Finance & Development, June 1980
Finance & Development
International Monetary Fund. External Relations Dept.
This paper highlights that in a shift of policy, the World Bank decided to finance directly health projects in developing countries. Under its old policy, formulated in 1974, health components providing basic health care for low-income individuals were incorporated into projects in other sectors, such as agriculture and rural development, urban development, and water supply and sewerage. Lending for such components will continue. After reviewing the World Bank's experience in financing health-related activities in 44 countries, the report recommends the adoption of a three-tier pyramidal structure for delivery of health services, adapted to local conditions.
Fund and Bank activity: Fund transactions; Bank loans and IDA credits; new sector paper on health
Views & comments: de Larosière on adjustment of national policies; William Clark on the World Bank’s work
Energy and the role of gasoline taxation: Can increased taxes help reduce consumption of gasoline? An assessment of seven industrial countries’ experience
Poverty and progress—choices for the developing world: Conclusions from recent Bank research, and a pragmatic approach to poverty alleviation
Is there a tradeoff between growth and basic needs?: Evidence from 83 developing countries indicates that policies to meet basic needs can aid growth
Adjustment to the changing international structure of production: Implications for national and international policy
Pegging to a currency basket in a world of floating rates: A method of deriving an “optimal basket,” based on relative price and exchange rate movementst
Bahrain’s offshore banking center: The impressive growth of this center and its effects on the region
Root crops: potential for food and energy: This relatively underutilized source of food and energy could assist rural development
Use of migrants’ remittances in labor-exporting countries: Comprehensive policies are needed to maximize the benefits of such remittances for growth and development
Exchange rate indicators: Six charts and a brief discussion of trends in major industrial countries
Uses of remittances: the evidence
Toward more productive use
Anand G. Chandavarkar
The implications of the large and growing numbers of skilled and unskilled labor migrating from the less developed countries to the industrial countries in Europe and North America and the oil producing countries in the Middle East have to date been studied largely in terms of their macroeconomic effects on growth, employment, and balance of payments (BOP) of the labor exporting and importing countries. For the labor exporting countries, the question is not only how best to maximize remittances but also, given their transitory character, how best to use these remittances so that they make an appropriate contribution to the growth of their economies.
Labor exporting countries have generally exhibited resourcefulness in designing policies to attract flows of remittances from their migrant workers, but they have given little attention to the utilization of these remittances, a crucial factor in determining their impact upon a country’s growth and development. This article will look at the policies which labor exporting countries have employed to attract remittances and will then give particular attention to the type and scope of measures needed to ensure their optimal use in domestic savings and investment. The article does not, however, attempt an evaluation of the costs and benefits of international migration for the countries of origin and the host countries.
For many developing countries, foreign remittances constitute a substantial proportion, and one of the fastest growing components, of foreign exchange earnings (see Tables 1 and 2). But the magnitude of foreign remittances is, if anything, understated in these figures. First, the figures cover only cash remittances through official channels. Several labor exporting countries (like India, Pakistan, and Somalia) permit merchandise remittances, including not only consumer durables but also capital goods such as commercial vehicles, tractors, and so on. Although there are no separate data on merchandise remittances, they are estimated to be fairly substantial (about 17 per cent of total migrants’ remittances to Pakistan). Second, in many countries cash remittances below specified limits (for example, 10,000 rupees and below in India) need not be reported. For these and other reasons there are unavoidable errors and omissions in the BOP data on private remittances.
… Indicate data are not available.
1 Fiscal year beginning July 1.
Table 2.Workers’ remittances and their share in relation to total export of goods in selected labor exporting countries
Remittances1
As per cent
of exports
Algeria 371 20 390 9 466 11 245 5
Greece 730 59 651 37 754 39 778 35
Morocco 249 27 356 21 533 35 548 43
Syrian Arab Republic 51 14 62 8 55 6 512 5
Tunisia 98 24 118 13 1462 17 135 17
Turkey 1,183 90 1,425 93 1,312 94 982 50
Yugoslavia 1,390 49 1,621 43 1,695 42 1,728 35
Source: This table has been adapted from Table 4 in Z. Ecevit and K. C. Zachariah, “International Labor Migration,” Finance & Development, December 1978, p. 36. The original table is based on IMF consolidated balance of payments statements and World Bank reports.
1 In current prices, in millions of U.S. dollars.
2 Estimated.
The easing of the traditional foreign exchange constraint on growth and development constitutes the primary economic rationale for the special incentives given by some countries to migrants’ remittances, such as the privilege of importing consumer goods. On the other hand, labor exporting countries may have to be equally vigilant to ensure that excessive incentives for migrants do not create the nucleus of a new, privileged class in these already highly stratified societies and generate resentment in the economically active nonmigrant population. Some countries have even raised the possibility of taxing the income of migrants. Affirmative action in support of relatively affluent groups does, after all, require very special justification, and there is, therefore, a delicate trade-off involved in this policy area between economic efficiency, equity, and expediency. But subject to this caveat, it is useful to examine the scope and limitations of measures to maximize remittances and to allocate them to the most productive uses within the labor exporting countries. The typical policy package, while comprising several common basic elements, has to be tailored to the specific requirements of each labor exporting country as well as to the institutional framework of the host country.
The remittances of migrants are subject to a variety of socioeconomic factors: the usually higher costs of settlement and living abroad; the need to keep a “nest egg” of savings abroad for emergency expenditure; the length of stay abroad; the ease of access to remittance facilities at the place of work; and even the educational level of migrants. For instance, Pakistani migrants’ remittances appear to be inversely related to their level of education—the more educated an emigrant is, the less he tends to remit home (Perwaiz, 1979). In the case of Turkish workers abroad, it was estimated that mean savings amounted to about 36 per cent, mean remittances to about 11 per cent of mean income abroad, and that nonbasic expenditure totaled about 10 per cent of earnings abroad (Paine, 1974). The portion of remittances made for family maintenance generally tends to be relatively stable, and consequently less responsive to incentives. It tends to decline sharply when migrants bring their immediate families over to live with them.
The fact that host countries usually have liberal policies for transfers abroad allows labor exporting countries to maximize remittances from their respective nationals. The question arises whether to make the repatriation of remittances compulsory, or whether to offer incentives. Some governments have required some nonresident nationals to repatriate a specified proportion of their earnings. The Philippines, for example, requires construction workers and seamen to remit 70 per cent of their earnings and other workers to send back 30 per cent. In other cases, returning workers are required to surrender part or all of their foreign exchange earnings. In general, however, labor exporting countries have largely relied on incentives rather than on controls to encourage remittances.
To some extent incentives to repatriate are also affected by the requirement in some countries that foreign assets be paid in by returning migrants. One option, of course, is to wholly exempt migrants from such requirements, as Egypt does. Another alternative is to permit returning emigrants, as in India, to use their foreign currency balances for imports of equipment for new industrial units or even for specified nonessential imports.
Given a congenial legal and political milieu, clearly the most important macroeconomic requisite for inducing remittances through official channels is a realistic unitary (single) rate of exchange for the currency of the labor exporting country. Remittances are notably sensitive to any indications of currency overvaluation and are prone to slow down in such cases, leading to widespread resort to unofficial channels to transfer funds. Such multiple currency practices are indeed contrary to the obligations of member countries of the International Monetary Fund and are, at best, purely temporary expedients. In any event it is difficult to monitor such special rates, which offer scope for leakages through declaration of other categories of receipts as remittances, and so on. Some countries, like Sudan and Turkey, which have had special rates for workers’ remittances, recently abolished them; others, such as Algeria and Morocco, still retain them.
Concomitantly, with realistic rates of exchange, convenient facilities for holding remittances in approved foreign currency accounts with banks in the countries of origin are another useful incentive that has been widely adopted for attracting migrants’ funds. For instance, in November 1975 India introduced a Foreign Currency (nonresident) Accounts Scheme, which allows both nonresident Indians, as well as persons of Indian origin resident abroad, to maintain pound sterling and U.S. dollar accounts in India in tax-free interest-bearing term deposits for periods ranging from 91 days to 61 months. These accounts, including accrued interest, are repatriable in the same designated foreign currency. Account-holders are, in addition, eligible for priority allotment of specified items, such as motor scooters and tractors. These accounts may also be used for investment in shares in the Unit Trust of India, and in specified industrial undertakings—with the option to repatriate a specified percentage of investment. Such accounts do pose problems particularly since the rates of interest have to be reasonably competitive with overseas rates on comparable assets. Such schemes have nonetheless evoked a satisfactory response.
On the whole, the macroeconomic policy framework in the labor exporting countries seems adequate to induce large flows of private remittances as an alternative to their being spent or saved abroad. Appropriate macroeconomic policies and measures are, however, necessary but not sufficient conditions for an optimal policy framework for remittances. Their ultimate net impact on the economies of the labor exporting countries depends on their utilization.
It is difficult to determine how revenues from remittances are used, largely because of the paucity of systematic empirical evidence. Clearly, positive and coherent policies need to be formulated to ensure the optimal use, sectoral and regional, of cash remittances. It is this area that presents a choice between consumption, saving, and investment; in the case of merchandise remittances their use in consumption (consumer goods) or in investment (commercial vehicles, tractors, and so on) is largely predetermined. The subsequent discussion, therefore, focuses on the desirable and feasible utilization of cash remittances.
The available empirical evidence on the utilization of remittances in some major labor exporting countries, like India, Pakistan, Portugal, Turkey, the Yemen Arab Republic, and Yugoslavia, is admittedly fragmentary. The data, nonetheless, are supportive of the assessment that while some of the remittances have been invested, the bulk have contributed little if anything to the long-term development potential of the respective countries. Some of the more salient features of the ways remittances are used in the aforementioned countries are reviewed below and may be regarded as typical of other labor exporting countries as well.
Yugoslavia’s experience, as the only socialist country which permits its nationals to work abroad, typifies some of the problems of directly investing private remittances where the scope for private investment (mostly in areas such as housing, trucks and taxis, tourist hotels and catering, and small-scale farming), is very limited because of official policy. The limited investment outlets were very quickly saturated; thus, for example, the very success of private road haulage led to restrictions on it in order to protect socialized transportation. While the investment of migrants’ remittances in small farms, especially in the plains, helped to improve their productivity, it also resulted in uneconomic overmechanization of farms, which are subject to a ceiling of ten hectares. It has therefore been argued that “only a change of the present policy which discouraged emigrant workers from investing their savings in economic activities” out side the range of permitted uses can widen the scope for productive investment (Baucic, 1972).
In Turkey, official attempts to channel migrants’ savings into investment in agriculture through special loans (for example, through the Halk Bank) and concessions for imported machinery are said to have been hampered by, among other things, the lack of management experience among returned migrants, as well as their reluctance to put savings into cooperatives or community projects (Paine, 1974). Financed by workers abroad, the Turkish Village Cooperatives Scheme was launched in 1963; it failed, however, largely because “it was not effectively integrated into a nationwide system of regional planning” (OECD, 1978). Nevertheless, Turkey, which was the first labor exporting country to try using migrants’ remittances for productive investment, seems to have been relatively more successful in channeling migrants’ savings into investment than other labor exporting countries (see Table 3). According to one estimate, emigrant workers form nearly half the number of stockholders in over 200 ventures set up with the help of state economic enterprises, trade unions, the Halk Bank, and Desiyab (Industrial and Workers’ Investment Bank).
Source: Interviews by N. Abadan, cited by Bernard Kayser, Cyclically-Determined Homeward Flows of Migrant Workers. OECD, Paris, 1972, p. 43.
Interestingly, in Portugal, while remittances have stimulated the banking habit under the impetus of fierce competition between banking networks, there is no evidence of investment in industry, trade, or services. However, these savings accounts with the banks are soon withdrawn to finance consumer purchases. As one survey showed, about 38 per cent of migrants’ remittances was spent on land and housing; 32 per cent on consumer items, including appliances; and 24 per cent on education (Kayser, 1972).
Historically, the Yemen Arab Republic has one of the longest traditions of migration among developing countries. Likewise migrants’ remittances account for a much larger share of foreign exchange earnings and of the national economy than in other labor exporting countries. Because of limited rural investment outlets, the bulk of remitted capital seems to have been invested in urban real estate in the cities of Taiz and Sanaa, and in commercial agencies, known as wakils, especially established to assist migrants, and in retail marketing, and road transport. But even these investments are mostly on an individual or family basis. Joint stock enterprises are virtually unknown and large-scale private investment is apparently difficult to undertake. The reliance on remittance incomes in the rural areas and on cheap imported grain has actually resulted in a decline of agricultural production. “Thus, Yemen has drifted… from the economic independence she once enjoyed and is now committed to exchanging her manpower for consumer goods and foods in an economic climate of rampant inflation” (see Swan-son, 1979).
One of the very few systematic published studies on the utilization of overseas remittances in South Asia was undertaken in India by the Commerce Research Bureau (Commerce, 1978). It is based on a sample survey of 402 emigrant households in the Malabar subregion of Kerala, which is believed to be the largest single recipient of overseas remittances among Indian states. This survey revealed that about 60 per cent of the emigrants were in debt and unemployed at the time of migration. Once the debt commitments, including fees and levies paid to migration agents and sponsors, were liquidated and the requirements of current consumption met, the assets most preferred by emigrant households were land, buildings, and jewelry. Consequently, land prices in the region doubled or even tripled. On the other hand, investment in shares and securities was reported to be almost nil. Although the survey showed that most remittances had not been used “for productive purposes,” it also noted that a poor region takes time to step up its marginal propensity to save. Even so, it is significant that a backward district (Malappuram) recorded a fourfold increase in bank deposits in the six years ended June 1976. Such experiences aptly exemplify the role of remittances in promoting the banking habit and thereby enlarging the sphere of institutional finance.
A study of migrants’ remittances into Pakistan—based on a five-year survey of the local press and interviews with emigrants, overseas employment promoters, and migration experts—found that the Pakistani emigrant typically consumed about 40 per cent of his income abroad leaving the balance for savings abroad or remittances home (Perwaiz, 1979). Most of the cash remittances, however, were reported to have been “frittered away in personal consumption, social ceremonies, real estate and price escalating trading” and likewise the merchandise remittances comprised mostly “status-oriented consumer goods.”
In evaluating the impact of remittances on domestic savings and investment in labor exporting countries, it is important to guard against the fallacy of treating all “consumption” as necessarily unproductive. Although family maintenance (including housing and education) represents consumption, this does not make it any the less desirable than “investment” in low-income countries. To the extent that it improves the health and efficiency of the recipients, it is productive in the same way as investment in physical capital. Since a considerable proportion of migrants originate in depressed areas with high unemployment, low per capita incomes, and heavy indebtedness, the use of remittances in essential consumption will be seen to be eminently in consonance with the current “basic needs approach” to development.
Also, considering the generally low-import content and high-labor content of housing, the domestic multiplier effects of housing expenditure on growth and employment may be substantial in most less developed countries.
It is, therefore, essential to envisage and implement an integrated policy package covering the entire “migratory chain,” that is, the process of migration, its overall socioeconomic effects, and the optimal allocation of remittances in decentralized employment-generating projects. The latter can be predicated only on the basis of at least some indicative regional and sectoral planning with appropriate institutions and incentives.
There are a number of possible lines of action within such a framework. First and foremost, given the lack of financial and managerial skills and know-how of many of the migrant households, the creation of a specialized institution, or of specialized units within existing banks, is imperative. A variety of proposals have been mooted: in India, for example, to start a multipurpose Kerala International Development Bank to mobilize savings from remittances, underwrite the issue of shares, provide consultancy services for emigrant entrepreneurs, and to issue special bonds in the Gulf countries for specific projects in Kerala; and in Pakistan to create an Overseas Investment and Management Corporation, Emigrants’ Foundation, and an Emigrants’ Welfare Fund. Similarly, given the transitoriness of remittances, it is important to ensure that they are utilized to inculcate an enduring savings psychology among the recipients. This can be achieved through the creation of contractual savings schemes like provident fund schemes and annuities for the rural and self-employed sectors and through the linkages of savings to credit facilities in rural post office and savings banks. All such measures, however, are contingent, among others, on an adequate spread of banking facilities in rural areas, concomitantly with the development of an appropriate intermediate financial technology in the labor exporting countries. To be successful, institutional banking will have to adapt lending procedures to the viability of projects rather than to the availability of collateral. Likewise, conscious measures, such as advantageous interest rates in rural areas (as in India and Bangladesh), are necessary to redress the traditional urban bias of the financial system in developing countries, which otherwise leads to the habitual leakage of rural savings into urban credit.
To conclude, labor exporting countries need to supplement their macroeconomic policies to maximize migrants’ remittances by policies to ensure their optimal use in enlarging their income and employment potential.