remittances, the average was US$14 in the 1990s and has increased to US$45 (UN). Okome (2007, p. 174) argues that “the current formal market conditions tend to favour those who can afford to make larger transfers, but if the cost of transferring smaller amounts of money could be reduced, more people would be able and possibly willing to remit, increasing the volume and value of remittances, with consequent positive effects on social welfare and equity.”
The rate and size of remittances to Senegal through official channels could be increased by a national financial policy that provides cheaper transaction costs for remittances from abroad and better savings and credit schemes to put those remittances to work. Ayittey (2005) cites a microcredit response to local need that could be elaborated upon through the wider availability of financial services such as local banks or easy money transfers.
The example Ayittey (2005, p. 385) describes is the Kebemer rubbish collectors, a group of women who borrowed money from Christian Aid to “buy a horse and cart, employed rubbish collectors, and earn a salary by cleaning up the streets on a daily basis” not only eventually employing twenty people, but also fixing a health problem.
Projects like these do not need injections of capital from ODA or PFI, but could be set up using remittance savings if the necessary banking structures were in place. As it is now, a government banking law means that institutions that can be easily accessed in all parts of the country are not licensed to engage in international money transfers, since those transfers are restricted to government regulated institutions.
This means that a large amount of remittances are transferred through informal means, giving the recipient a better exchange rate, but reducing the potential macro-economic growth impact.
Emigration tends to be to other West African countries or France, Italy, Spain and the US. The UN reports that 76 percent of urban families and 64.5 percent of rural families have a relative who has migrated. Okome (2007, p. 158) writes that “the results of a survey conducted in France among migrants from Senegal, Mali, Guinea-Bissau, and the Comoros indicate that family support is the primary purpose for remittances to the home countries.
Subsequently, they fund home construction, business investment, and community development efforts.” This indicates that poverty alleviation is the goal of migrant remittances to Senegal, with investment and economic development lower down on their list of priorities. In Senegal, for example, remittances can account for up to 90 percent of the recipient’s income.
However, the Senegalese Diaspora has been particularly adept at encouraging remittances: Senegalese migrants in New York “remit significant transfers to Senegal through banks owned by members of their community and other networks” (Okome, 2007, p. 165).
Given that Senegalese businesses have established a similar informal system for migrants to Senegal – “there are shops that will allow a migrant to order and pay for a television set or essential medicines to be released to a family member at home” (De Ferranti and Ody, 2007, p. 73) – it seems that the informal sector is responding well to the need for remittances. Okome (2007, p. 164) also explains that “Senegalese migrants use Western Union and banks, the latter when sending savings and investments” but also points out that “money transfer operators and ethnic businesses have been more proactive than banks in offering targeted financial services to African migrants” within the host countries.
This may suggest that in addition to Diaspora involvement and recipient country policy, the migrants’ host countries also need to take an active role in encouraging the savings and investment of remittances.
However, it is clear that Senegal needs to step up its efforts to increase formal remittances and open up access to savings and credit facilities beyond Dakar to enable the growth of private industry throughout the country. De Ferranti and Ody (2007, p. 76-77) point out that “if governments provide a supportive policy environment – including, above all, policies and regulations that promote competition for the benefit of consumers, rather than protection of incumbent financial institutions – ingenuity and innovative technology can continue to extend the reach of organized financial services.”
Conclusion
This chapter has presented three case studies of SSA LDCs with high remittance rates. The active Diaspora networks of these three countries and the permanent nature of their stays indicate that the type of migration and remittance relationship in West Africa could make significant inroads in the development agenda if government resources were aimed at efficient capture of these inflows.
Since remittances now account for larger, more stable inflows than either ODA or PFI, their impact could be significant in the effort to aid development and growth. However, governments and financial institutions within these countries need to encourage migrant capital flows and enact policies that support productive investment rather than acting as predatory governments, skimming off the top and thereby encouraging immediate consumption of any remittances.
Addison (2004, p. 23) supports the role of policy in activating migrant remittances for macro-economic effects: “initiatives include lowering transfer costs (i.e. lower fees and more favourable exchange rates), reducing the risks involved in these transfers, and offering more attractive investment alternatives” as well as offering savings options and expanding services offered by micro-finance institutions to encourage the spending of remittances on productive investments.
Although the role of the Diaspora in organizing to effectively utilize the remittances is important – and is in fact more successful in SSA than in Mexico, for example – it is the government’s policy toward those remittances that often determines their productive value and macro-economic impact. The case of Nigeria demonstrates that it is not necessarily the rate or size of remittances (or type of Diaspora) that influences the impact of remittances on macro-economic growth, but the government’s encouragement of the use of those remittances for productive capital investment.
Senegal’s Diaspora has been innovative in developing ways of transferring money, but still faces policy obstacles when it comes to foreign exchange regulations and the establishment of savings accounts. If government policy could be enacted to overcome these barriers, the effects of migrant remittances could go beyond poverty alleviation and distributive effects to create productive enterprises and increase savings rates so that development investments could be made on both the local and national level.
Restrictions on foreign currency should not be made too lax (in order to prevent the development of a black market or parallel currency exchange). However, by creating a friendly remittance policy, the government could also increase the rate of formal remittances, which might have a positive impact on the country’s BOP and foreign exchange inflow.
This thesis has presented the current views in the literature on development economics and migrant remittances. There is a split amongst academics about whether or not migrant remittances can make a significant impact on LDC development, particularly in the post-development aid consensus. The case studies examined in the previous chapter showed that migrant remittances are no panacea for the problems facing these LDCs.
Despite the eagerness of the development community to embrace the long-term development potential of remittances, this is largely shaped by what remains after the basic consumption needs of families receiving poverty relief are met. Much of the focus of research on remittances and their impact on development are on Latin America and South Asia, where most of the remittances go and there is a large amount of data.
The research interest that has driven this study has been to explore whether migrant remittance flows can be put to use in expanding the macro-economic development of Sub-Saharan African countries and what the current state of Diaspora remittances indicates about the possibility of remittances making a significant contribution to the achievement of wider development goals.
This research has been framed by several research questions: What is the overall impact of remittances worldwide? How do migrant remittances fit into the achievement of development goals? Do remittances disturb aid and upset economic equilibriums? How does ‘brain drain’ negatively affect the possibility for macro-economic growth, despite the potential impact of remittances?
The macro-economic impacts of remittances when they are unfettered by government policy are most notably distribution effects and poverty alleviation. These are the primary reasons migrants send remittances and they have the effect of raising the overall national income. Other macro-economic effects include remittances “effect on the current account of the BOP.
Remittances help in raising national income by providing foreign exchange and raising national savings and investment as well as by providing hard currency to finance essential imports thereby curtailing any BOP crisis” (Addison, 2004, p. 20).
The idea is that a successful remittance policy would encourage remittance recipients to save their money in banks, increasing their available resources, banks’ available capital, and the ability to invest in entrepreneurial enterprises that could increase production and GDP. And finally, by formalizing remittance flows, countries would be able to use the contribution of remittance income to GDP as a security for loans and investments from other nations.
The conclusion of this thesis is that remittances can offer some help to aid development in Sub-Saharan Africa, but they require a certain type of Diaspora and government encouragement of investment. While the case of a large Diaspora did not help increase the effective use of remittances in Nigeria for macro-economic growth, the associationalism of Nigerian migrants and the focus of their remittances on poverty relief and development initiatives such as education means that the remittances still have an impact on the country’s macro-economic development.
However, with effective government policies, remittances could have a greater impact on its growth. Remittances can make up part of a macro-economic growth package, but should not be expected to bear the entire burden of development, particularly since one of the factors that hinder total development – institutional instability – tends to reduce the impact of remittances as well.
This confirms Brown’s (2006, p. 55) argument that “the developmental contribution of remittances can be significantly enhanced through complementary macroeconomic policies in labor exporting countries and financial innovations in remittance transmission.” These policies, as well as a view to economic and political security, will help to encourage remittances being used for a development, rather than poverty-alleviating, agenda.
If banks and governments encourage the development of more complex financial institutions for the purpose of encouraging Diaspora investment, then migrant remittances can be put to more structured use and have greater productive effects.
This is the inverse of Aggarwal et al.’s (2005, p. 1) argument that “remittances promote financial development measured by the ration of deposits to GDP.” In other words, remittances can aid development as long as the institutions are in place to allow them; otherwise, they will be put to immediate consumption purposes and remain in the family.
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