By Sankalp Sharma
According to the new definition of IMF, Balance of Payments and International Investment Position Manual (BPM6) remittances consist of all current transfers in cash or in kind made or received by resident households to or from nonresident households. In a developing country, context remittance flows become all the more important since most people go out in search of work and employment. There are more than 230 million international migrants and over 700 million internal migrants in the world today according to the World Bank. The number of people impacted by migration via remittances, trade, investments, philanthropy, transfer of skills and technology is even larger. Remittances are now nearly three times the size of official development assistance (ODA) and larger than private debt and portfolio equity flows to developing countries. Remittance flows are only second to FDIs, thus making them the second largest source of external finance for countries today.
The recently released brief of the World Bank on October 2, 2013 has some very interesting points to ponder on. The bulk of remittances are to the developing countries, which will account for approximately 414 Billion USD compared to 550 Billion overall, in 2013.
Interestingly, Indias remittance flows are expected to be the highest in the world with remittances to the tune of 71 billion USD, followed by China which will have remittance flows of 60 billion USD in 2013. This accounts for roughly 3.7% of the Indias GDP, despite the high costs of sending across remittances to India. The increase in remittance to India can be attributed largely to the weakening rupee and the urge in Non Resident Indians (NRIs) to take advantage of cheaper goods back home.
In some countries, the remittance flows are very high as a percentage of GDP. The top 10 remittance destinations and the top 10 countries having the greatest remittance to GDP ratio are shown in graphs 1 and 2. Despite efforts to reduce remittance costs, these costs seemed to have stabilized at around 9% for sending across USD 200 to most parts of the world. The remittance flows have an interesting story to tell- as more migrants move abroad especially from the developing world for employment the flows are bound to increase. On the positive side this will enable global and regional connectedness and transfer of not just capital but ideas across the world. Remittance flows can also help in economic development in the long term if channeled properly.
Figure1
Source: World Bank (2013)
Figure 2
Source: World Bank (2013)
On the flip side this may lead to what economists call as the Dutch Disease Effect in the near term for economies, which have high remittance flows as a % of GDP. The Dutch Disease Effect implies that inflow of remittances may lead to an appreciation of the real exchange rate undermining the competitiveness of the traded-goods sector and, in particular, of manufacturing exports. At the present juncture, the positives seem to outweigh the negatives, with ever increasing remittance flows to host countries. Indias people will certainly take advantage of these ever increasing remittance flows but the countrys ailing manufacturing sector (with a % contribution to GDP roughly fixed at 15% since 1990) will have to become internationally competitive if it wants to see a reversal of trends in its growth rate in the long term.
Sankalp Sharma is Senior Researcher at the Institute for Competitiveness, India. He is the co-author of the State Competitiveness Report 2012 and 2013 and the India Competitiveness Report 2013. He has contributed to a number of articles on governance and economic policy in various magazines and online platforms. His upcoming publications include a paper on Urban Mobility in India to be published by the Rockefeller Foundation.