Remittances facilitate long-term development for poor countries
July 10, 2009 | By Ananthsa | Filed Under Letters
Guyanese need to understand the importance of remittances and its contribution towards development. The effects of remittances on development are not a one way road, but instead entail both positives and negatives. The trick is to master the art on the utilisation of remittances to sustain long-term development.
Today, developing countries hold high hopes in the benefits that remittances have to offer, and remittances now account for more than 10% of the Gross Domestic Product (GDP) of these countries and are of high importance to their national economies.
Developing countries like Guyana depend on remittances as one factor in its developmental process and this is not wrong. Remittances into Guyana rose from US$29.2 million at the end of 2000 to US$225.9 million at the end of 2006. Remittances account for the second largest source of foreign finance after private capital flows.
Remittances are the major financial source for most developing countries and are key players in cushioning the impact of the economic crisis today. Migrants from developing countries are seen as the providers of human and financial capital to their homelands. Remittances also contribute to positive long-term macroeconomic growth patterns and are a key source of foreign exchange for Caribbean countries.
Being a significant source of foreign exchange, remittances can serve as a pillar to support and improve credit worthiness and access to international capital markets for many countries in the ECA region. Unlike capital flows, remittances do not create debt servicing or other obligations. Instead, they provide financial institutions with access to better financing than might otherwise be available. Remittances are one of the defining factors of exchange rate dynamics in Caribbean and other developing countries and as a consequence create macroeconomic policy in the small economies.
Remittances positively impact poverty and inequality and also influence investment, growth, and macroeconomic stability of developing nations. Remittances supplement national income and aggregate demand as a whole, and can lead to economic growth simply by increasing the migrant’s household income; whether through increased consumption, savings or investments.
Remittances have a positive impact on productivity and employment, both directly and indirectly through their effect on investment and contribute to household income and reducing poverty. Poor families benefit from migrants’ remittances. In the 1990s, Egypt, India, Mexico, Portugal and Turkey were the main remittance-receiving countries; and over the years, these countries have incorporated remittances as a developmental tool for long-term sustainable development.
When migrants invest in their home country, local people benefit and production is stimulated. Remittances are used to cover expenses over food, clothing and healthcare. Funds can be used to improve housing, buy land, repay loans, etc. Even though these investments may seem small, they should be considered as large amounts in absolute terms because of the large and growing amount of remittance transfers. Sending and receiving remittances are not only an economic transaction, but a form of exchange between individuals that takes place in a fairly intricate social context; some may remit for altruistic reasons, while others remit for self-interest.
Because of the growing importance of remittances, Governments need to develop strategies to increase the development effects of remittances.
This should include financial incentive schemes to increase the volume of remittances via commercial banks, matching the development investments of migrant associations with government funds, and improving the investment climate for small and medium enterprises.
The Banking system of developing countries should cater for the implementation of special remittance programmes for their Diaspora members, since remittances are a source of potential profits generated by a rising level of cross-country money transfer business and also serve as a promising channel to reach migrants as regular customers in the future.
Remittances strengthen grassroots banking and have a multiplier effect, providing a host of banking incentives for developing countries; and remittances can access banking conduits in the home countries with attractive incentives to their Diaspora people. This is one way in which banks can use remittances for long-term development.
And so, we must not spit on remittances as if it is wrong because clearly any developing country is dependent on it to maintain a sound macroeconomic environment and to improve the standard of living among the ordinary people. There is more I want to say, but I will leave the rest for another letter.