Role of remittances in Bangladesh

The outward migration of labor and the remittances that are generated as a result have been a feature of Bangladesh’s most liberation history. The earliest official records on remittances demonstrate that the country received about US $24 million in remittances overseas in remittances in 1976. Since then foreign remittance recipients have grown at an exponential rate that has been shown in table no 1.

The role of remittances in the economies labor sending countries like Bangladesh is assuming increasing importance. Remittance is shown that a very stable source of foreign exchange (Ratha, 2005) and even as being counter -cyclical (Esquivel et at, 2006). The effects of remittance on the macro economy of a country are universally proved. The incoming foreign exchange helps receiving countries to pay import liabilities, improve their position in balance of payments, strengthen foreign exchange reserves and finance external debt. At the micro level remittances contribute towards increasing the income of receiving households with related effects on the standard of living, while depending upon consumption patterns they have been known to increase the level of savings which is an important source of capital (Ratha, 2005). Thus, in resources scarce countries like Bangladesh remittances have a great potential to produce economic and social impacts. This fact has been recognized as by policy makers and has received attention from researchers. However, as has been mentioned there are hardly any studies on he microeconomic impact of remittances on the households or per capita incomes. Most research has focused on the potential use of remittances as a policy tool and having acknowledged its importance on possible revenues of further increasing the volume of official remittances receipts by directing them through legal avenues and by promoting even greater export labor. Fig 3 which shows remittances a percentage of GDP highlights it growing importance in the economy of Bangladesh.

Remittances have been rising rapidly around the world and are the fastest growing source of foreign exchange earnings for developing countries. The observed literature suggests that remittances can have both positive and negative influences on the growth and development of receiving states. However, the literature has been largely silent on he potential effects.

3.6 Importance of remittance in the Economic of Bangladesh

Under our investigation in this section we examine the importance of remittance in three economies. For the sake of conciseness we talk about the importance of three areas: tends in remittances, the link between remittance and economic growth and the importance of remittance as a source of foreign exchange in these economics. It is seen that the growth rate varies from time to time but sometimes it is quite constant. Over the last two decades it has been observed that the growth in remittance across the country appears to have stabilized somewhat with the variance of fluctuations that dramatically reduced relative to the period 1976-1985. This reduction is variance of remittance growth is related to the stabilization of Government policy and currencies overtime. Both formal and informal remittance transfer channels could help to give explanation why the remittance growth between 1980 and 1991 was relatively stagnant. Informal remittance channels involve money which carried out place to place through individuals or couriers or it could engage a hawala service network which is informal and provides cash payout across borders at a portion of the cost of formal methods. In addition formal networks like banks and foreign exchange bureaus are more fashionable in robust and liberalized economies with strong financial sectors (Sander and Maimbo 2005, p,65). It is estimated that nearly half of Bangladeshi’s offshore labor employed in Saudi Arabia (Siddique, 2004), Bangladesh too experienced the benefit from the growth in West Asia during the 1970’s. This illustrates that their large growth in remittance during the late 1970’s in line with rising he oil prices of the time. There was a considerable plateau in remittance growth in the period leading up to and during the Gulf war from 1988-1991. This was remedied with Bangladesh workers involvement in post war construction which is reflected by steady remittance growth from 1992-1994 (Siddique, 2004). With Saudi Arabia as a majority employer, availability and quantity of work for Bangladeshi migrant workers is at the mercy of pricing fluctuations in the oil industry. When weigh against to crude oil prices, increases or decreases in remittance growth is correlated to the increases and decreases in oil prices. The period between 1977-81 and 1988-91, are good indicators of this as well as the strong growth in remittance from 2002 which is in line with a sharp rise in oil prices in the same period. Bangladesh demonstrate the greatest reliance on remittance as a form of income growing from approximately 6% of export income in 1976 to more recent times where remittances have hovered close to 50% of export income since 2003. The period up to and including 1979 displays steady growth in remittance as a percentage of export before a major jump in 1980.

3.7 Remittance effects

On the growth and development of receiving states remittance have both negative and positive influences.

Studies indicate that remittances may raise per capita income and reduce poverty in come countries. For example, a 10 percent increase in the share of remittance to GDP in a given country would lead to a 1.6 percent decline in the share of people living in poverty. Remittances may have decreased the share of poor people in the population by 6 percent in Bangladesh, where more than 150 million people are internal migrants; the second most important factor for lifting a household out of poverty is the reporting of a migrant in the family. However, it has been found that remittance reduce poverty. Even where remittances do not pull households out from below the poverty line, the ultimate effect of poverty are reduced.

In addition remittances advance human development outcomes. Generally, remittance recipient households spend more on health care and have higher school attendance rates. Studies based on household surveys exhibit that children from remittance receiving households have a lower school dropout rate and thee households spend more on private tuition for their children. In fact children whose parents receive remittances demonstrate higher health outcomes than those from non-recipient households, with similar demographic and socio-economic characteristics. Remittances aid the poor during the time of macro economic shocks. In many cases remittances are counter cyclical, as migrants are prone to send more money to assist their families and friends during the crises.

There is also evidence that remittance can have negative effects too, making recipients dependent on these flows without leveraging them to generate additional income. Remittance have been used to surrogate low levels of income resulting from scarce wage jobs, but have not resulted in considerable increases of other sources of financing in most the corridors analyzed. Families can tend to make these resources for granted and grow dependent on them; discouragement the motivation to develop additional skills or make investments to yield additional income. For example, in Guatemala there is a perception that migration and remittances are leading young people to drop out of school and create a tendency to migrate. Many youth do not study or work, but rather wait until they are old enough to migrate their preference countries. Moreover, it is estimated that the average stay of migrants is on the rising pattern. However, the effects of remittances on labor force participation rates vary from countries to countries. Research shows that have a role in reducing both labor force participation rates and the number of hours worked per week in most countries, though the reduction in labor supply causes by remittances is much lower among individuals with higher levels of schooling. It has been detected a positive effect of remittance on labor supply in Philippines, where an increase in remittance remittances flows in the wake of the Asian Financial crisis led to reduce child labor (and increased schooling) and an increase in adult employment in entrepreneurial and capital intensive.

3.8 Macroeconomic Benefits of Remittance

The distinctive characteristics of remittances and their potential economic impact have drawn attention of policy makers and researchers in recent years, as evidenced by a growing literature aimed at analyzing remittances and their consequences for individual countries. There are there main features of remittance which provide the force for embarking on a study of their macroeconomic impacts like: the size of these flows relative to the size of the recipient economies, the likelihood that these flows will persist unabated into the future through the continuation of global trends, which are much better understood in the literature. These features suggests that the macroeconomic effects of remittances’ are likely to be substantial and sustained over time and may have unique implications for policy makers in recipient countries.

First, concerning the sixe of remittance flows, the literature offers ample documentation on how large they have become in recent years. We present our own findings using the most recent data available on remittance. It has been found that the level of remittances using he item workers’ remittances from the World Development Indicators (WDI) database (World bank, 2006) rose from US $ 48 billion to US $114 billion in 2003.In examining both the official and unofficial remittance flows (World bank, 2005) it shows a dramatic results which is this level could be substantially higher. However, for many countries specially developing countries the level of remittances received equal to or exceed the amount of foreign direct investment portfolio flows from financial markets and official development assistance. Since the remittances flow are large in size and pervade a significant number of households in the recipient economies, they undoubtedly have effects at the macro level, influencing both the market prices and the interactions among households, firms, financial intermediaries and the government.

Second, the forces behind the substantial growth of remittances flows do not show to be subsiding. As a part of an effort to improve growth prospects, many countries have over the past several decades initiated a series of policies to relax their economic systems. In that time the policy makers have primarily focused on the understanding the effects of globalization, trade openness and capital account liberalization on the course and extent of private capital flows, foreign direct investment and economic growth. However, the inclination toward deeper economic integration through regional arrangements such as the Association of South east Asian Nations (ASEAN), along with the propagation of trade agreements like the North American Free Trade agreement (NAFTA), has also accelerated to underpin increased flexibility in labor migration. Consequently, the growth and performance of remittance flows can be viewed as an additional implication of globalization, an implication that has yet to receive as much as analysis as the economic impacts of trade and capital account liberalization.

Finally there are key differences between remittances and other international flows and while it may be convenient to view remittance flows through the same lens as official aid and private capital flows, there are good reasons to have faith in that remittances behave differently and in turn have different economic impacts. The most extensively accepted definition that prevails literatures is that remittances are unreturned, nonmarket personal transfers between households across countries.

Remittances significantly differ from official aid flows, since the latter government-to – Government transfers, where as remittances are composed of numerous small transfers between private individuals. Furthermore, one crucial element sets remittances apart from both official aid and private capital flows: the presence of familiar relationships. This element introduces well known economic issues concerning interactions among family members and fuels the uniqueness of remittances behavior. The appropriate foundation for understanding remittances originate with Becker’s economics of the family which indeed underlies much of the research on the microeconomic implications of remittances. It has been found that remittance plays a major role for the economic development of Bangladesh. According to the latest economic and social survey of United Nations Economic and social commission for Asia and pacific (UN-ESCAP), annual remittances exceed official development aid and foreign direct investment in Bangladesh (Daily Star, April01, 2006). Formal remittances stood at US $3.8 billion in 2004, equivalent to around 6% of GDP. It is extremely difficult to measure the informal remittance flow, but these channels are considered to b almost as much as formal remittances. Therefore, if informal channels are included this figure reaches US $5.9 billion or around 9-10 % of GDP. Formal remittances have been growing at over 10% annually since 2000 due to effective government policies encouraging greater efficiency and confidence in formal remittance payment channels. Formal remittances alone are equivalent to more than 50% of the total government revenue and are equivalent to amount four times total annual aid flows in 2004. Remittances also present around 40 % of export values and play a critical role in providing foreign currency and financing the country’s trade deficit (DFID Bangladesh, 2005).

Fig

The foreign currency aspect if remittances are especially important in Bangladesh runs a trade deficit and is currently and is currently suffering from a serious foreign exchange crisis. Growth remittances are likely to be one of the key factors in the middle of run in maintaining foreign exchange reserves and thereby maintain economic stability.

3.9 The impact of Remittance on Economic Insecurity

Impact on households and poverty

Remittance play an important role in smoothening household consumption basically respond positively in case of adverse shocks relating to natural disasters, crop failure, job loss and health crisis. From this perspective they can be said to provide a degree of social insurance to poorer households that lack access to insurance and credit markets and are therefore vulnerable to severe declines in income from negative shocks. The sending of family members to other regions and countries can in some instances be viewed as part of a strategy to manage risks facing households – namely the correlation of income shocks and with the home region will be smaller thereby assisting consumption -smoothing income transfers.

Impact on poverty

Economic insecurity also pertains to insecurity brought about by poverty that brings greater uncertainty and unpredictability into people’s lives and also make them more vulnerable to violate economic circumstances. Remittance can diminish poverty through augmenting the income of recipient households, through indirect multiplier effects and through their macroeconomic effects.

The Keynesian multiplier theory suggests that even if the remittances are totally spent on consumption there will still be a benefit to the receiving economy, to the extent that at least some of the funds are spent on local goods and services. Several studies have estimated that remittances multipliers, operating primarily through the consumption effect in a number of countries and found their values to be significant (Chami et al, 2003).

Impact on income distribution

In order to better understand the long term broader impact of remittances on poverty, it is vital to begin by trying to assess how it can affect the distribution of income and /or assets in the receiving country. For example, studies have suggested that poverty in Latin America world be significantly lower if the distribution of income was less unequal. According to Lopez- Cordova and Olmedo the theoretical relationship between remittances and inequality should be viewed as a dynamic process, with an early amplify in inequality followed by decrease over time (Lopez-Cordova and Olmedo, 2006). During the initial stages of migration to new designation, the cost of emigrating is usually relatively high with mainly higher -income migrants being able to afford to move. However, together with the number of migrants in the countries increases, the cost of emigration declines allowing individuals in lower income households the possibility to migrate. This is because established and growing networks reduce information costs about the specific destination, the search for job and so on. This is the ultimate result which shows overtime and thus remittances should increasingly accrue to low income households and reduce income inequality in the country of origin.

Impact on savings and investment in human, social and physical capital

In addition the survey results the high propensity to consume remittance income in a number of countries shows that the role of remittance in smoothing household consumption and moving counter cyclically. This does not prevent the fact that the remittances may at the same time also boost households’ savings, thereby reducing their economic vulnerability and increasing their ability to invest in the future. Moreover, remittances may free up resources for greater savings from other sources of household’s income i.e. the fungibility issue – providing the basis for studies showing a higher propensity to save among remittance receiving households than in others (Kapur & Orozco, 2003). Thus, in a various cases remittances have been shown to both consumption and supply funds for investment – remarkably in education, housing, and also in business.

Remittances can undoubtly impact long term poverty where investments are made in human capital. Human capital not only affects today’s well being but also permits future generation to break the cycle of poverty and advance growth perspectives -thereby providing longer-term economic security. Remittance transfers may increase education and health as they relax income constraints that inhibit optimal human capital investment. It should nevertheless be noted that it is empirically difficult to measure the effects of remittances on human capital formation, which may occur over a very long period of time.

Effects on incentives

It is known that the international remittances may affect the quality of economic policies and governance at the microeconomic level. The parallel concerns that they could also make a moral hazard problems at a more localized level, encouraging recipients to decrease their labor force participation, limit job searchers, reduce labor effort or invest n riskier projects – all of which could adversely affect the longer term economic prospects of households and the wider economy and render them vulnerable to adverse shocks.