Information about Asia and the Pacific Asia y el Pacífico

5 Remittances and Migration

Christopher Browne
Published Date:
August 2006
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Information about Asia and the Pacific Asia y el Pacífico
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Christopher Browne

Remittances to developing countries have grown steadily over the past three decades. In many countries, they now constitute the largest single source of foreign exchange, ahead of export receipts and foreign direct investment. Firm data on remittances are difficult to obtain (Kiribati is an exception), but net private transfers in the balance of payments statistics may give a partial indication of the magnitude of flows. Experience in the Pacific region has been varied (Table 5.1). A number of countries in the region have very large receipts by developing country standards (Figure 5.1). Both Tonga, with remittances equivalent to 24 percent of GDP, and Samoa, with remittances of about 20 percent of GDP, have very large receipts by overall developing country standards, a result of the fact that a large proportion of their citizens are permanent residents of Australia, New Zealand, and the United States. Kiribati, with remittances of 18 percent of GDP, also has large receipts, mainly from earnings by seamen on foreign ships who have attended the local Marine Training Institute, which was established with donor aid in the 1970s.

Remittances are also useful sources of foreign exchange in several other Pacific island countries. Fiji obtains such inflows primarily from citizens of Indian origin who have become permanent residents abroad, notably in Australia and Canada, following military coups, the most recent of which occurred in 2000. Marshall Islands, Micronesia, and to a lesser extent Palau, receive remittances from the United States. Emigration from these countries to the United States has increased over at least the past decade because progressive declines in grant assistance have reduced public sector employment and because citizens of these countries need only a valid passport and no visa to work in the United States. However, in Marshall Islands, inflows are offset by nuclear compensation payments to land owners who live abroad and in Palau, by payments to Asian employees in the construction and tourism sectors. The Melanesian countries of Papua New Guinea, Solomon Islands, and Vanuatu receive virtually no remittances, as there has been no tradition of emigration in modern times.

Table 5.1.Selected Pacific Island Countries: Private Transfers and Worker Remittances(In millions of U.S. dollars)
Fiji (personal remittances)43.782.697.4122.4171.4
Kiribati (worker remittances)
Marshall Islands (net private transfers)1-6.2-6.2-12.1-12.2-11.7
Micronesia (net private transfers)
Palau (net private transfers)13.3-1.4-1.4-1.3-1.7
Samoa (net private transfers)43.250.657.974.066.6
Tonga (net private transfers)145.352.958.879.781.1
Sources: IMF staff estimates and country data.

Data for fiscal years ending June 30 for Tonga and September 30 for Marshall Islands, Micronesia, and Palau.

Sources: IMF staff estimates and country data.

Data for fiscal years ending June 30 for Tonga and September 30 for Marshall Islands, Micronesia, and Palau.

Future Remittance Flows

Remittances in the region are expected to stay at their present scale over the medium term, but a continuing flow of new migrants will be necessary to ensure continued remittance flows. This should be possible because of the well-established links with traditional destination countries such as Australia, New Zealand, and the United States, although it is unlikely that any major new channels will open. Furthermore, with job shortages expected to continue in the region, there should be plenty of people willing to seek better opportunities abroad, even if faster rates of sustainable economic growth are achieved. Their ability to find jobs is enhanced when they have relations, friends, and local communities in the recipient country, which is common.

At present, however, there is little labor mobility within the Pacific region, in part because many countries have legislation and regulations favoring their own citizens for job openings in the formal sector, a reflection of the high level of unemployment. Efforts to expand labor mobility will likely enhance remittance flows. The regional integration embodied in the Pacific Plan provides for further examination of Pacific labor market issues, including greater mobility throughout the region and beyond. One of the stated long-term objectives of PICTA is the creation of a single market in the region, which would at some point extend to the movement of capital and labor.

Figure 5.1.Fifteen Largest Development Countries Recipients of Remittances as Share of GDP

(1990-2003 average)

Source: IMF, World Economic Outlook, April 2005, Chapter II.

Uses of Remittances

Remittances play a critical role in reducing the vulnerability of individuals in recipient countries to economic downturns or natural calamities. In the Pacific, they are primarily spent by families to maintain or increase expenditure on consumption needs, housing, education, health care, and small business activities. The last may include, in the agricultural sector, purchases of seeds, fertilizer, and tools to produce food to market. Business investments are often focused on the purchases of shops and the establishment of taxi and other transport businesses. Other uses include church donations, weddings, funerals, and local development projects. Because of social structures and customs, Pacific islanders have a high propensity both to remit and to do so longer than migrants from other regions. Samoans and Tongans living abroad, in particular, maintain very strong ties with their families, villages, and churches, and this is true even among second-and third-generation migrants.

Remittances provide an important source of funds at most income levels. Emigrants’ motivations for sending contributions tend to evolve over their careers, and three phases are frequently identified. At first, the contributions appear to be essentially for families to meet basic consumption needs, but they may later expand to include telephones, sound systems, computers, and outboard motors. There is progressively greater emphasis on human capital investment for the next generation, including support for schooling in the home country and later possibly for tertiary study abroad. Finally, the focus moves to investments to meet future retirement needs if migrants plan to return home, including for living expenses, business investments, and real estate purchases.

The Impact of Remittances and Migration

The overall impact of remittances on fostering economic growth is hard to determine and has not been effectively measured in the Pacific region, although it is generally agreed that the impact is positive. Studies show that households with access to remittances provide their children with more education and better health care, engage in small business formation on a greater scale, and accumulate more assets. There is also a close link between remittances and poverty reduction, if the additional resources are used for basic consumption. However, more comprehensive data are needed on the sources and size of remittances, supplemented by greater use of household surveys, if there are to be more accurate measures of the effect on growth and poverty reduction. Efforts should also be made to assess informal flows. A very substantial amount of cash and goods, primarily imported food and household items, is sent informally with people traveling home to the Pacific islands, especially during the Christmas season. In return, emigrants are often given goods to take back with them, usually local food and handicrafts, which are not recorded as exports.

One worrisome aspect of emigration is the potential for a permanent loss of skilled labor from the Pacific, especially of youth and the well-educated. There is no doubt that emigrants tend to have higher skill levels than the general population. Even though emigrants may find better work opportunities and may gain experience that will prove valuable if they repatriate, the loss of human capital may hamper the development process, particularly because skills are already in such short supply in the region. Furthermore, the population loss may reduce government service delivery, because of erosion of the tax base, and increase property prices, which may make it even more difficult for those left behind to abandon subsistence agriculture.

There may have been some shift in recent years of remittance flows from informal channels to formal banking arrangements, reflecting a general easing of exchange rate restrictions and increased regulation, especially in the wake of the terrorist attacks of September 11, 2001. When remittances are deposited with financial institutions, a larger share of the population can come into contact with the formal financial system, expanding the cash economy, especially in rural areas, and promoting development. This facilitates the encouragement of savings accounts, the greater availability of credit, and the provision of education loans, home mortgages, and borrowing for the establishment of small businesses. It is generally agreed that policies should be developed to promote the sending of remittances through official channels, thereby encouraging migrants to save in financial assets at home and not abroad.

Governments must ensure that policies do not discourage remittance inflows. One concern is that remittances can be used to launder money and finance terrorism, and remittance service providers must be appropriately regulated to reduce this risk. However, supervisory frameworks must take into account, and where possible minimize, any adverse impact on the costs of sending remittances. There should also be no attempt to tax remittances, which are always derived from privately earned sources of income and may well have been taxed in the countries where emigrants are employed. Finally, no government steps should be taken to direct remittances, which will remain privately owned by local citizens, to specific sectors and purposes.

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