Remittances to poorest countries could play greater role in broadening and empowering their economies, report says

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Remittances to poorest countries could play greater role in broadening and empowering their economies, report says
Least developed countries urged to find ways to channel vast, largely private money flows – which increased even during global financial crisis –into improving productive capacities

Geneva, Switzerland, 26 November 2012

Nationals of the world’s poorest countries who work abroad sent home some $27 billion in 2011. The governments of those countries should strive to employ this vast resource – which largely goes in private transfers directly to families – to improve the breadth and abilities of their economies, a new UNCTAD report recommends.

The Least Developed Countries Report 20121, subtitled Harnessing Remittances and Diaspora Knowledge to Build Productive Capacities, was released today.

It says that the world’s 48 least developed countries (LDCs) should take steps such as improving domestic banking and financial services, so that a greater proportion of such money is available for investment, small business development, and job creation for increasingly urbanized populations who cannot depend for their survival on farming. It notes that remittances continued to increase even during the global financial crisis – an important factor of late, since LDCs as a whole performed less well in 2011 than in 2010, signalling challenges ahead. Remittances are forecast to continue to grow over the medium term.

The Report adds that migration from LDCs has taken on a South–South dimension in recent decades: 80 per cent of LDC emigrants move to other developing countries. The destination of LDC emigrants varies across regions, but most go to South Asia, the Middle East, and Africa.

The Report also urges that governments should act to reduce the transfer costs associated with sending remittances home; these often run as high as 12 per cent of the amount transferred, which is about a third more than the global average. It is estimated that in 2010, remittances sent to sub-Saharan Africa could have generated an additional $6 billion for recipients if the costs of remitting money had matched the global average.

In particular, the Report recommends that these significant flows of money be channelled effectively into improving LDCs’ productive capacities – that is, the abilities of their economies to produce greater varieties of goods and services, and more sophisticated goods, for domestic use and export. For some years, UNCTAD has argued that improving productive capacities is the best, most stable long-term strategy for helping to lift countries and their populations out of poverty. The production of greater varieties of goods and services makes economies less vulnerable to collapses in the demand and price for specific goods – especially the raw natural resources and basic farm products that many LDCs now produce. Improving productive capacities also expands knowledge and technological capabilities. In addition, the production of more sophisticated goods and services results in higher profits and the creation of more and higher-paying jobs.

The potential pay-offs are significant. LDCs have some 27.5 million citizens living abroad. Over the last decade, remittances have outstripped inflows of foreign direct investment (FDI) to LDCs.

Research shows that most such money is spent directly by families on such vital needs as food and housing. However, the Report says that it would be beneficial if more of it could be channelled – once these necessities are taken care of – into such activities as local infrastructure development and vocational training projects.

In 2011, the overall economic growth rate for LDCs was 4.2 per cent, down 1.4 percentage points from 2010, thus mirroring the slowdown of growth worldwide. Although LDCs overall improved their export performance in 2010 and 2011, largely due to higher international commodity prices, for non-oil-exporting LDCs the resource gap widened: 18 LDCs had current account deficits of more than 10 per cent of gross domestic product (GDP), the Report notes, while only five LDCs reported current account surpluses. Net disbursements of official development assistance (ODA), together with net debt relief to the LDCs from all donors, reached a record level of $44.8 billion in 2010, which offset declines in private financial flows and FDI. Nonetheless, with less diversified economies, LDCs have neither the reserves nor the resources that are needed to cushion their economies and adjust easily to negative shocks, the Report warns.

Given the growing danger that the world economy might be entering a lengthy period of stagnation and deflation, LDCs have to prepare for a relatively prolonged period of uncertainty, with a possible escalation of financial tensions and the threat of a real economic downturn, the study cautions. It calls for an urgent rethinking of remittances policies and of the role that they could play in promoting industrial development and structural transformation in home countries.

The Report finds that despite some heterogeneity across countries, the value of remittances relative to GDP or export revenues has historically been much greater in LDCs than in other developing countries. In the average LDC, they account for as much as 4.4 per cent of GDP and 15 per cent of export earnings, as compared with 1.6 per cent and 4.5 per cent respectively for other developing countries. While remittances, by their very nature, are distinct from capital flows, they clearly play a significant role in providing foreign exchange for a large number of LDCs. In 2010, it was estimated that as much as two thirds of recorded remittances to LDCs originated in other Southern countries.

The Report documents the positive impact of remittances at the household level, both in terms of poverty reduction and as a risk-mitigation strategy to diversify income sources. However, the relationship between remittances and economic growth is complex and multifaceted. On the negative side, unless properly addressed, large inflows of remittances may also be associated with appreciation of the real exchange rate, weighing down domestic competitiveness and hindering economic growth (i.e. the so-called “Dutch disease”). On the positive side, remittances may support economic growth and productive capacity development via two channels: investment, and financial deepening, namely the increased provision of financial services with a wider choice of services geared to all levels of society. Indeed, remittances provide a much-needed source of foreign financing that could enhance the pace of social and economic development, especially in the areas of education, health, and poverty reduction.

The Report says that post offices, savings and credit cooperatives, and microfinance institutions can play an important role in expanding access, especially for rural populations, to remittances and financial services in LDCs. It says that exclusive agreements with money-transfer operators, which limit competition and tend to increase the cost of sending money, should be avoided.

Finally, UNCTAD cautions that the growing attention being paid to remittances does not mean that they can be considered a substitute for FDI, ODA, debt relief, internal resource mobilization, or other sources of financing for development.

Indeed, the Report says that owing to the inherently private nature of remittance flows, the effective mobilization of remittances for productive purposes depends on an array of policy and institutional improvements aimed at reinforcing both the “investment channel” and the wider provision of financial services. This may entail a range of policy interventions, such as domestic and regional development policies aimed at inducing private investments. It may also include appropriate financial and regulatory reforms designed to reduce transaction costs and promote greater financial inclusion and credit provision for small- and medium-sized enterprises.

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