Chami and Fullenkamp neatly summarize the impact of remittances in the latest edition of Finance & Development magazine (highly recommended for those who are unaware of it).
Excerpts from the article:
[…]remittances can provide much-needed fiscal space—which allowed some countries to increase spending, lower taxes, or both, to fight the effects of the recent global recession.
[…]governments can sustain higher levels of debt when the ratio of remittances to domestic income is high—which reduces country risk.
[…]By expanding the tax base, remittances enable a government to appropriate more resources and distribute them to those in power. At the same time, remittances mask the full cost of government actions. Remittances can give rise to a moral hazard problem because they allow government corruption to be less costly for the households that receive those flows. Recipients are less likely to feel the need to hold the authorities accountable, and, in turn, the authorities feel less compelled to justify their actions.
[…]Because remittances increase household consumption, fluctuations in remittance flows can cause changes in output in the short term. But a shock that reduces economic output is also likely to induce workers abroad to send more remittances home, which then has the effect of reducing output volatility.
[…]remittance flows increase the simultaneous occurrence of business cycles in remittance-sending and remittance-receiving countries.
[…]Remittance inflows can also facilitate the financing of investments by improving the creditworthiness of households, effectively augmenting their capacity to borrow. Remittances may also reduce the risk premium that lenders demand, because they reduce output volatility.
[…]But if remittances are perceived to be permanent income, households may spend them rather than save them—significantly reducing the amount of flows directed to investment. […]many households save part of the remittances by purchasing assets such as real estate, which generally doesn’t increase the capital stock.
[…]evidence from the Philippines and from Mexico suggests that receiving remittances leads to increased school attendance. However, that extra education would likely have little effect on domestic economic growth if it simply makes it possible for the recipients to emigrate.
[…]Remittances enable recipients to work less and maintain the same living standard, regardless of how the distant sender intended them to be used (say, to increase household consumption or investment). Anecdotal evidence of this negative labor effort effect is abundant, and academic studies have detected such an effect as well. Thus, remittances appear to serve as a drag on labor supply.
[…]remittances may enhance the efficiency of investment by improving domestic financial intermediation (channeling funds from savers to borrowers).[…]remittances may help GDP growth when the financial markets are relatively underdeveloped because remittances loosen the credit constraints imposed on households by a small financial sector.
[…]remittances can lead to real exchange rate appreciation, which in turn can make exports from remittance-receiving countries less competitive.
[…]When a positive effect of remittances on growth is found, it tends to be conditional, suggesting that other factors must be present for remittances to enhance economic growth. For example, some studies have found that remittances tend to boost economic growth only when social institutions are better developed.
[…]unequivocally good for recipient households because they alleviate poverty and provide insurance against economic adversity.
[…]governments will have to strengthen or facilitate the channels through which remittances benefit the overall economy while limiting or weakening others.
[…]he government can take advantage of its increased borrowing capacity to finance improvements in infrastructure. One potential use would be to upgrade a country’s financial system at all levels, including improvements in the payment system, availability of banking services, and financial literacy.
[…]Policymakers must design programs that are responsive to the needs of individual households and that give recipients the proper incentives to use remittances productively. Promoting the acceptance of remittance income as collateral for private loans used to finance productive investments is one way to direct remittance income into growth-enhancing investments.
