Remittances play a very important role in eliminating poverty of a nation. Remittances not only reflect the domestic labor working in the global economy but also show the connection between growth and integration with the world economy. Hence, remittances improve the integration of countries into the global economy. With the wake of globalization, multiple factors have contributed to labor movement in which better working environment, more opportunities and compensation are on top of priority list. It has been generally argued that globalization has caused loss of power of nation states and dismantled welfare state model that grossly reduced the efficiency of the governments.
A 10 percent increase in international remittances in developing economy may decline the poverty by 3.5 percent. Remittances are also poverty cushion as increased money supply stimulates the demand and increased consumption expenditures on goods and services would ultimately benefit the poor. Low level of economic activity has created unemployment for skilled labor while the remittances have created the opportunities even for unskilled labor. The workers’ remittances in the decade of 1980s had positive economic and social effects on households receiving money from Middle East. Remittances are mostly spent on consumption, housing and land and are not used for productive investment that would contribute to long–run development.
Despite the ever-increasing size of international remittances, little attention has been paid to their effect on poverty and income distribution in developing countries. While remittances reduce poverty, countries with higher levels of poverty are not necessarily receiving more remittances.
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Countries with the highest levels of povertydo not produce many international migrants and thereby receive fewer remittances. To increase the positive impact of international remittances on poverty, it would be useful for the international community to:
- Lower the cost of sending remittances home by increasing competition among service providers, improving payment system infrastructure and removing regulatory barriers.
- Promote financial democracy by encouraging greater use of the banking system.
- Promote greater remittance flows by avoiding taxation and overregulation.
- Enhance their local development impact by supporting hometown associations.
- Improve housing conditions by offering mortgage loans to migrants.
- Encourage banks to offer new financial products to migrant families, such as health insurance policies.
Remittances have an important role to play in the economic development of a country. Yet their impact is primarily seen at the regional and local level as a source of income to improve the wellbeing of thousands of households in migrant-sendingcountries. Households receiving remittances tend to have better nutrition and access to healthand educational services compared to households that do not. However, remittances should not be seen as a substitute for government policy and action.
Remittances are widely viewed as compensatory transfers between family members. Nevertheless, remittances respond to investment opportunities in the home country as much as to charitable or insurance motives. Many migrants invest their savings in micro businesses, real estate or other assets in their own country, probably expecting to return one day or because they know local markets better than in their host countries. Small-scale savings are also increasing as more migrants open savings accounts with remittance companies in their hometowns thinking that their funds are safer back home than in European or US bank accounts. Others prefer to keep their capital closer to home to invest in property, other assets or further migration. Some remittance companies are now exploring microfinance and other investment services and products.
[box type=”note” align=”” class=”” width=””]The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan[/box]