India Receives World's Largest Remittance Flows

Remittances – money sent home by immigrant workers abroad – are hugely beneficial to many countries across the world.

India is the world’s top receiver of remittances. Flows into the country have grown dramatically in recent years, touching US$ 17.4 billion in 2003, up from some US$2 billion a year in the late 1980s.

Funds repatriated home by workers exemplify the principle of self – help. But, can these flows be used more productively?

Compiling the contributions of some 20 experts from different disciplines, Remittances: Development Impact and Future Prospects, edited by Samuel Munzele Maimbo and Dilip Ratha, discusses recent trends in remittance flows, and examines the key challenges countries face in harnessing these flows for development.  Clearly, more needs to be done. >>>get the book

Remittances: An Economic Force

Remittances by international migrants to their home countries have grown dramatically in recent years. They are now the largest source of external finance for developing nations after foreign direct investment (FDI), even exceeding FDI in some. In others, they are greater than official development aid.

In 2004, migrant workers’ remittances were estimated at US$182 billion. Of this, developing countries received an estimated US$ 126 billion, up by nearly 48.7 percent from 2001.

Although measures to curb money laundering and terrorist financing have brought more transfers into the official fold, actual amounts remain much larger than officially recorded figures as informal remittance systems such as hawala elude data collection.

India is the world’s top receiver of remittances. Growth in money sent home by its migrant workers has been dramatic in recent years, touching US$ 17.4 billion in 2003, up from almost US$14 billion in 2002, and over US$ 11 billion in 2001.

Remittances are one of the most visible - and beneficial - outcomes of global migration which has risen markedly in recent years due to persistent income inequalities between nations. The United Nations estimates that about 175 million people, or roughly 3 percent of the world’s population, lived and worked outside the country of their birth in 2000, up from 120 million in 1990.

In the oil exporting Persian Gulf states, foreign workers continue to represent more than half the labor force. In Saudi Arabia, expatriate workers account for 70 percent of the work force.

Unlike other capital flows, remittances are stable and directly benefit the poor. In the wake of the Asian financial crisis in the late 1990s, remittances to developing countries continued to rise even though FDI and official aid flows declined.

With migration set to rise in the coming years as a result of globalization, remittances can be expected to grow steadily well into the foreseeable future. Therefore, both remitting and recipient countries are considering the long-term economic implications of these transfers.

India and China compared

Interestingly, India and China, the two countries with the largest global migrations, report substantial differences in remittance figures.

While remittances into China were about one-eighth those to India between 1992 and 2001, foreign direct investment from overseas Chinese communities was ten to twenty times more than FDI from the Indian diaspora.

However, after combining remittances and FDI, and taking into account assumptions regarding the round tripping of domestic Chinese funds that are brought back to the country legally or illegally, inflows from overseas Chinese were two to four times greater than those from overseas Indian communities.

Building houses or boosting growth?

Workers’ remittances undoubtedly help ease poverty and improve living standards in their home countries by enabling better health care, nutrition, housing, and education. In many communities, however, the money is often put to unproductive uses such as buying land and building houses.

Citing the example of District Jalandhar in India and District Mirpur across the border in Pakistan, both with large numbers of migrants in the United Kingdom, Roger Ballard notes that remittances contributed to sharp increases in agricultural production – a green revolution - in India by enabling farmers to purchase tractors and machinery.

In Mirpur, on the other hand, despite the area’s agricultural potential and larger inflows of remittances, these funds spurred a housing construction boom. While most houses were kept locked by their overseas owners, agricultural production wasted away, leaving the young with few other options than to follow suit and migrate too.

While remittances are not public funds, and decisions about spending must be left to remitters and recipients, unproductive expenditures stem mostly from a lack of other investment opportunities. Good policies and public infrastructure in major recipient countries are therefore essential to encourage the proper investment of these funds.

The report discusses how such downward spirals might be brought to a halt, and better still, reversed, through a variety of carefully tailored “smart aid” initiatives that can kick-start the productive potential of local economies in areas where high levels of migration have taken place.

This applies to all parts of the developing world which are witness to chronic deceleration of growth in rural areas as a result of large-scale migration to urban centers. 

Helping families to start small businesses

Micro-enterprises have recently been recognized as an important tool for alleviating poverty. In most impoverished societies, however, credit for tiny self-owned rural and urban ventures is hard to come by. 

As many workers repatriate small amounts to sustain families back home, can these funds be used to provide micro-credit for productive enterprises?
 
In one chapter, Abul Kalam Azad, reviews the efforts of several countries in channeling remittance flows for this purpose. In Mexico, for example, the so-called Home Town Associations and other self-help groups are responsible for almost 20 percent of the capital invested in micro-enterprise in the country’s urban centers.

Using these case studies, the report explores the possibility of using migrants’ remittances for micro-enterprise development in Bangladesh. It suggests options for pooling and redirecting individual remittances for the development of the country, taking into account the fact that Bangladeshi migrants are mostly risk-averse semi-skilled or unskilled workers with low earnings, many of whom continue to transfer funds through informal channels despite the government’s efforts to facilitate the use of banking channels.

Striking a balance between transparency and access

Despite the growth of formal transfer mechanisms, substantial volumes of global remittances continue to flow through informal, and sometimes underground, channels outside the purview of government supervision and regulation.

Using rudimentary technologies, millions of dollars are transferred through informal channels, riding the social capital of ethnic groups, and relying on trust. These channels owe their existence to the inefficiencies in the formal system as informal agents are cheaper, work longer hours, and operate in remote areas.

Tighter controls have been imposed on informal transfer systems after September 11, 2001, to check the possibility of abuse. However, a balance needs to be struck between curbing money laundering, terrorist financing, and general financial abuse on the one hand, and facilitating the flow of funds between hard working migrants and their families back home on the other. The bulk of remittances are sent by migrants to support their families, and unreasonable and arbitrary scrutiny may result in higher costs and delays that could jeopardize the survival of families back home.