BUSINESS

Importance of remittances in the global economy

A spectacular growth in "invisible'' receipts (service exports) has been responsible for India's healthy current account position since the mid-1990s. And among invisible exports, it is remittances from Indians working abroad (not bank deposits in NRI accounts) which has contributed to the surplus in trade of "invisibles.'' Software exports get all the attention but it is remittances that make the larger contribution to India's trade in services. For instance, according to the latest Balance of Payments data of the Reserve Bank of India, remittances during April-December 2002 were $10.8 billion — nearly twice India's software export earnings of a net of $5.8 billion.

The importance of remittances to the economy is not unique to India. One chapter in a new World Bank study, Global Development Finance 2003, delineates the contribution of remittances to developing countries around the world. Although, considerable controls exist on the movement of labour compared to the liberalisation of national regulations on movement of goods and capital, remittances seem to do more for the developing countries than is commonly acknowledged.

In 2001, according to the GDF 2003 which drew on IMF statistics, remittance flows to the developing countries totalled $72 billion. This was the second largest source of external finance for the developing (low and middle-income) countries. These receipts exceeded aid and private loan finance. Only foreign direct investment was larger than remittance flows to the developing countries. Remittances were equivalent to 1.3 per cent of GDP of the developing world. But they were more important in the low-income developing countries, equivalent to 1.9 per cent of GDP in 2001. (According to latest RBI statistics, Indian private transfers — broadly equivalent to remittances — were equivalent to 2.5 per cent of GDP in 2001-02.)

India recorded the largest receipts ($10 billion) in 2001, followed by Mexico ($9.9 billion) and the Philippines ($8.4 billion). Other South Asian countries recording large receipts were Bangladesh ($2.5 billion), Pakistan ($1.5 billion) and Sri Lanka ($1.1 billion). But in terms of the weight of remittances in the domestic economy, it is obviously larger among the smaller economies. Remittances are equivalent to more than 35 per cent of the GDP of Lesotho!

The positive aspect of this kind of external finance is that it is more stable and is relatively more evenly distributed among the developing countries. Unlike loan capital, portfolio investment or FDI, which all dry up when economic conditions worsen in the host or receiving countries, remittances appear to maintain a steady flow during good and bad times. The GDF 2003 notes that during a boom in the countries where the expatriates work, remittances from the skilled professionals rise. And when conditions worsen in the home countries, the unskilled expatriate appears to send more money to support the family at home. Remittances also appear to be more evenly distributed. Nearly three-fourths of global FDI flows to the developing countries end up in just ten developing countries, the corresponding figure for remittance receipts among the ten largest recipients is a relatively more modest 60 per cent.

In spite of all these positive features, the medium and long-term prospects of continued and an ever-increasing flow of remittances to the developing countries do not look bright, though the World Bank report thinks otherwise. The migration that yields large remittances remains largely a South to North phenomenon and this is increasingly subject to restrictions. (Going by the hostility and accusations that swirl around the temporary migration from Bangladesh to India, the restrictions on South-South migration appear to be no less.) There are the fears of job losses and falling wages in the host countries (where the evidence is mixed according to the World Bank study). Then there is the resentment that migrants enjoy social security benefits without paying sufficient taxes. (Not true says the World Bank, the skilled professional may be paying more in the form of taxes than receiving benefits.)

Ever since the late 1980s, India has been trying to get first GATT and then the WTO to put in place rules and regulations that would permit the free flow of labour across national boundaries on temporary work. There was very little flexibility written into the Uruguay Round agreement of 1994. Now India is trying once again to expand the scope of WTO rules for movement of labour (referred to as Mode 4 arrangements in trade in services). It has asked for the creation of a special visa, called the GATS visa (after the General Agreement on Trade in Services), under which skilled and unskilled labour can travel abroad on specific assignments. In the context of domestic hostility in the developed countries to immigration, this proposal never had much of a chance. The imbalance with which global institutions saw movement in goods and capital and that of labour was always going to remain in place. After the terrorist attacks in the U.S. in 2001, hopes of a liberal even if temporary immigration regime in the advanced countries can be as good as given up.

CRR