Remittances in South Asia and Development Economics

Using a recent report on remittances to motivate a discussion on how remittances play into Developmental Economics

Nafee H. Ahmed

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Migrant Workers from South Asia working in Qatar (picture by European Pressphoto Agency)

On April 21 2017, The Times of India published an article which summarized the findings of a recent World Bank Report on remittances. The article referenced a few interesting facts which can motivate a discussion on how remittances relate to development economics. After discussing remittances in depth one can revisit the article to see how well developmental economic theory reflects real world events.

The article highlights that India received more money in remittances than any other country in 2016; Indian workers sent home 62.7 billion American dollars in total. The article also notes that the total amount of money in remittances to India fell by 8.9 percent in 2016 and contextualizes that drop by explaining that the total amount of money in remittances sent to all developing countries fell by 2.4 percent in 2016. The article later reveals that money in remittances sent to South Asia fell by 6.4 percent.

This article claims that the primary cause of migrant workers sending less money home is related to lower oil prices and lower economic growth among countries in the Arabian peninsula; many Indian migrant workers work in these countries lower economic growth in these countries can decrease the amount of money migrants can send home.

The article provides a useful list of the countries which received the most money in remittances. In terms of absolute dollars those countries are India, The Philippines, China, Mexico and Pakistan; however, the countries which take the most money in remittances as a percentage of that country’s GDP are Kyrgyz Republic, Nepal, Liberia, Haiti, and Tonga.

The Importance of Remittances

Remittances are an important topic for two main reasons. Firstly, remittances are major component of the economy in many developing countries. The Times of India article referenced above divulged that remittances account for 6.0 percent of Bangladesh’s GDP, 6.9 percent of Pakistan’s GDP and 2.9 percent of India’s GDP.

 

Secondly, there is evidence that remittances decrease poverty in developing countries. In 2005, an article in the journal, World Development, by Richard Adams and John Page found a relationship between remittances and poverty. Adams and Page claimed, “both international migration and remittances have a strong, statistically significant impact on reducing poverty in the developing world … After instrumenting for the possible endogeneity of international remittances, a similar 10 percent increase in per capita official international remittances will lead, on average, to a 3.5 percent decline in the share of people living in poverty.” (Adams and Page  1660).

 

Remittances and Growth

 

Katushi Imai et al.’s article, “Remittances, Growth and Poverty: New Evidence from Asian Countries,” provides a strong claim that that remittances have a positive relationship with GDP growth. The authors’ model found that, on average, a 10 percent increase in a country’s remittance payments as a share of that country’s GDP increased that country’s rate of growth in GDP per capita. The authors also provide an intuitive explanation for why higher levels of remittances are related to higher economic growth, stating “The existing literature (for example, Barajas et al., 2009) identifies various channels through which remittances enhance growth, including the boosting of capital accumulation, labour force growth, and total factor productivity …” (Imai et al. 530-531).

 

A link to the article “Remittances, Growth and Poverty: New Evidence from Asian Countries” can be found here: http://www.sciencedirect.com/science/article/pii/S0161893814000209

 

Applying Remittances to a Growth Model in Development Economics

 

If one accepts that remittances positively influence GDP growth in developing countries, then one can also look at traditional growth models in Development Economics and apply the value of remittances as an additional variable. Many models in Developmental Economics relate economic growth to other variables. If economic growth has a positive relationship with one variable, then the value of remittances a country receives should also have a positive relationship with that same variable.

 

Consider two examples with a common model in Development Economics, The Solow Model:
The Solow Model is a common model of economic growth which relates several variables to economic growth. In summary, The Solow model describes economic output as an equation determined by physical capital, labor, the depreciation of physical capital, and the savings rate of a population. More Modern versions of the model add even more variables into this equation including the education level of a workforce and the level of population growth.

An intuitive video series by explaining the Solow Model can be found here: https://www.youtube.com/watch?v=eVAS-t83Tx0&list=PL-uRhZ_p-BM6L_I3IHvE85NHooK2Ln9Rm

 

One can use the Solow model to find how remittances are related to other economic variables. I created the following two examples trying to fit remittances into the logic of the Solow Model

 

1)

The Solow model implies that the levels of economic growth in a country decreases with respect to time when holding all other variables constant. Assuming positive relationship between remittances and economic growth then allows the Solow model to imply that the value of remittances a country receives will also decrease with respect to time holding all other variables constant.

 

2)

The Solow model implies that smaller economies experience higher levels of economic growth than large economies when holding all other variables constant. Assuming the same positive relationship between remittances and growth then allows the Solow model to imply that smaller economies will receive more in remittances than large economies holding all other variables constant.

Back to the Original Article

 

Looking back to the original Times of India article, we can check if our ideas about remittances derived from growth models match data from the real world. When applying remittances to the Solow model one can predict that over time, countries will receive less money in remittances as a share of that country’s GDP. While the original article does note a decrease in remittances compared to previous years, this is because of factors not related to the countries receiving remittances but rather problems in the countries from which migrant workers send remittances. The original Times of India article also claims that World Bank projections show that South Asian countries will not see significant growth in remittances in the near future. This projection is not necessarily proof that applying remittances to the Solow growth model is correct, especially since the projection was based on factors outside of South Asia, but the World Bank’s projection does not contradict the idea that a developing country might receive less money in remittances over time.

 

Applying remittances to the Solow model also allows one to predict that the countries which receive the most remittances as a share of the country’s GDP should also be very small economies. The Times of India article confirms this prediction; data from the World Bank database reveals that none of the countries which receive the most money in remittances as a share of the country’s GDP have a GDP per capita higher than 5,000 dollars.

 

The original Times of India article predicts a decreased level of remittances in South Asia for next year. Given the evidence examined in this blog post, this may have a potential negative impact on economic growth, something which businesses, policy makers, economists, and other observers should note in the coming years.

Works Cited

 

Academic Articles and Textbooks:

Adams, Jeffrey and John Page. “Do international migration and remittances reduce poverty in developing countries?” World Development, vol. 33, no. 10, Oct. 2005, pp. 1645-1669. Science Direct.

 

Imai, Katsushi et al. “Remittances Growth and Poverty: New Evidence from Asian Countries.” Journal of Policy Modeling, vol 36, no. 3, June 2014, pp. 524-528. Science Direct.

 

Mankiw, Gregory. Macroeconomics. 8th ed., Worth Publishers. 2012.

 

Photographs/ Videos:

Construction workers queue for buses back to their accommodation camp in Doha, Qatar. 19 Nov. 2013. European Pressphoto Agency, Frankfurt. http://www.epa.eu/economy-business-and-finance-photos/sports-events-sports-organisations-soccer-human-rights-heatlh-at-work-construction-property-photos/foreign-laborers-work-in-doha-photos-51109917

 

“The Solow Model of Economic Growth.” Youtube Playlist, uploaded by Marginal Revolution University. 28 March 2016. https://www.youtube.com/watch?v=eVAS-t83Tx0&list=PL-uRhZ_p-BM6L_I3IHvE85NHooK2Ln9Rm

Websites:

“India tops global remittances at $62.7 billion in 2016: World Bank.” Times of India, 21 April 2017. http://timesofindia.indiatimes.com/business/india-business/india-tops-global-remittances-at-62-7-billion-in-2016-world-bank/articleshow/58302262.cms

 

“DataBank World Development Indicators.” The World Bank, 1 May 2017, http://databank.worldbank.org/data/reports.aspx?Code=NY.GDP.MKTP.KD.ZG&id=1ff4a498&report_name=Popular-Indicators&populartype=series&ispopular=y#

3 thoughts on “Remittances in South Asia and Development Economics”

  1. It is interesting to see that the countries that receive the highest amount of remittances are highly populated countries like India and China, yet the amount of remittances received in the past couple years has fallen. It was quite obvious to me that remittances could reduce poverty for many reasons, as the US dollar can go a long way in developing countries, yet I was surprised to learn that it can also account for growth in GDP. I am very interested to see how remittances factor into the growth of countries in the future.

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  2. I could easily see how the added factor of remittances to a countries economy could lead to a decrease in poverty. With relatives sending American dollars back to their families in developing countries, the exchange rate would bring the households income to increase dramatically, especially if they are below the poverty line. But with the increase in a households income coming from remittance, couldn’t this lead those households to be less productive? Knowing that their family member is sending them back money, this could lead to some to opt out the labor force and live off of the remittances. Do you think there is any evidence on this happening already, which could be the cause of a decrease in the countries economy?

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  3. It makes sense remittances can boost one country’s GDP, but I was surprised to see the percentage is higher than what I expected. A comment above mentioned it could discourage people from working and they may live off solely on remittances. I do not think that is a concern. Some families living in poverty send young men to bigger cities or even other countries to work, while women, children, and the elderly are left behind to take care family members and their farmland. In this case, women who are left behind would not have worked anyways, so they are not discouraged from participating in the labor market because of remittances.

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