The Pros and Cons of Remittances

 

The Pros and Cons of Remittances Tarron Khemraj Published: Insight  Published:  Insight , Economics and Finance, Sep 17, 2013 As a percentage of GDP, Guyana is one of the largest recipients of remittances each year. These inflows of critical foreign exchange are important for economic stabilisation and  possibly growth of the Guyanese economy. I will outline the role remittances play in stabilising the economy in the short-term and conjecture whether remittances pay a positive or negative role in the growth of GDP in the long-term. Misunderstanding of the role of  remittances often stems from failing to decipher the difference between fluctuations in actual GDP and the trend of GDP. Remittances obviously are important for smoothing the fluctuations of GDP. It other words, the inflows stabilise GDP in the short-term and add certainty to inflation. However, the long-term level of GDP is dependent on the trend of GDP over time. The steeper the trend the higher will be the rate of growth of GDP, while a relatively flat trend indicates GDP is growing slower over time. Whether remittances determine the steepness of  the trend is debatable. Less uncertain, however, is the positive role remittances play in smoothing the fluctuations of GDP. When GDP is below its trend it means the economy is  producing less than it really rea lly can (unemployment will be higher); while when it is above trend it is producing more than capacity (unemployment will be lower). The latter will see prices rise as employers must bid up wages to attract scarce employees. Wide swings of production away from its trend are never good for a society. The hallmark of skilful policy-making would be to smooth out the fluctuations of GDP. One of the first things remittances do is supplement current income. Remittances are not income, but a supplement to it. Income comes from being employed; remittances are a transfer or a gift from one person abroad to a local. If remittances are to have a long-term favourable effect on the trend of GDP (long-term growth), then the monies received must be spent on things that enhance human capital such as education and health. This is also dependent on whether the person receiving remittances today, and spending on education and health, will stay in Guyana in the long-term. Data show that Guyana is the largest exporter, as a per cent of population, of skilled citizens. citiz ens. The economics literature is clear on what determines long-term economic growth or the trend of GDP. These factors are education, research, health, law and order, arts and culture, science and technology, good governance and the protection of private property rights. Until we have evidence that remittances are contributing to these growth enhancers, we cannot for certain say that the inflows promote economic growth. Indeed, the dual of remittance inflows is the migration of Guyanese, particularly skilled folks. No country can grow in a sustainable manner with such a large loss of its human capital and talents.  Nevertheless, remittances most likely li kely have a ffavourable avourable effect by stabilising the economy in the short-term. In particular, the inflows serve to provide a reliable source of foreign

 

exchange, which helps to maintain the relatively stable exchange rate after 2004. Studies have found that families abroad remit for altruistic reasons. Therefore, even when there is an economic downturn in the advanced economies we still see the growth of remittances. Exchange rate stability is very important for an economy such as Guyana. This is because a rapid depreciation often results in higher inflation that could even result in political conflicts. Devaluation also could cause GDP to fall far below trend because the import price of fuel and other production inputs will increase. Therefore, to the extent remittances help to stabilise the exchange rate it is doing the same for GDP and inflation. The long-term growth effects are less certain. My hunch is migration of skilled Guyanese is slowing down economic progress and preventing high quality economic growth instead of  low quality growth from extracting natural resources such as gold and raw bauxite. Studies are also needed to figure out whether remittances reduce the willingness of people to find work.