The World Bank will on Tuesday urge policymakers to take a more cautious approach towards the development potential of remittances, the multi-billion dollar financial flows sent home by migrant workers in North America, Europe and Asia.
In a report analysing their significance in Latin America and the Caribbean, bank economists argue that remittances are not “manna from heaven”, that the benefits have been “overestimated” and that associated social and economic costs in developing countries have not been taken into account.
“Remittances are an engine for development but they are not a substitute for sound national policies in the countries,” said Humberto López, World Bank senior economist for Latin America and the Caribbean, and co-author of the report. “Although positive, the impact of remittances on poverty and inequality is in most cases quite modest.”
Remittances have risen sharply in recent years, reaching $167bn (€131bn, £88bn) worldwide in 2005 and accounting for roughly a third of all financial flows to developing countries. They help poor families meet basic food, education and health needs. In Latin America – one of the regions most benefiting from the trend – there has been growing interest in their potential as a source of investment capital. A report published this month by the Inter-American Development Bank showed that a growing number of recipient families were using remittances to invest in homes and small businesses.
The World Bank highlights the macro-economic impact of remittance flows, especially in the small economies of Central America and the Caribbean where they typically equal more than 10 per cent of economic output, and in Haiti amounted to 52.7 per cent of GDP in 2004.
But it suggests that the impact of these flows on development is limited. In a detailed analysis of the 1991-2005 period, it found that for each 1 per cent increase in the ratio of remittances to GDP the fraction of the population living in poverty was reduced by about 0.4 per cent. In addition, the 1.6 per cent jump of these flows as a share of GDP from 1991 to 2005 is estimated to have led to an increase of 0.27 per cent in per capita GDP growth.
Although these benefits are real, the report argues that more needs to be done to increase the positive economic impact. For example, it would be beneficial to increase the access of migrant families to the financial system. Relatively few recipients have bank accounts (although the number tends to be larger than for the population as a whole) and even fewer have access to credit, for example.
At the same time, the report says policymakers must be alert to the negative consequences of high rates of migration and remittance flows. Remittances in some cases simply replace earnings that migrants would have made had they stayed at home. Migration can also lead to labour shortages.
Some parts of the region are suffering from a “brain drain”. In Haiti and the English-speaking Caribbean countries, 80 per cent of college graduates are living abroad, the report says.
