Workers Remittances: Importance and Determinants in Africa

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Workers RemittancesImportance and
Determinants in Africa

• by
• Derrese Degefa

A paper prepared for the Workshop on
Financial Systems and Mobilization of Resources
in Africa Organized by United Nations Economic
Commission for Africa (UNECA) 1-3 November
2004 Inter-Continental Hotel Nairobi, Kenya
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Outline

• Introduction
• Background to Foreign workers remittances
• Relative importance of workers remittances
• Methodology and Empirical Results
• conclusion

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I. Introduction

• Africa needs 7 growth rate to cut poverty by
  half by 2015
• Investment rate of 33
• 15 Savings rate
• 18 need to be covered from external sources
• FDI 2
• ODA 9
• 7 additional requirement
• Workers remittances need to be given special
  attention

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II. Background

• Characteristics of remittances (4)
• Remittances do not create liabilities
• They target groups that need them most, i.e., the
  poorer sections of society
• Remittances are first and foremost
  person-to-person transfers and
• they are counter-cyclical, i.e., remittances flow
  strongly in times of crises.

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Forms of remittances (5)

• Money (cash) transferred formally through the
  formal banking system or informally via informal
  agents
• Goods sent/given to households in the form of
  gifts or personal effects
• Payments made by the migrant on behalf of
  households like educational expenses and payments
  for international airfares
• Donations by the migrant to governmental and
  non-governmental institutions or organizations
  and
• Deposits made into bank accounts held by the
  migrant overseas.

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Channels

• Two categories (differing in accessibility, cost
  and service delivery)
• Formal channels
• include banks and non-bank financial institutions
  such as foreign exchange bureaus and money
  transfer operators
• Informal channels
• Hawala or hundi services or single-destination
  services provided by individuals business
  people, friends, relatives, etc

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Why do migrant workers remit part of their
income?

• Three basic factors
• altruistic reasons
• to increase the well-being of family members
• self-interest motives
• to finance the purchase of durable goods, real
  and financial assets and/or investment
• implicit mutual beneficial arrangements
• migrants may remit part of their income as
  repayment of the principal invested by the
  household in their education to share costs of
  migration.
• part of risk sharing strategy for the household
  during crises

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Impacts of workers remittances

• Increase savings, credit investment
• Remittances enable migrants families to spend on
  education, housing, and healthcare
• poverty reduction (consumption)
• a 10 increase in the share of remittances in a
  countrys GDP leads to a 1.2 decline in
  headcount ratio (Adams page, 2003).
• Brain Gain
• Temporary migrants bring with them the new skills
  and ideas
• Source of foreign exchange

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III. Relative importance of remittances in Africa

• Africa
• Remittances are the 2nd largest important next to
  net ODA but more important than net FDI inflows
• Though increasing in absolute terms, the regions
  share in the total flow of remittances to all
  developing countries drastically dropped from as
  much as 33 in 1980 to only 13 in 2002
• In absolute terms, it was US11.2 billion in 2002
  up from US5.8 billion in 1980

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Share of workers remittances received by all
developing regions, 1980 - 2002
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Differences in importance

• a. North Africa
• workers remittances are the largest source of
  development finance on top of both ODA and FDI
• However, more volatile than net FDI inflows but
  less so compared to aid flows to this sub-region
  during 1975-2002 period
• Dramatic increase, up from only half a billion US
  dollars in 1975 to over 8 billion in 2002

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b. Sub-Saharan Africa

• Workers remittances are the most stable source of
  foreign exchange earnings though they are the
  least source of development finance compared to
  ODA and FDI
• Registered an increase from US 0.32 billion in
  1975 to over US3 billion in 2002

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c. Country-wise

• Top ten recipients of workers' remittances, 2002

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Summary of relative importance of remittances
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Why so much difference b/n NA SSA?

• 3 main factors can be mentioned
• Geographic proximity of NA countries to oil rich
  ME economies
• Similarity of religion and languages of the two
  sub-regions created conditions for easy labour
  mobility
• The relative success in human development
  (literacy and education) might also have created
  a group of professional and middle class migrants
  

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IV. Methodology and Empirical results

• Data Source WB and HF/WSJ
• Correlation analysis
• Determinants
• Macroeconomic variables (including EFI)
• then 10 components of economic freedom indicator
  that capture institutional arrangements/policy
  set
• Trade policy, fiscal burden, government
  intervention, foreign investment, banking and
  finance, wage and price control, property rights,
  business regulation, black market activity
• The choice of panel data covering 47 African
  countries for 1995-2002 is based on availability
  of data
• Specification of the model RMPC f (set of MEVs
  or CEFI)

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Macroeconomic determinants of remittances flow to
Africa
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Summary results 1

• Economic freedom is consistently found to be
  statistically significant determinant of foreign
  workers remittances flow to Africa
• More economic freedom encourages the flow of
  remittances
• Other macroeconomic determinants
• inflation, real effective exchange rate, domestic
  credit, domestic real per capita income (both in
  level and growth) and real GDP growth,
• the investment motive is supported regarding the
  impact of income and inflation on remittances,
• Realistic exchange rate is found to have a
  positive effect on remittances flow to Africa as
  the cost of using official channels to remit is
  cheap, and
• domestic credit augments remitted income for
  investment

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Institutional determinants
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Summary results 2

• Fiscal burden of government, monetary policy,
  capital flows and foreign direct investment and
  property rights are found to be the main
  determinants
• the lower is the fiscal burden a government
  imposes on its citizens, the more stable is the
  monetary policy, the lower is the restrictions on
  the foreign investment limit, and the higher is
  the ability of the government to secure property
  rights of citizens, the higher is the inflow
  migrant workers remittances to Africa
• Hwv, banking and finance, regulation, wages and
  prices are also found to have significant impacts
  on the flow of remittances to Africa but with
  unexpected sign

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Conclusion

• remittances have become a key source of external
  development finance in developing countries
  (Africa)
• Macroeconomic determinants
• Economic freedom (-ve)
• Inflation (-ve)
• Real effective exchange rate (ve)
• Real per capita income (level growth) (ve)
• Real GDP growth (ve)
• Domestic credit (to private sector, or total
  credit provided by banking sector) (ve)

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• To encourage the flow of remittances to African
  countries, policymakers of the region, among
  other things, need to (i) secure private property
  rights, (ii) stabilize monetary policy, (iii)
  encourage foreign investment and capital flows,
  and (iv) lessen the fiscal burden of the
  governments on its citizens.
• If governments are strongly involved in the
  determination of prices of goods and services,
  the more banks are controlled and the higher the
  regulatory frameworks are put in place by the
  governments, the more is the inflow of
  remittances (?)

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Thank you!