Sunday, April 13, 2008

Remit, Vomit

More comforting reads for the weekend.

"We find that the data confirms the countercyclical nature of remittances, which is consistent with the model's implication that remittances are compensatory transfers. In addition, we also find that remittances are negatively associated with economic growth. This result is also consistent with our model, in which remittances are subject to significant moral hazard problems that increase the likelihood of poor economic performance. Together, these results imply that remittances do not act like a source of capital for economic development, at least for now, and moreoever that there are significant obstacles to transforming them into a signifant source of capital (Chami, Fullencamp & Jahjah 2003: 5)

Edited to add:

"The prospect of converting remittances to development capital is even more daunting if we think of immigrant remittances as returns to flows of human capital across national boundaries. Immigrant remittances can be thought of as dividends from human capital assets invested by the family in economies where their return is relatively high. In other words, sending members abroad may already represent the family's main investment project, which has a much higher return than investment opportunities at home, including human capital investment. If this is the main motivation behind migration, then it implies that remittances are intended to be a main source of family income and will be devoted primarily to consumption...The dependency on these transfer induces recipients to use remittances as a substitute for labour income, and to lower their work effort. (22)."

"Governments, too, may succumb to a moral hazard problem created by the receipt of remittances...remittances provide a major source of foreign exchange for many countries. In the absence of remittances, it is likely that many countries' exchange rates, and in turn their domestic economic policies, would come under (greater) pressure. But the receipt of large remittance flows removes or mitigates this pressure. Therefore, the government may be able to ignore imbalances in the domestic economy and avoid taking politically costly steps to address them. At worst, governments could intentionally pursue politically beneficial but economically unwise policies, in the expectation that remittance flows will continue to insulate the domestic economy from any negative consequences. Such policies would likely exacerbate the conditions that led to large-scale migration and remittance transfer, leading to heavier dependence on immigrant remittances and decreased effort on the part of domestic workers, firms and entrepreneurs (23)."


Chami R., Fullencamp C. & Jahjah S. (2003). "Are Immigrant Remittance Flows a Source of Capital for Development?" IMF Working Paper WP/03/189.

1 comment:

failed misanthrope said...

What a sad thing for our OFWs.

Pero what do they, the OFWs, actually think about those "significant moral hazard problems"?