Remittance Flows- the ‘boost’ a developing country desires

Remittances have gained popularity in recent times, due to increased expatriates. The dual ended flow is structured around an expatriate sending foreign currency to his native country, and the expatriate’s household transferring local currency to the foreign destination. Expatriates face the conundrum: convert foreign currency, or to invest the aggregate remittance. To address the concern, the implications of remittance flows need to be considered. The overall scope shall be discussed on the level of importance, addressed under Micro and Macro levels.

Micro Level- Implication on individuals and households

The most conspicuous facet of remittance flows is stabilization of household income, ensuring improved living standards and better quality of life. Acting as a responsive measure for income deficiencies, this has the potential to heal household income disparities. This is an ideal solution for families with significant saving constraints and thus exposed to unaccounted risks.

Accumulation of human capital by pursuing advanced health standards and higher education is an indirect underrated boon that usually remains unnoticed. Studies reveal the mannerism in which human capital growth of beneficiaries of expatriates who emigrate and the remittance flow that is derived contribute towards improved healthcare by relieving financial constraints. Remittances have led to reduced mortality rates, higher birth weights and elevate sanitary conditions in beneficiary households through acquirement of consumer durables namely refrigerators, washing machines and stoves.

Remittance flows show favorable influence on the education of the offspring. In order to get a bigger picture on the impact on educational investment, a study took advantage of the depreciation succeeding the Asian financial crisis of 1997. An increased remittance flow was recorded for educational investment. Results derived emphasize the increase of children who received the privilege to receive education compared to the decline on child labor. It was argued that the absence of a parent affects the child negatively, which would ultimately induce the child to leave school and search for employment. However, the argument was put to rest by introduction of facilities that simplifies the beneficiary household to receive the funds remitted more conveniently.

The ideal way to get a better understanding is to do a comparison between a family that has a member as an expatriate and a regular household. Research reveals that even considerably deprived clusters of children receive compensation. Secondary education level students who cannot afford to remain unemployed, higher order birth children who may not receive equal treatment and specifically girls are inclusive to all the wonders that are generated. A regular household may have practices that exclude certain individuals whilst all can be given equal attention.

Investment opportunities and savings are two criteria that are sought out by most households. Remittances relieve credit restrictions that mitigate entry to financial markets. Thereby, better acquisition of assets (land, labor, capital and entrepreneurial opportunities) is ensured which improves financial literacy. Therefore, due to gained financial literacy, households have the option of re-investing the currency sent in new ventures. A certain value addition process is launched thereafter due to emergent small scale family businesses which ultimately contribute for the growth of the Gross Domestic Product of the county.

Macro Level- Impact on the domestic economy

The overall scope of the impact of remittances on the domestic economy can be summarized as economic stability and the economy’s creditworthiness. Resilience and its countercyclical nature advocate towards economic stability. Studies have been conducted by using natural disasters and financial crisis’ as agents to measure remittance flows. It was realized that remittances act in response for the economic need; skyrocketing when critical and reduce vice versa.

Remittance is recognized as a prominent factor in foreign exchange. Reversal in current accounts during periods of instability, appreciating the nation’s credit rating and improving the flow of new investments occur simultaneously. Increased remittances generate a favorable impact on the current account contemporaneously where poorly sustained current account balances tends to depend on. Fixed exchange rate regimes facilitate a deficit in the short run, regardless whether remittance is invested for consumption or investment. However a fiscal policy that integrates inflation targeting with some flexibility in the nominal exchange rate helps achieve a current account surplus. This is identified as a result of the resource reallocation and changes in the price of nontradable products that are derived through remittances which usually occurs as an immediate aftermath of remittance inflow. In other words, this acts as a catalyst for nominal appreciation and real appreciation which reduces exports.

Due to the appreciation of the domestic currency, the credit ratings of the countries will improve systematically. Credit ratings are taken into account prior to investment in foreign markets. An unfavorable rating potentially could withdraw current investments while demoralizing potential investment opportunities. Remittances act in favor of the nation’s credit ratings; therefore the current investments are protected. Furthermore it acts as a lure for potential alluring investment prospects.

Policy implementation

Developing countries that are beneficiaries of remittance flows are advised to adapt convenient policies which facilitate better functionality. Removal of constraints imposed on exchange and capital controls is an ideal start. Launching domestic operations overseas which simplifies transactions between beneficiaries and expatriates shall promote international transactions through financial institutions.

Issue of identification cards which provides convenience to access financial institutions is a strategic concept that has been lucrative for some countries. The ‘Matricular consular’ is used as a formal document of identification which grants undocumented Mexicans living in USA access to financial institutions. Ensuring familiarity with financial institutions is a key to improving financial literacy and access for asset accumulation and investments.

Reducing remittance cost is a must to ensure better flow of currency to the intended beneficiary. This matter is given priority since it determines the overall success of the entire process. Rates fluctuate from 2% (Russia) up to 18-20% (Japan). Throughout the years, countries strived to reduce remitting costs, which fluctuates at an average 8% at present.

Using immigration policies as means to strengthen remittance flows is an ambiguous approach that needs to be discussed. Assuring permanent residence of migrants similar to the 1986 US Immigration Reform and Control Act is a hit or miss scenario which acts as a goldmine if executed to perfection, or a catastrophe if done without proper concern. Providing legal status in the country grants the capability for expats to move freely from host country to native country. This ensures better connection between the expat and the household, thus facilitating a smooth flow of remittances. On the other hand, it runs the risk of disruptive remittance flows if the expat settles permanently and loses contact with his household, or relocate the entire household to the host country altogether. In that case, a link which ensured a smooth flow is erased from the domestic economy.

National income of a country comprises of numerous sources. Each plays a significant role in the growth of the economy under consideration. Inward remittances, as scrutinized plays a pivotal role, influencing both individual households and the economy. It acts as an agent to up-lift a household in need and it assists to kick start the functionality of an economy which shows stagnant characteristics. In conclusion, it is evident that a remittance flow is the inevitable ‘boost’ that a developing country desires.