Remittances’ Impact on the Labor Supply B

Remittances’ Impact on the Labor Supply  B
Remittances’ Impact on the Labor Supply
and on the Deficit of Current Account
Dietmar Meyer and Adela Shera
Working Paper No. 97
February 2015
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Remittances’ Impact on the Labor Supply and on the Deficit of Current
Account
Dietmar MEYER – Adela SHERA
Abstract
Remittances as one of the main benefits of international migration have a great and important
impact on the countries of origins and make migration a topic of special interest for many
researchers. Workers’ remittances represent an important financial flows and a major source of
private external finance for many developing countries, which they receive them in large
quantity. For many economies, remittances represent a sizable and stable source of funds that
sometimes exceed official aid or financial inflows from foreign direct investment. One substantial
drawback of remittances is that it means developing economies lose their best, most skilled
young workers. It can lead to a situation where so many adults have migrated to a richer country;
children are being brought up by grandparents. This has both an economic and social cost. The
economy loses because young workers are not available; society loses out by the displacement
effect of young adults not being there. On the other hand, people wouldn’t undertake the
upheaval of moving to other countries, if they didn’t think their families would benefit and the
country benefits too. The free movement of labor enables greater opportunities for people in
developing economies and also helps developing economies gain important foreign currency
revenue. Developed countries benefit from a more elastic supply of labor, enabling greater labor
market flexibility. Remittances may increase consumption and enhance investments and have a
significant impact to finance economic growth in receiving economies. In particular, migrants’
transfers of funds, being inflows of foreign currencies that can be used to repay foreign debt, are
less volatile compared to other financial flows. For some countries money sent back in the form
of remittances from migrant workers are mostly used for consumption and investments and
comprise a substantial portion of GDP and their balance of payments. This paper examines the
impact of remittances as an income source to finance the balance of payment deficit. First, it
documents the increasing share of remittances relative to other foreign capital flows to Albania
and Southeast countries, distribution of remittance inflows across countries. This is followed by
some analysis of the potential benefits and costs of remittances in recipient countries. The paper
drawing on the case of Albania, Serbia, Bosnia Herzegovina, Moldova, Bulgaria, Romania and
Republic of Macedonia, the paper shows the positive impact that rising remittances can have on
the improvement of current account balance. Finally, also examines the role of remittances in
funding decreasing Albanian National Debt.
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Workers’ remittances to Albania are nevertheless an important financial flow—with perhaps,
significant developmental effects. Albania earns a large amount of worker’s remittances which
since 1992 they have grown rapidly. It is well known that they represent the second largest inflow
of incomes, are less costly and increased mostly consumption level. Our results point the positive
impact of remittances in financing the deficit of the balance of payments and are a stable source
of incomes.
Keywords: Workers ‘remittances; international migration; deficit of current account; national
debt
JEL: F 24, F 22, H 63, C 01
2
1. Introduction
International migration is an international and very wide spread phenomenon, which has complex
and very significant effects for the origin and destination countries and is very important for the
transition process for the developing countries. During the years of migration individuals and
families have changed the way of life and thinking, also their economic, social and cultural
conditions have changed and been improving during the years. Migration increases the size of the
overall economy and the demand for labor, improvement of the living standards and the
development of the country. One of the main positive consequences of migration are remittances,
which represents an important source of incomes in the country of origin and have a great
significant impact on the household livelihood, lead to higher consumption, better access to the
goods and services market and the possibility of accumulating assets and investment. The reasons
that people migrate are various such as; economic factors, public security, weak institutions,
education possibilities etc. Economic condition and factors are the main reasons that have pushed
individuals to migrate such as; lack of employment possibilities and difficult living conditions.
One of the main and most important causes of migration is the high rate of unemployment in the
country of origin. Leaving the country for many people has been very difficult and painful
because they have left behind their families and beloved familiars. Also the origin country have
lost their labor force or we can say “selling” their labor forces to the most developed countries
which has generated incomes – remittances, which are a growing and relatively market based on
external source of incomes. Several data shows that developing countries has faced the cost of
losing their labor forces but in the same time; lower labor supply has lowered the unemployment
rate in the country of origin and generated incomes (remittances).
Remittance flows, funds received from migrants working abroad, are enormously important as a
source of income in many developing countries (Giuliano and Ruiz-Arranz, 2005; Mundaca,
2005). Remittances for many families in the country of origin are seen as a mean of surviving but
also they serve as an international redistribution of incomes. These transfers act as the
international mechanism of social protection based on private transfers. The sustainability of
remittances for many developing countries such as Albania and other southeast European
countries is very important because they represent one of the main sources of incomes and also
they depend on various factors such as migration pressures in the sending countries and the
evolution of migration policies in advanced economies.
Remittances are relatively concentrated in a group of developing countries: the top 20 countries
receiving worker remittances capture around 80 per cent of the total worker remittances to the
developing world. In terms of value, the three main recipient countries are India, Mexico and the
Philippines, while the three main source countries are the US, Saudi Arabia and Germany. Inflow
of remittances affects economic growth positively by reducing current account deficit, improving
the balance of payment position and reducing dependence on external borrowing (Iqbal and Sttar,
2005). Very important are the effects that remittances have on the overall economy specifically
3
on the macroeconomic variables such as consumption, investment, economic growth and balance
of payments. Inflows of remittances increase the economic growth and reduce the poverty by
stimulating the income of the recipient country, reducing credit constraints, accelerating
investment, enhancing human development through financing better education and health [Calaro
(2008); Jongwanich (2007); Stark and Lucas (1988); Taylor (1992); Faini (2002); Gupta et
al.(2009)]. However Chami et al (2003) find that remittances have negative impacts on economic
growth of recipient country because a significant flow of remittances reduce labor force
participation and work efforts which lowers output. The indirect impact of remittances on
unemployment through aggregate demand is more complex. It is obvious that remittances
increase disposable income, and as result, directly or indirectly, is influenced positively over
macroeconomic variables like consumption, investment and GDP and which finally decrease
unemployment. In this paper, we try to analyze the effect that remittances have on the economy
and also their impact in the current account balance and help in financing the national debt
deficit.
2. Review of Literature
Many analysts have studied and examined the economic effects of remittances and has given a
growing body of literature in recent years (Ozden and Schiff 2005). These studies serve to
underscore the increasing importance of remittances provided by migrant workers from
developing countries working in other countries. For instance, Ratha (2003) emphasizes the
growing importance of remittances as a source of external funds for developing countries. The
empirical evidence on the effect of remittances on economic growth, poverty, and income
inequality has shown mixed results. For instance, Chami et al. (2003), covering 113 countries
found that remittances had a negative effect on growth. The authors of the study attribute this
negative effect on the moral hazard problem that remittances create. Essentially, the study
concluded that income from remittances allows receiving families to decrease their own work and
productivity, which then translates into a reduction in the labor supply for the developing
country.
In a study conducted by IMF (2005) about the impact of remittances on growth over an extended
period (1970-2003) for 101 developing countries found no statistical link between remittances
and per capita output growth, or between remittances and other variables such as education or
investment rates. However, this inconclusive result attributed to measurement difficulties arising
from the fact that remittances may behave countercyclical with respect to growth. Faini (2002)
and Ang (2007) found that the impact of remittances on growth is positive. Faini (2002) argues
that remittances overcome capital market imperfections and allow migrant households to
accumulate positive assets. Ang (2007) shows the relationship between workers’ remittances and
economic growth at the national and at the regional levels in the case of Philippines. He found
that at the national level remittances do influence economic growth positively and significantly.
4
When he broke down his analysis at the regional level to confirm the national results, he found
that mixed results giving rise to his anecdotal observations that remittance do not positively affect
economic growth. In sum, he concludes that remittances have to be translated to value-added
activities and investments which are more foundational sources of development and growth.
Glytsos (2005) using data for 1969-1998 for Egypt, Greece, Jordan, Morocco, and Portugal
shows that the impact of remittances on output varies over time and across countries. For Egypt,
Jordan, and Morocco the growth-generating capacity of rising remittances characteristic is
smaller than the growth-destroying capacity of falling remittances. Therefore the large
fluctuations in the real value of remittances contribute to large fluctuations of output growth and
cause instability in the economies concerned.
Giuliano and Ruiz-Arranz (2005) gathered a sample of 73 countries during the 1975–2002
periods, and then calculated five-year averages for all variables used in their study to smooth out
cyclical variations. Again, remittances were defined as the sum of workers’ remittances,
employee compensation, and migrant transfers. This study conducted OLS as well as fixedeffects panel estimates, and through a system generalized method of moments (SGMM)
procedure used internal instruments to account for possible endogeneity. The study’s basic
specification regressed per capita GDP growth on the total remittances–to–GDP ratio,
conditioning on the initial level of GDP per capita, the investment rate, population growth, the
fiscal balance as a percentage of GDP, years of education, a measure of openness, and inflation.
This specification did not find total remittances to be significantly related to growth. However,
the authors also explored possible interactions between the total remittances–to–GDP ratio and
financial deepening, as a way of testing whether remittances might enhance growth by relaxing
credit constraints. Indeed, the authors found significant negative interaction terms and interpreted
these results as indicative of the credit constraint hypothesis; total remittances appeared to have
positive effects on growth only in countries with small financial sectors where presumably credit
constraints would be more pervasive.
Another study, by Catrinescu and others (2006), incorporated institutional variables into the
analysis, which covered 114 countries during the 1991–2003 period. Catrinescu and colleagues
conducted OLS cross-sectional and various static and dynamic panel regressions of per capita
GDP growth on the (log of) total remittances–to–GDP, controlling for initial GDP per capita,
ratios of gross capital formation and net private capital inflows to GDP, and such institutional
variables as the United Nations Human Development Index, six governance indicators as in
Kaufmann, Kraay, and Mastruzzi (2003), and risk ratings from the International Country Risk
Guide (ICRG). Overall, their study found a robust positive relationship between growth and gross
capital formation, as well as between growth and some of the institutional variables. The study
also found some evidence of a positive relation- ship between growth and total remittances,
although this relationship was not very robust and, as the authors acknowledge, relatively mild.
These instruments reflect the idea that income in the host country appears to be a key driver of
remittances. The inverse of the distance between the migrants’ destination country and the
5
remittance-receiving country was also used in place of migration shares in the migration
instruments described above to form “distance” instruments. The growth regressions found a
consistently positive relationship between the total remittances–to– GDP ratio and GDP growth,
both when investment was included and when it was excluded from the estimations. When
investment was excluded, however, the coefficients lost their significance. The authors also
calculated the contribution of total remittances to growth rates and found that it was small.
In case of Albania, a number of studies have been undertaken at micro as well as macro level that
directly or indirectly focused on the impact of remittances on growth (Burney, 1987; Arif, 1999;
Adams,1998; Malik et al,1993; Nishatet al,1993; Burki,1991; Kozel and Alderman,1990;
Amjad,1986; Nishat and Bilgrami,1991). The general conclusion of these studies suggest that
remittances have positive effects on economy of Albania in terms of aggregate consumption,
investment, reduction in current account deficit, external debt burden and improve
education/skills of the households. Furthermore, labor migration is considered to be a useful
source of foreign exchange earnings (Naseem, 2004). Siddidui and Kemal (2006) explored the
Impact of decline in remittances on welfare and poverty in Albania. This massive inflow of
remittances contributes in reducing current account deficit, increasing foreign exchange reserves,
stabilizing exchange rate and reducing poverty. Remittances can increase consumption or
stimulate investments in economies with liquidity constraints (Reilly and Castaldo, 2007;
Woodruff and Zenteno, 2001). One of the first studies that examined the consequences of
remittances on home countries is Funkhouser (1992), who finds that in Nicaragua that
remittances increase self-employment for men and reduce the labor supply of women. However,
from a development perspective, a decline in the labor supply in the recipient families should not
necessarily be viewed as a negative effect. For instance, women in remittance receiving
households may carry out both parenting and home production activities (Acosta, 2006). Since
remittance inflows are simple income transfers, recipient households may rationally substitute
unearned remittance income for labor income. Regardless of their intended use, remittance
transfers may be subject to moral hazard problems (Chami et al., 2003). These problems may
induce recipients to divert resources to the consumption of leisure, thereby reducing their labor
market effort. There are cases in which members of remittance-receiving families reduce their
labor market participation in Pakistan (Kozelt and Alderman, 1990) and in Caribbean Basin cities
(Itzigsohn, 1995) The impact of remittances on the decision to work has been examined by
Rodriguez and Tiongson (2001) in Manila. Without accounting for the endogeneity of
remittances with respect to labor supply, they conclude that remittances reduce employment.
Using household survey data from Moldova, Görlich et al. (2007) examine labor market
inactivity by considering three potential explanations: a “disincentive effect” in which leisure is
considered a normal good and non-labor income raises the reservation wage of a potential
worker; a labor substitution effect, in which people in remittance-receiving households allocate
more time to household production than their counterparts in the non-remittance-receiving
households; an education effect, in which migration provides incentives for additional education
and remittances are used to invest in the education of those remaining at home.
6
There are few empirical studies of the relationship between remittances and labor market issues
in Albania. Konica and Filer (2009), using Albanian Living Standards Measurement Survey
(LSMS) for 1996, suggest that remittances have a negative effect on female labor market
participation due to higher income from abroad. This finding is consistent with studies conducted
in other countries. In the Albanian case however, Konica and Filer (2009) find that neither the
existence of emigrants in the household nor the amount of remittances received has an effect
onlabor force participation of Albanian males. Using data from the 2005 Albanian LSMS Kilic et
al. (2007) measure the impact of past migration experience of Albanian households on non-farm
business ownership through instrumental variables regression techniques. These results indicate
that households’ past migration experience exerts a positive impact on the probability of owning
a non-farm business. Using the same dataset, Dermendzhieva (2009) investigates the effect of
migration and remittances on labor supply in Albania. A linear probability model is estimated for
the probability of a household member to be working on the subsamples of male and female
household members separately. Only after using the instrumental variable, Dermendzhieva
(2009) obtains large and negative coefficients for receiving remittances for females and older
males.To date the studies on Albania have focused mainly on the decision to work and have not
considered that remittances may change the hours worked or the type of work performed in the
receiving economy, without altering employment rates. Hence, by focusing on work performance
a clearer picture of the allocation of labor supply across different types of employment can be
established.
3. Macroeconomic Effect of Remittances
According to many studies remittances have huge macroeconomic impact on the economy.
Different studies states and has created debates whether remittances has a positive, negative or
any effect in macroeconomic growth. But there are seen three main consequences of remittances:
Firstly,different studies state that remittances may cause a similar situation to the Dutch disease.
Acosta and Lartey found that whether altruistically motivated or otherwise, an increase in
remittances flows leads to a decline in labor supply and an increase in consumption demand.
Secondly, Chami, Fullenkamp and Jahjahha would reduce the incentive of people to work
(decreasing the labor supply), by creating a moral hazard problem and this would reduce the
productivity of the country, giving negative effect in developing growth (Chami, Fullenkamp and
Jahjahha, 2005).
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Thirdly,remittances are used mostly for consumption and not for investments. A possibility has
been pointed out that if the remittances be used as just consumption rather than investment,
growth would
not be gained (Ghosh, 2006). However, against the conclusion of Chami, Fullenkamp and
Jahjahha (2005), Mansoor and Quillin have stated that the remittances appear to have a positive
and statistically significant impact on growth (Mansoor and Quillin, 2006).
Table 1: Pros and Cons of Remittances
Pros:
Financing external deficits
Potential sources of saving and investment
Facilitating investment in education
Raising Standard of Living recipients
reducing poverty
Reducing Poverty
Cons:
Easing pressure on government to implement reforms for
reducing external imbalances
Carriers of economic shocks, especially when a country is
heavily dependent
Reduce labor efforts of recipient families
Decrease of labor forces and negatively depending on economic
growth
Increase Inequality
Source: (www.iom.int)
In the case of wage remittances, they contribute to family consumption, they contribute to
elevating the standard of living and welfare of receiving homes, and at the same time have an
effect on the dynamics of economic inequality and the conditions of poverty. As for capital
remittances, macroeconomics shows that they contribute to the savings-investment balance. As a
source of investment, we can consider productive remittances as an instrument of economic
growth which, together with other investment funds (foreign direct investment, private domestic
investment, public investment, etc.), forms the basis of any development process.Indeed, we
cannot confuse this impact of capital remittances on economic growth with a hypothetical impact
on the welfare of the population and/or reduction of poverty, which is associated more with wage
remittances. Thus emigration and remittances are seen as a consequence of underdevelopment,
not as a manifestation of the global economy that integrates and subordinates these emigrating
regions into the global and postindustrial economy. Moreover, emigration and remittances are
also seen as an opportunity for these underdeveloped economies, as a resource that, if wellmanaged, would allow them to overcome the structural conditions or precariousness, poverty and
inequality that led to labor emigration.
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Table 2: Benefits and costs of remittances from international worker migration
Benefits
Ease foreign exchange constraints and
balance of payments
Permit imports of capital goods and raw
for industrial development
Costs
improve
materials
Are potential source of savings and investment for
capital formation and development
Net addition to resources
Raise the immediate standard of living of recipients
Improve income distribution
migrate)
(if poorer/less skilled
Are unpredictable
Are spent on consumer goods which increases
demand, increases inflation and pushes up wage
levels.
Result in little or no investment in capital generating
activities
High import content of consumer demand increases
dependency on imports and exacerbates BOP
problems
Replace other sources of income, thereby increasing
dependency, eroding
good work habits and
heightening potential negative effects of return
migration
Are spent on 'unproductive' or 'personal' investment
(e.g. real state, housing)
Create envy and resentment and induce consumption
spending among non-migrants
Source: Russell, Sharon Stanton. (1986) "Remittances from International Migration: A Review in Perspective" World
Development 14:6: 677-696.
Remittances are a fraction of the wages and remunerations of the migrant labor force inthose
global markets. They are a part of the pay that migrant labor receives, which has the same
macroeconomic function as any other wage: the reproduction of the labor force. For the country
of origin they represent a loss in their active labor forces but in the other hand it means a
reduction in the unemployment rate. Remittances are undoubtedly a wage fund; this is their
significance and function as a macroeconomic variable. But for the country of destination it will
be a higher labor supply in the labor market. They are not only a part of the process of the
transnational reproduction of the migrant labor force but also of the structural conditions of the
social exclusion and labor precariousness faced by this labor force.
4. Remittances as an income source to finance the balance of payment deficit
As noted, remittances constitute a voluntary and unilateral transfer of resources to the receiving
country, and as such appear in the current account of the balance of payments, and national
accounts Remittances can be expected to cause a widening of the external trade account deficit
(including services as travel), or a narrowing of the current account surplus. As remittances
increase purchasing power in the receiving country they augment domestic demand. BouhgaHagbe found in their analyses, that “remittances almost cover the trade deficit and have
9
contributed to the recent surpluses of the external current account, as well as the overall BOP.
The BOP surpluses have contributed to the strengthening of Morocco’s external position through
the accumulation of reserves, which now cover the external public debt (Bouhga-Hagbe, 2004,
p.10). A related phenomenon, resulting in positive flows, is the nostalgic expenditure of
emigrants described by Orozco. This expenditure includes emigrant travel to the home country
and consumption of home goods that increase exports from the home country. Overall, the effect
of the remittances plus the expenditure of emigrants on the receiving country’s balance of
payments in a first round will be positively offset by the increase in imports (and decrease in
exports) as demand for both domestic and foreign goods rises.
As an unrequited transfer in the recipient country’s balance of payments accounts is instead a
disguised capital flow—that is, that the migrant retainsownership of the resources sent to the
home country,and the recipient simply invests these resources on themigrant’s behalf. This
situation differs from that of atraditional capital inflow in that the domestic intermediarywho is
entrusted with investing the remittedfunds is typically a family member, rather than a
formalfinancial intermediary in the destination country. It ismore likely to arise when the
recipient country’s financialsystem is poorly developed, so domestic investorscan reduce the
external finance premium they face byborrowing from family members living abroad, ratherthan
from a domestic financial institution.Although this situation has implications for thebehavior of
remittances (e.g., they should be responsiveto return differentials between the economy in
whichthe migrant resides and that to which he or she remits),its growth implications are less
clear, for at least tworeasons.
First, and most obviously, the demand forloans in the recipient country can arise to finance
eitherconsumption or investment. But second, even if theloan is intended to finance investment,
adverse selectionand moral hazard problems (aggravated by familialrelationships and distance)
make it uncertain that theloan funds will indeed be used for investment purposesor that, if they
are, the resulting investment will beproductive.
Theoretical and empirical literature on remittances is rich, as many studies on the motives,
causes, and effects of worker’s remittances in the growth and development process have been
conducted. According to Elbadawi and Rocha (1992) the determinants of remittances can be
divided into two main categories- endogenous migration and portfolio approaches. The key
determinants and the motivating factors behind the endogenous migration approach are economic
situations facing the migrant and their family as well as demographic information describing the
nature of family ties or the existence of other family arrangements (Chami, R., C. Fullenkamp,
and S. Jahjah, 2005).The main determinants of the portfolio approaches to remittances include
interest rate differentials on deposits between the host and home countries, rate of return on real
estate in the home country, black market premium, inflation rates, political risk and uncertainty
(Salisu, M., 2005). On the basis of these approaches, remittances can be divided into what
(Wahba, S., 1991) describes as “fixed” and “discretionary” remittances. The fixed remittances
10
support the family leaving behind the home country while the discretionary remittances go to
investment purposes.
Remittances are sometime difficult to measure, because it is calculated from the balance of
payment data under the lines “worker’s remittances” and “compensation to employees”. But
these are likely to understate the extent of remittances, as some remittance flows occur through
informal (non-market) channels, and are excluded from the official records. It should be mention
here that although various strategies to transfer remittance have taken over last one decade even
the choice of remittance channel is 46% formal and 54%. The impacts of remittances are felt
beyond the household and affect the national economy. High levels and/or large increases in
remittance flows can have direct as well as indirect repercussions on the macro-economy.
Remittances, specifically, have been acknowledged as critical sources of foreign exchange and
macro-economic stability.
The literature notes that when remittances are significant they make a dent in the national balance
of payments and their impact is felt in foreign exchange reserves and current account of the
balance of payments of the receiving country (Ramamurthy, 2003). In simply words remittances
are money sent home form emigrants working abroad. The amount of remittances depends on the
number of migrants, the wealth of the countries where they go, their wages, intents, education
etc. Remittances can be money or made in-kind and their channels of transportation can be
formal or informal.
Remittances are seen as a key factor of financial inflow to many countries (mainly developing
countries) as the stand the second after foreign direct investment and also they can be considered
even the largest source of income. Usually remittances have an important influence in the
economy of the poorest countries where the migration is in high levels rather than in developed
countries. Remittances have a direct impact on consumption, investment and savings contributing
so to economic growth but we are going to focus to the impact of remittances to trade balance. As
financial inflow remittances affect the balance of payment. As remittances represent money
flowing in, they improve negative balance of payment and cover the trade deficit financing the
import. However there is another impact of remittances in opposite from what we said. This
impact is the appreciation of the national currency because the total amount of money in
country’s economy increases. This appreciation makes the exports more expensive and since the
competition gets worse in the international area the economy will face a decrease in exports and
an increase in imports. This phenomenon is called Dutch Disease and brings a trade deficit. As it
could be seen, remittances may have a double effect in economy which can be handled by
different policies.
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Table 3: Albania potential benefit from remittances
Variables
Domestic
Demand
Positive
• Multiplier effect on GDP through consumption
• Reactivation of construction sector
• Development of remittance-related activities
Negative
• Demand is heavily focused on nonproductive
• Economic activity is sensitive to
changes in migratory cycles
•Support for investment (particularly
microenterprises)
Current
Account
• Improvement in current account through balance
of invisibles
Labor Market
• Higher reservation wage
• Higher real wages (due to reduced labor supply)
• Lower unemployment (fewer people looking for
work)
Prices
• Imported disinflation (due to appreciation of
currency)
Financial
systems
• Increased functional efficiency (more
competition between financial intermediaries)
• Increased balkanization among remittance
recipients
• Increased tax revenue
• Lower social expenditure
• Lighter debt burden (greater access to
international financing)
• Increased investment in education and health
care
• Organization of emigrant networks for the
sending of collective remittances
• Reduced poverty
• Steady income for retirees
• Funding of social projects by emigrant
associations
Public
finance
Human and
social capital
Poverty and
Inequality
• Increased imports as a result of
ostentation and imitation
• Loss of competitiveness as a result of
currency appreciation (risk of Dutch
disease)
• No incentive to work (culture of
idleness)
• Increase in money supply
• Increased demand for non-tradable
goods
• Higher production costs (due to
increase in
real wages)
• Risk of money laundering
• Moral hazard (growing public debt)
• Collateral problems: brain drain and
break-up of families
• Increased social and geographic
inequality
• Strong financial dependence on the
part of recipient households
• Risk of reduced social spending
(remittances take its place)
Source: Authors literature review and findings
Remittances offset chronic balance of payments deficits, by reducing the shortage offoreign
exchange. These transfers can help to ease the often crucial restraint imposed onthe economic
12
development of the migrants’ home countries by balance of payment’sdeficits. They have a more
positive impact on the balance of payments than othermonetary inflows (such as financial aid,
direct investment or loans), because their use isnot tied to particular investment projects with high
import content, bear no interest and donot have to be repaid. In addition, remittances are a much
more stable source of foreignexchange than other private capital flows and for certain countries
they exhibit an anti-cyclical character (Buch et al., 2002; Buch and Kuckulenz, 2004; Nayyar,
1994; Straubhaar, 1988).Developing countries quickly recognized this obvious and clearly
estimable positivebalance of payments effect of remittances, and measures were taken to increase
suchinflows of foreign exchange. But such measures must be implemented with care,
becauseapart from the positive balance of payments effects, remittances have an impact on
theeconomic activity in the home country. Depending on how they are spent or invested,
theireffects on production, inflation and imports will be different.
As Albania moved from a centrally planned economy to a market oriented one, after the big
political and economic changes in ’90, the level of import was highly increased. There was a lack
of products in market as a result of a higher demand for goods and services and the impossibility
of domestic production to respond to this demand. During years this level (in absolute terms)
continued to rise. While the export compared to GDP (Gross Domestic Product) was and still is
in small levels. Although the growth of the level of export over years, the trade deficit continuous
to widen. This severe imbalance shows that Albania continues to be an import-oriented economy.
In 2009 total import reached 430.945 million Albanian Lek (a decrease of 1.8 % from 2008) and
the total export reached 102.898 million ALL (a decrease of 8.1%) with a trade deficit of 26, 6%
of
GDP.
Figure 1: Albania Current account to GDP 1992 – 2013
120
100
80
60
Exports
40
Imports
20
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
0
Source: World Bank Database 2014
13
During the period, a negative balance due to the decrease of exports and the sharp increase of
imports characterizes the Albanian foreign trade. In 1992, the trade deficit in Albania was 470
million USD, whereas in 1998, it reached 588 million USD. 71% of the trade deficit is with
Greece and Italy, two its main trade partners. This trade deficit, during the period 1991 – 1998, is
covered 32% - 81% by remittances. The Albanian economy suffers from a trade deficit, albeit a
declining one. In 2010, Albanian exports totaled $1.194 billion while imports totaled $3.602
billion – which decreased significantly from $4.898 billion in 2009 when exports remained at a
similar figure of $1.345 billion. Albania exports textiles and footwear, asphalt, metals and
metallic ores, crude oil, vegetables, fruits and tobacco. Its primary export trading partners Italy
are (55.9% of exports), Greece (11.6%), China (7.2%), Italy (27.6%), Greece (14.8%), Turkey
(7.4%), China (6.8%), Germany (5.6%), Switzerland (5%) and Russia (4.2%).Albania’s primary
imports include machinery and equipment, foodstuffs, textiles and chemicals. It imports from
Italy (32.2% of imports), Greece (13.1%), Turkey (7.2%), Germany (6.6%), China (4.5%),
Russia (4.4%) Italy (27.6%), Greece (14.8%), Turkey (7.4%), China (6.8%), Germany (5.6%),
Switzerland (5%), Russia (4.2%). Italy dominates both imports and exports, while Greece is its
second two-way trading partner.From the analysis of the trade balance we can draw the
conclusion that emigrants’ financial flows, under the conditions of the lack of the microeconomic
restructuring, are recycled abroad, or more correctly mainly to their country of origin by the
means of imports.
Figure 2: Balance of payments and remittances’ flows trend
9000
8000
7000
6000
5000
Remittances
4000
Balance of Payments
3000
2000
1000
0
-1000
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
Source: Bank of Albania 2013
Actually, in Albania, the remittances are playing an important role for the development of small
family enterprises and the employment. Those enterprises are mostly created in the sectors of
trade and services and represent 84% of the overall number of the enterprises. Meanwhile, the
14
rural families that don’t have their members in emigration and are entirely engaged with the
agricultural and processing activities in their farms earn annual income that is 2-3 times less than
the income of the families that have someone in emigration. This difference has stimulated and is
still stimulating two negative phenomena.
First, the families with income from emigration are investing in housing or for their living
improvement in general, thereby neglecting the farm and the agricultural activity in general.
Second, the group of the farmers that have nobody in emigration are becoming disgruntled with
their income level from their work in farm and are thinking about either emigration or off
agriculture and off village activities. If these trends continue in the future, then the young
generation considering the lack of the jobs or the low level of the income would constantly want
to emigrate.The value of remittances sent by Albanian emigrants however is still less than that
sent by emigrants in other Mediterranean countries; in 1991 the value was about a tenth
compared to the transfers sent to Portugal and Yugoslavia and half of those sent in Tunisia.
The size of remittances flowing to Albania in the period 1992-2010 was indeed enormous both in
absolute and relative terms. According to the Bank of Albania a total of 778.1 million USD was
transferred from the immigration countries to Albania in 2003, an amount representing 11.4
percent of the GDP (almost the size of an economic sector), almost three times the FDI inflows,
covering more than 50 percent of the country’s trade deficit on average (Bank of Albania, 2004).
According to the World Bank a total of 1,156 mill. $ was transferred to Albania almost two times
than FDI inflows. But according to the dates we can see that there is a decline in the level of
remittances after 2009 because of the financial crisis.
Figure 3. Remittances flows and Current Account trend
10000
Remittances
8000
6000
Trade Balance
4000
2000
Current Account excluding
official transfers
0
Current Account
-2000
-4000
Overall balance
-6000
-8000
Source: IMF World Economic Outlook 2013
15
Remittances have shown to be reasonably stable and less volatile than FDI but having a null
effect in the monetary equilibrium. (Buch and Kuckulenz, 2004). They have contributed
significantly to the development of tourism since a good share of emigrants, in particular those
settled in Greece or Italy choose to spend their summer vacations in Albania, together with
theirfamilies or relatives. As noted by the Bank of Albania (2010), the money spent by emigrants
during the tourist seasons constitutes a significant share of the revenues from tourism in Albania.
5. Remittances flows in Southeast Europe and their impact on the Current account deficit
According to the data, the Southeast Europe region is one of the most remittance recipients in the
world. This countries has created a large number of emigrants, which the main motive is the
economically factor, as well as the strong family relationship. According to the latest World Bank
(December, 2013) data for 2013, the largest recipient countries of remittance flows are: India,
China, Mexico, Philippines, France, Pakistan, Germany, Bangladesh, Belgium and Spain. It is
evident that the list of top 20 remittance recipient countries includes high-income countries as
France, Spain, Germany and Belgium, but the amount of received remittances as a share of the
GDP, in these countries, is insignificant. As one would expect, in 2010 remittances received by
the top 10 developing recipient countries represented 45 percent of the total remittance inflows.
This is not unusual having in mind that 8 of those countries are included in the group of top 20
emigration countries in the world. The most important receiving countries by a share of
remittances in GDP in 2012 (World Bank, December, 2013), were: Tajikistan, Lesotho, Samoa,
Moldova, Kyrgyz Republic and Nepal. Remittance inflows in these countries are more than 20
percent of GDP. From the group of 24 countries that have remittance inflows above 10 percent of
GDP, 7 countries belong to the region of Europe and Central Asia, while 7 of them belong to the
Southeast Europe region (Albania, Serbia, Bosnia Herzegovina, Moldova, Bulgaria, Romania and
Republic of Macedonia).
As shown in figure 2, the total amount of remittance inflows (compensation of employees,
workers' remittances and migrant transfers), or of current transfers, net (defined in accordance
with the BOP definition), is one of the most important items of the balance of payments, and they
largely contribute into providing sustainable balance of payments, especially for covering the
deficits in the foreign trade.
16
Figure 4: Remittances inflows trend
100
90
80
70
Romania
60
Serbia
50
Macedonia, FYR
40
Moldova
Bosnia and Herzegovina
30
Bulgaria
20
Albania
10
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
0
Source: World Bank 2014
The simplest way to explain the importance and the size of remittances in Southeast Europe is to
express them as a share of GDP (Figure 4). From the figure 4 it is evident that this percent is
more than significant, and in some countries it reaches 34,7 percent (e.g. Moldova in 2006).
Over time, remittances have become one of the main important sources of incomes of migrant’s
families and with positive effects on economic growth. Remittances started to grow sharply in
2003 – 2004, which also reflected the increase in the number of migrants. The growth trend of
remittances was affected by the crisis period in 2008, but then in 2010 transfers started to
increase again. With the exception of Bosnia and Herzegovina, where the data shows a
decreasing trend over time (as a result of GDP growth in recent years, and low coverage of
remittances flows), all other countries have stable remittance inflows over the period 2000-2008
(Albania, Serbia and Bulgaria), or a continual trend of growth (Romania, Moldova and Republic
of Macedonia). A slight slowdown in remittances growth since the second half of the last decade
caused a reduction of their share in GDP, from 34.7% in 2006 to 22.3% in 2011, yet the Republic
of Moldova ranks the third country in the region of Europe and Central Asia as regard
remittances’ weight in GDP and their per capita value (Stratan et al., 2013). Over 30% of
Moldova’s exports are tied to remittance based finances. Remittances therefore look set to play
an increasingly important role in the Moldovan economy and may see an increase in the
emigration flows of Moldovans in the foreseeable future.
Remittance inflows declined in 2009 in almost all of the analyzed countries (with the exception
of Serbia and R. Macedonia), due to the global crisis that caused remittance inflows in
developing countries to fall by 5.2 percent.
17
Figure 5: Impact of Remittances on the deficit of current account
Bulgaria
Albania
100%
100%
Current account
balance (% of GDP)
50%
0%
0%
Personal
remittances,
received (% of GDP)
-50%
-100%
Bosnia and Herzegovina
Moldova
100%
100%
Current
account
balance (% of
GDP)
50%
0%
-50%
Macedonia
100%
-100%
Personal
remittances,
received (% of GDP)
0%
Serbia
-50%
Current account
balance (% of GDP)
50%
-50%
0%
Personal
remittances,
received (% of GDP)
-50%
-100%
50%
Current account
balance (% of GDP)
50%
Current account
balance (% of GDP)
Personal
remittances,
received (% of
GDP)
60%
40%
20%
0%
-20% 2005 2007 2009 2011
-40%
-60%
-80%
Current account
balance (% of GDP)
Personal
remittances,
received (% of GDP)
Source: World Bank 2013
Remittance inflows in 2009 had an effect on reducing the current account deficit by almost 4
times in Moldova, 2 times in Serbia, and almost 2 times in Albania. On the other hand, it is
obvious that remittances, when they are mostly spent on imports, can by themselves create trade
18
deficits. Even in that case, it is clear that such deficits are self-financing and pose no threat to
balance of payments stability.
Figure 6: Workers’ remittances and FDI flows
Albania
Bulgaria
35
Personal
remittances,
received (%
of GDP)
30
25
20
40
Personal
remittances,
received (% of
GDP)
30
20
Bosnia and Herzegovina
Serbia
Macedonia
20
20
15
15
Personal
remittances
, received
(% of GDP)
10
5
2010
2007
1992
1992
1995
1998
2001
2004
2007
2010
0
2004
20
Personal
remittance
s, received
(% of GDP)
2001
Personal
remittances,
received (%
of GDP)
50
40
30
20
10
0
1998
40
Personal
remittanc
es,
received
(% of
GDP)
10
5
19
2012
2008
2004
2000
1996
1992
2012
2008
2004
2000
0
1996
0
1992
Foreign direct
investment, net
inflows (% of
GDP)
Moldova
1995
60
2010
2007
2004
0
2001
1992
1995
1998
2001
2004
2007
2010
0
10
1998
5
1995
10
Foreign
direct
investment,
net inflows
(% of GDP)
1992
15
Romania
16
14
12
10
8
6
4
2
0
Personal remittances,
received (% of GDP)
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
Foreign direct
investment, net
inflows (% of GDP)
Source: World Bank Data 2013
Starting from 1992, foreign direct investments represent one of the main sources for developing
countries but a very important source for external financing are remittances, which they show
more stability, contra cyclicality and sustainability, even in the cases of global economic and
financial crises.Only in Bulgaria and Romania, remittance inflows are ranked behind foreign
direct investment as a source of external funding. In other four countries (Albania, Bosnia and
Herzegovina, Macedonia and Moldova) remittances are significantly larger than other types of
capital flows. This is in line with international experience, which confirms that poorer and
smaller countries receive relatively larger remittances. Inflows from portfolio investments are
negligible by size, indicating a high level of underdevelopment of the secondary stock exchange
markets in these countries.Official aid for development represents capital flows without any
obligations for future repayments and with certain degree of stability over the years. But usually
they are considered as a limited and highly dependent source of external funding, which cannot
promote sustainable economic growth.
6. Impact of Remittances on National Debt
In less developed countries, governments use national debt as an imperative tool to finance its
expenditures. Economic growth can be increased by effective and proficient utilization of
resources to achieve macroeconomic goals. However, if the national debt is not properly utilized,
it would restrict economic growth and become the biggest curse for the economy. National debt
is one of the major economic issues facing the governments of developing countries.
There are several reasons of national debt. First, it is used to finance budget deficit. Second, it is
used to implement monetary policy through open market operations. Third, there is need to
develop and deepen the financial markets by the instruments of national debt. Nationaldebt can
have severe implications for the economy as well. National debt servicing absorbs a major part of
20
government revenues. So, government has fewer resources to spend on development projects. In
this way, national debt servicing is more harmful for the economic growth than the stock of
national debt.
But developing countries such as Albania that has gone through a transition process and has been
facing with a large number of emigrated people and high remittances inflows, which may have a
very crucial impact on national debt and especially in financing it. Remittances in Albania
represent the second largest flow of incomes and have shown an important impact in main
macroeconomic variables, such as national debt.
Figure 7: Remittances inflows and National Debt as a % GDP
100
90
80
70
60
50
40
30
20
10
0
Personal remittances
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
National debt
Source: IMF database 2014
6.1.An empirical investigation of the effect of remittances on national debt
The notion that remittances have a significant effecton financing thenational debt may at first
besurprising, since governments have no direct claims onthese person-to-person transfers. The
fact that remittancesenter the recipient economy through familytransfers means that remittances
affect national debt sustainability indirectly through the activitiesof remittance-receiving
households, primarily throughtheir consumption decisions and saving patterns. In this respect
remittances are quite different from naturalresources, which governments may own and
fromwhich they derive revenue, and public aid transfers,which enter the government budget
constraint directly.
21
Since remittances contribute to higher consumption ofdomestic and imported goods, they may
affect government’s revenues through consumption- and trade-based taxation. Furthermore,
remittances may leadto increased deposits in the banking system and, to theextent that the
marginal propensity to consume is lessthan unity, they may increase the level of private
saving.Both of these channels may affect fiscal policy throughcredit market activity. As a result,
remittances can playan important role in the assessment and finance of a country’s debt, since
they alter the fiscal balance andthe evolution of the stocks of public and private sectorliabilities
over time.To examine the impact of remittances in financing the debt levels, data were
assembledfrom the IMF World Economic Outlook database andthe World Bank’s World
Development Indicators for the Albanian economy, based on the ratio of remittances to GDP
between 1992 and 2013.
Model:
Debt = b0 + b1 Re mt −3 + b2 Debt −1
Debt = 0.63 − 0.404 Re mt −3 + 0.73Debt −1
22
Results:
Dependent Variable: DEB
Method: Least Squares
Date: 04/14/14 Time: 10:35
Sample: 1998 2013
Included observations: 16
Convergence achieved after 5 iterations
Variable
Coefficien
t
Std. Error
t-Statistic
Prob.
C
0.638587
0.034224
18.65890
0.0000
REM(-3)
AR(1)
-0.403720
0.732558
0.199037
0.058302
-2.028367
12.56490
0.0635
0.0000
0.920360
0.908108
0.019340
0.004862
42.08773
75.11764
0.000000
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
Inverted AR Roots
.73
Autocorrelation test and partial correlation
23
0.619978
0.063798
-4.885966
-4.741106
-4.878548
1.930103
Normality test
6
Series: Residuals
Sample 1998 2013
Observations 16
5
4
3
2
1
0
-0.04
-0.03
-0.02
-0.01
0.00
0.01
0.02
0.03
Mean
Median
Maximum
Minimum
Std. Dev.
Skewness
Kurtosis
-3.73e-16
-0.002978
0.037568
-0.031030
0.018004
0.348411
2.552862
Jarque-Bera
Probability
0.456996
0.795728
0.04
Serial correlation test LM
Breusch-Godfrey Serial Correlation LM Test:
F-statistic
Obs*R-squared
0.015495
0.044948
Prob. F(2,11)
Prob. Chi-Square(2)
0.9846
0.9778
Test Equation:
Dependent Variable: RESID
Method: Least Squares
Date: 04/14/14 Time: 10:41
Sample: 1998 2013
Included observations: 16
Presample missing value lagged residuals set to zero.
Variable
Coefficie
nt
Std. Error
t-Statistic
Prob.
C
REM(-3)
AR(1)
RESID(-1)
RESID(-2)
-0.003830
0.028360
-0.001910
0.051458
-0.044876
0.043087
0.273951
0.067514
0.374779
0.336967
-0.088898
0.103521
-0.028298
0.137302
-0.133176
0.9308
0.9194
0.9779
0.8933
0.8965
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.002809
-0.359806
0.020995
0.004849
42.11024
0.007747
0.999860
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat
24
-3.73E-16
0.018004
-4.638780
-4.397346
-4.626416
1.965399
Heteroscedasticity Test
Heteroscedasticity Test: ARCH
F-statistic
Obs*R-squared
1.948475
1.955191
Prob. F(1,13)
Prob. Chi-Square(1)
0.1861
0.1620
Test Equation:
Dependent Variable: RESID^2
Method: Least Squares
Date: 04/14/14 Time: 10:41
Sample (adjusted): 1999 2013
Included observations: 15 after adjustments
Variable
Coefficien
t
Std. Error
t-Statistic
Prob.
C
RESID^2(-1)
0.000438
-0.364070
0.000131
0.260818
3.347843
-1.395878
0.0052
0.1861
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.130346
0.063450
0.000387
1.94E-06
97.66417
1.948475
0.186135
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat
0.000320
0.000399
-12.75522
-12.66082
-12.75623
1.746117
From the table we observe that value of regression coefficient of worker remittances is -0.403720
which means that an increase in one million-worker remittances decrease the national debt by
about 0.403720 million. This effect is very strong and statistically significant also showing that
there is a time lag by three years in financing the national debt. Workers’ remittances can
positively affect national debt through a number of channels. Firstly, remittances may reduce
credit constraint of household receipts so that entrepreneurial activity and private investment
could increase (Yang, 2004; Woodruff and Zenteno, 2004). In developing countries, households
face less efficient financial markets so that access to credit markets appears to be their prime
concerns. Remittance inflows could assist households to set up their entrepreneurial activity and
also help to finance education and health which are main variables in enhancing long-term
economic growth.
Secondly, remittances could develop a country’s creditworthiness and thus boost its access to
international financial markets. World Bank (2006) explains that the country credit ratings also
25
depend on its size of remittance flows. Thirdly, remittance inflows could produce positive effects
to economic growth through multiplier effect mechanisms. There are backward and forward
linkages in investment activities so an increase in investment of one household could increase the
other household income. In the context of increasing returns, the expansion of one sector could
increase the size of other sectors.
Conclusions
Migration has a high price for migrants’ them-selves, both in financial and deeply human terms,
as they uproot themselves from their families and undertake a dangerous journey. The free
movement of labor, enables greater opportunities for people in developing economies and also
helps developing economies gain important foreign currency revenue. Reliance on remittances,
particularly in a small country such as Albania with significant emigration to the Italy, Greece,
United States, Canada, and the United Kingdom., can comprise a significant share of a
household’s income, thus affecting decisions such as labor market participation and hours
worked. Migration phenomena lowers labor supply and the unemployment rate in the country of
origin. The countries of origins even if they have a reduction of the active and skilled labor
supply forces they have a huge and important benefit which are one of main sources of incomes –
remittances. Also they have a positive impact in the improvement of the deficit of the balance of
payments. Facing theoretical criteria, and especially the practical criteria of current account
deficitsustainability vis-à-vis the current account balance position in Albania, the conclusion is
drawnthat current account deficit in Albania’s case is chronic and at very high levels. In
general,however, it may be estimated as being relatively sustainable, but with very fragile and
seriouslythreatened sustainability. The fragility is related particularly to the dominating trade
deficitweight in the current account balance and the expected unsustainability of financing
sources ofthis deficit in medium and long-term periods.Taking into account the current account
deficit structure, we draw the conclusion that remittances has a positive impact in financing and
improvement the deficit of current account balance, above all, the trade balance improvement.
The econometrical model shows that remittances have a positive impact in financing the national
debt of Albania with a time lag of three years.
26
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