Is There a Remittance Trap?
Source details
- Canonical URL
- Is There a Remittance Trap?
Other formats
Bibliographic details
- Authors: RALPH CHAMI, EKKEHARD ERNST, CONNEL FULLENKAMP, ANNE OEKING
- Published: September 1, 2018
Overview and central question
- High levels of remittances can spark a vicious cycle of economic stagnation and dependence.
- Key question: How can developing countries overcome the remittance trap?
Scale and role of remittances
- Remittances amounted to over $400 billion in 2017.
- Remittances rank between official development assistance and foreign direct investment in size.
- Remittances can:
- Provide person-to-person transfers that help relatives afford necessities of life.
- Potentially fund investment in human or physical capital or finance new businesses.
- Empirical finding: Many studies confirm remittances are essential in the battle against poverty, lifting millions of families out of deprivation or bare subsistence.
- Empirical puzzle: Economic research has failed to find that remittances make a significant contribution to a country’s economic growth.
Case study: Lebanon
- Average remittance inflows during the past decade: over $6 billion a year, equal to 16 percent of GDP.
- Lebanon received $1,500 a person in 2016.
- For remittance-receiving families in Lebanon, remittances account on average for over 40 percent of income.
- Remittances amount to 50 percent more than Lebanon’s merchandise exports.
- Real per capita GDP growth in Lebanon:
- 1995–2015 average: 0.32 percent annually.
- 2005–15 average: 0.79 percent annually.
- Sectoral observations:
- Information and communication technology sector size: less than 1 percent of GDP.
- Less than 2 percent of remittance inflows go toward starting businesses in Lebanon.
- Emigration statistics for Lebanese university graduates:
- Up to two-thirds of male graduates emigrate.
- Nearly half of female graduates emigrate.
Mechanisms producing a remittance trap
- Consumption and price effects:
- Remittances are spent mostly on household consumption, increasing demand for nontraded and traded products and placing upward pressure on prices.
- The flood of foreign exchange and higher prices reduces export competitiveness (a Dutch disease–like effect).
- Labor market and incentives:
- Remittances increase the reservation wage, causing some workers to drop out of the labor force and exert upward pressure on wages.
- Shift of resources from tradable to nontraded sectors leads to:
- Decline in better-paid, high-skill jobs typical in traded sectors.
- Increase in low-skill, poorly paid jobs in nontraded sectors.
- Higher-skilled workers are incentivized to emigrate in search of better-paying jobs, reinforcing emigration and brain drain.
- Real estate and cost-of-living effects:
- Remittances are often spent on real estate, causing home prices to rise and sometimes stoking property bubbles.
- Rising cost of living increases imports and further reduces growth, which increases incentives to emigrate to send money home.
- Political economy effects:
- Large remittance inflows insulate families from economic shocks and reduce pressure on governments to respond to societal needs.
- Governments benefit from enlarged consumption tax bases (for example, value-added taxes) and reduced public scrutiny.
- Some governments actively encourage emigration and remittances, including establishing official offices or agencies to promote emigration.
Empirical patterns across remittance-receiving countries
- Of the 10 countries that receive the largest remittance inflows relative to their GDP—examples include Honduras, Jamaica, the Kyrgyz Republic, Nepal, and Tonga—none has per capita GDP growth higher than its regional peers; for most, growth rates are well below their peers.
- The absence of clear evidence linking remittances to increased economic growth and the lack of examples of remittance-led growth suggest remittances may interfere with economic growth.
Policy implications and recommendations
- Do not discourage remittances because of their importance to the well-being of millions of families.
- Prevent the two main downsides of remittances—Dutch disease and weaker governance—by enhancing:
- Economic competitiveness of industries that face foreign competition through:
- Upgrading physical infrastructure.
- Improving the education system.
- Reducing the cost of doing business.
- Government support for new business formation, including seed funding or other financial assistance for start-ups.
- Governance and institutional strength to counter reduced public scrutiny and political accountability.
- Strengthening economic competitiveness and governance aligns with the inclusive growth agenda and is urgent to avoid or escape a remittance trap.
- Avoiding the remittance trap may unlock remittances’ development potential by removing an obstacle to inclusive development.
Source: F&D Magazine — "Is There a Remittance Trap?" Ralph Chami, Ekkehard Ernst, Connel Fullenkamp, Anne Oeking, September 2018.
Content in this bundle
- هل هناك مصيدة تصنعها تحويلات العاملين؟
- ¿Son una trampa las remesas? ● Finanzas y Desarrollo ● Septiembre de 2018
- Is There a Remittance Trap? – IMF Finance & Development Magazine | September 2018
- Существует ли ловушка денежных переводов? – Финансы и развитие – сентябрь 2018 года
- 是否存在侨汇陷阱? - 《金融与发展》- 2018年9月号·第55卷·第3期 - 国际货币基金组织季刊