The importance of remittances
The increasing attention paid to the question of migrant remittances comes from the realisation of the important role they play in poverty alleviation and, circumstances permitting, economic development more broadly. The former is most obvious in the way the circumstances of individuals are directly transformed; the latter operates via a collective response much dependent on the existence of institutions that can leverage remittances to create true ‘development finance’.
Individual poverty alleviation
Remittance payments directly alleviate the poverty of the individuals and households to whom they are sent. Forming a relatively stable source of income independent of the (often dire) local economy of recipient families, remittances offer a lifeline to millions in the most vulnerable groups across the developing world. Moreover—and unlike other financial flows to developing countries that stream through government agencies and non-governmental organisations (NGOs)—remittance payments are targeted precisely to the needs and desires of their receivers. It is not aid agencies or governments that decide when, where or why remittance incomes are spent, but the recipients themselves.
As with other ‘novel’ devices of promise in the field of economic development (micro-finance and civil-society promotion being other examples), relatively little in the way of empirical work has been undertaken on the impact of remittances on poverty alleviation. The empirical work that has been done, however, supports the positive picture painted above and in the countless anecdotes that dominate the literature. For instance, a 71-country study undertaken by Adams and Page (2005:1646) concluded that remittances ‘reduce the level, depth, and severity of poverty’ of receivers and their communities. Likewise, Ratha (2005) found that remittance flows lowered the proportion of people living in absolute poverty in Uganda, Bangladesh and Ghana by 11, 6 and 5 per cent, respectively. Gupta et al. (2007) find that a 10 per cent increase in a country’s remittances-to-GDP ratio corresponds with a fall in the percentage of people living on less than $US1 a day of just more than 1 per cent. The World Bank (2003), the OECD’s Financial Action Task Force (2005) and Spatafora (2005) also find reductions in absolute poverty among remittance receivers. Meanwhile, studies such as López-Córdova (2005) and Hildebrandt and McKenzie (2005) find positive associations between remittances and poverty-reduction ‘proxies’ such as lower infant mortality and higher birth rates.[1]
The ways in which remittances alleviate the poverty of individuals are, in the ‘first round’ of effects, direct and fairly obvious. They include the following.
‘Survivalist’ income supplementation. For many recipients, remittances provide food security, shelter, clothing and other basic needs.
Consumption ‘smoothing’. Many recipients of remittances, especially in rural areas, have highly variable incomes. Remittances allow better matching of incomes and spending, the misalignment of which otherwise threatens survival and/or the taking on of debt.
Education. In many developing countries, education is expensive at all levels, whatever the formal commitments of the State. Remittances can allow for the payment of school fees and can provide the wherewithal for children to attend school rather than working for family survival.[2]
Housing. The use of remittances for the construction, upgrading and repair of houses is prominent in many widely different circumstances.
Health. Remittances can be employed to access preventive and ameliorative health care. As with education, affordable health care is often unavailable in many remittance-recipient countries.
Debt. Being in thrall to moneylenders is an all-too-common experience for many in the developing world. Remittances provide for the repayment of debts and for the means to avoid the taking on of debt by providing alternative income and asset streams.
Social spending. Day-to-day needs include various ‘social’ expenditures that are culturally unavoidable. Remittances can be employed to meet marriage expenses and religious obligations and, less happily but even more unavoidable, funeral and related costs.
Consumer goods. Remittances allow for the purchase of consumer goods, from the most humble and labour saving, to those that entertain and make for a richer life.
http://www.fao.org/3/ak405e/ak405e.pdf
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