A New Form of Foreign Aid?

Migration has various impacts. The loss of skilled labour hurts the countries of origin. On the other hand, the money migrant workers send home to their families is of an economic importance. Hans Werner Mundt takes a critical look.

photo: AP
Boon or burdon? The influence of remittances on national economies has gained importance over recent years

​​Highly skilled migrants such as engineers or computer experts can mobilise technological expertise as well as business contacts and generate investment in their home countries. Working with Diaspora communities presents opportunities still mostly untapped for development policy.

The connection between migration and development has recently re-surfaced as a topic of widespread public discussion. Many still recall the "brain drain" debate of the 1960s and '70s. Its primary focus was to prevent the emigration of highly skilled labour from developing countries.

But emigration cannot be stopped by force or legal proscription. Migration is basically a human right, even if it can be exercised only where an entry permit is granted by another country.

Nurses and doctors leaving poor countries

None of the remedies proposed back in the "brain drain" days (for instance taxing migrant labour or requiring host countries to compensate home countries for money spent on education and training) were ultimately implemented.

Yet the problem has neither been solved nor diminished. On the contrary, it has been rendered more acute. This is highlighted by the buzzword "care drain". Nurses and doctors from poor countries plug gaps in rich countries' health services although the needs of their own countries are much greater.

However, the loss of personnel is not the only aspect of migration that needs to be considered. Another major facet is the immense volume of money sent home by migrants. In the poorest countries, emigrants' remittances have acquired a major economic significance.

Don't forget about "brain gain"

Also, there is the matter of "brain gain", the benefits that can accrue for a home country as a result of skilled professionals such as engineers and software specialists working abroad.

Emigration of health care workers has had a dramatic impact on Africa. Because of the mass migration of doctors and trained nurses, the situation is becoming desperate in many countries. HIV/Aids has assumed pandemic proportions and the number of health care workers is in decline.

There are more than 21,000 Nigerian physicians practising in the United States alone; since 1980, 60 percent of all Ghana's medical graduates have left the country.

In the early 1990s, one in ten of the names Britain added to its national register of nurses belonged to someone form a developing country. By the turn of the millennium, the ratio was 40 percent and in 2001/2002 the number of new registered nurses from overseas overtook that of British staff.

Everything suggests that the trend will intensify in the years ahead. To some extent, this is due to demographic developments in the industrialised countries. The problem is compounded by structural issues such as nurses' low pay, which deters a growing number of people in rich countries from entering the profession.

Emigration leads to major fiscal loss

For countries of origin, such emigration remains expensive. According to OECD figures, the fiscal loss for South Africa alone totalled a billion dollars due to lost investment in training and education in the period 1995 to 2002.

Despite these sad facts, international debate has recently taken a surprising turn. Experts are starting to emphasise the advantages of migration. Increasingly, the focus is on the countries of origin benefiting from (largely inevitable) migration.

Closer examination, however, reveals that positive effects are probably being overestimated.

Second-biggest source of external funding

The money migrants send home tops the much cited list of advantages. The total sum has indeed increased steadily over the past ten years. Today, emigrants' remittances form the developing world's second-biggest source of external funding.

Remittances are likely to reach 100 billion dollars some year soon. They are drawing close to direct foreign investment and amount to significantly more than official development assistance (ODA). Moreover, these figures only relate to money transferred through banks. It is estimated that the same amount crosses borders through informal channels.

But even the official figures are quite impressive, especially for the least developed countries. The volume of remittances to low-income countries exceeds that of ODA by 20.6 percent. It beats direct investment by a staggering 113 percent.

Even in the economic crisis of 2000/2001, the volume did not diminish like other external revenues. Rather, it kept rising at a steady rate.

USA, Saudi Arabia and Germany

Germany accounts for 8.1 percent of all the money migrant labour sends home, ranking third in the world as a source of remittance payments – after the USA (28.4 percent) and Saudi Arabia (15.1 percent).

Together, the European countries account for a somewhat greater percentage of the total than the United States.

The prodigious figures have fuelled high expectations. In its 2003 report on Global Development Finance, the World Bank stated that remittances augment the recipient individuals' incomes and increase the recipient country's foreign exchange reserves.

A new form of foreign aid?

According to the bank, remittances contribute to output growth when invested and generate positive multiplier effects when consumed. The American magazine Newsweek, in its edition of January 19 this year, hailed remittances as "effectively a new form of foreign aid".

But are things really that simple? Without a doubt, the most important thing about emigrants' remittances is that, as direct payments to poor households, they can make a direct contribution to poverty reduction. Whether the poor really profit from repatriated earnings, however, depends on a range of factors, such as what income groups the migrants come from.

But even where remittances do not go to the poorest families, they can still benefit the poor indirectly because of the boost they give to spending. Consumption of locally produced goods and services can have a particularly marked impact on poverty reduction.

Do remittances lead to more investment?

Whether remittances lead to more investment is a question that has been discussed at great length. The issue is certainly misunderstood if we confine it to families investing money in businesses. The key question is whether they form more savings and thus permit more investment in general.

That, of course, will only be the case where an operational finance industry channels private savings into investment and where a business-friendly environment permits positive outlooks for start-up companies.

On top of this, money spent on training or education for family members or on meeting the family's medical needs can also be considered an investment if this improves prospects of finding work and securing an income.

On a macroeconomic level, remittances are an important source of foreign exchange. This is particularly so in countries where trade imbalances imply that foreign currency is in short supply.

The crucial question: How is the money used?

For a country such as India, which now has sufficiently high reserves, foreign exchange is no longer a major issue. But it certainly remains one for many other developing and transition countries. Once again, however, the crucial question is how the money is used. If it is spent on importing luxury goods, it has precious little developmental relevance.

Emigrants' remittances can even have a number of negative macroeconomic effects. For instance, they can push up the value of the recipient country's currency (or prevent it from sliding down).

Take Moldova, for example: despite waning competitive strength and dwindling exports, its currency did not depreciate from 1995 to 2002. So, in the long term, remittances can impair competitive strength, aggravate balance of payments deficits and thus have a negative impact on economic growth.

Even more controversial than the purely economic effects of remittances are their socio-economic and political effects. At present, we do not have enough empirical data for an accurate assessment. However, there are some clues.

At family level, for instance, income-boosting effects only occur if the extra income from remittances does not lead other family members to stay out of the labour market thus failing to secure an income of their own.

Studies showing negative effect of remittances

Indeed, some studies show a negative correlation between the volume of money remitted and the rate of economic growth

This can be explained by the fact that, for families, there seems to be little need to create long-term sources of income at home if basic needs are met by the money received from relatives working abroad.

At the same time, at the national level, the convenient financing of balance of trade deficits by remittances makes it unnecessary to pursue a policy geared to improving long-term competitive strength.

Lucrative on the personal level, but …

Migration, which is lucrative on a personal level, thus may divert labour and capital needed to make products that might be sold on the world market. In a self-perpetuating process, migration would thereby turn entire regions and countries into places specialised in the export of labour and nurseries for future migrants.

In many countries and regions, the truth will lie somewhere in between. But one thing is certain: the situation is complex and requires careful case-by-case analysis.

Labour migrants' remittances are by no means just a boon, as the international financial institutions would have us believe. For them to be put to good use, the social and political conditions need to be right.

Brain gain and "trans-national networks"

In an age of cheap, fast transport and communications, migration is nothing like the complete break with home that it was in the past. Exile communities today are more than just networks for newly arriving migrants; they can also have a major impact on the politics and society of their native countries.

Migration researchers are increasingly interested in the potential of "trans-national networks".

Members of a Diaspora enjoy special advantages when they conduct business and invest. They know their homeland and can better judge the capacity and trustworthiness of local partners. They have a better feel for the state of the market and the scope for doing business.

Mediators between homeland and host country

And thanks to their familiarity with social norms and conventions, they have a better chance of asserting legal positions. At the same time, they are more likely to enjoy the trust of business associates in the country where they are based.

They thus make perfect mediators between homeland and host country. If they possess technological expertise, they also are likely to serve technology transfer.

India's IT industry is the typical example. In an as yet unpublished study, Uwe Hunger shows how much the industry owes to Indians from the American Diaspora. Ten of the 20 most successful software companies generating 40 percent of the industry's total revenues are managed or were founded by Indians who returned from the United States.

India is the most frequently cited example but it is by no means the only success story of its kind. Similar developments can be observed in Korea, Taiwan and China.

The successes achieved in these countries, however, also and always reflect an economic policy which facilitates entrepreneurial activity. Moreover, such activity can only be developed by highly skilled migrants. Countries which operate unsuccessful economic policies and/or produce mostly unskilled migrants will not benefit much from these advantages.

Harnessing the potential of migration work

In Germany, a good deal of work still needs to be done to identify ways of harnessing the potential of Diaspora-communities for development policy purposes.

This year, one step was taken in this direction by a GTZ conference on cooperation with the Diaspora, which produced a number of proposals.

For one thing, it highlighted the importance of improving the financial conditions for remittance payments. International money transfers should to be made less expensive so that official institutions are used instead of informal channels (such as the Muslim hawala system).

Securing resident status of migrants

The resident status of migrants also needs to be secured – illegal immigrants have no access to formal banking – and those with plans for investing in their homeland should be given support and advice tailored to their needs. Such recommendations show the direction a sensible Diaspora policy might take.

One thing this would certainly require is recognition of immigrant communities as actors in the host country and encouragement to secure their cooperation.

It remains to be hoped that the internal political row over the issue of immigration will not prevent Germany from making better use of diaspora-communities' potential in the future than it has in the past.

Hans Werner Mundt

© Development and Cooperation 2004

Dr. Hans Werner Mundt is head of the GTZ project Migration and Development. The GTZ is an international cooperation enterprise for sustainable development with worldwide operations.

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