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Background
The issue of migration is at the core of global policy dialogue today as developed countries grapple with unexpected arrivals of migrants from different countries and by various means. Sub-Saharan Africa (SSA), one of the poorest and economically deprived regions of the world is no exception to this trend. Sub-Saharan Africa lags behind in several human development indicators as compared to other developing regions (Human Development Indicators, 2009). These factors among others have resulted in consistent migration of both skilled and unskilled labour in search of better working and living conditions. The heaviest toll of this brain drain is mostly felt in the health and education sectors of Sub-Saharan African countries (Kapur, 2005). According to the International Labour Organisation, the total global stock of migrants increases by six million annually, faster than world population growth. One of the outcomes of migration is remittance inflows, which has emerged as a key link between human mobility and development. Despite the steady increases in migration globally, it cannot be the sole reason for the increasing levels in remittance inflows. Other developments such as technological improvements in financial infrastructure, capital account liberalisation including the relaxation of restrictions on foreign exchange deposits and inflows, expansion of money transfer services, improvements in financial service delivery leading to increased market competition and remittance country partnerships in several remittance corridors have all contributed to an increase in the level of remittance inflows to developing countries (Singer, 2008). There have been challenges in the universal definition of remittances, however the fifth edition of the International Monetary Fund’s Balance of Payment Manual (BMP5) definition is what is universally used to define and record remittance inflows.
In this manual standard measures of remittances are based on three main items, namely workers’ remittances (money sent by workers residing abroad for more than one year), compensation of employees (gross earnings of foreigners residing abroad for less than a year and migrant transfers (net worth of migrants moving from one country to another) (IMF, 2006). Besides balance of payment estimates, other methods such as micro or household surveys and banks or financial institution records in origin countries are also used to complement measurement efforts (Addison, 2004). The widely used balance of payment statistics in most countries are unfortunately only capable of partially capturing remittance inflows due to the fact that substantial amounts flow in through informal channels and therefore are not officially captured. This is estimated to be at least 50 percent of globally reported flows. Very poor records are kept by institutions involved in remittance transfers, which affect the accuracy and quality of reporting to Central Banks or the respective oversight authority.
There are also inadequate linkages and levels of cooperation between sender end institutions and demand end institutions to facilitate the capture of remittances data from the leading sources of remittances to developing countries (World Bank, 2006). Despite these challenges to accurate measurement, remittances have attracted immense research and policy attention over the last two decades as a result of its current levels in excess of official development assistance (ODA), portfolio investments and in some cases foreign direct investment (FDI), its characteristics and its diverse economic impact on recipient countries. In terms of levels, remittances to developing countries as at end 2008, stood at 330 billion US dollars, thrice the value of official development assistance and also exceeded 10 percent of GDP in 23 developing countries worldwide (Mohapatra et al., 2009). In Sub-Saharan Africa remittance inflows have steadily increased from 1.4 billion US dollars in 1980 to 21.3 billion US dollars in 2008, approximately 2.2 percent of the regional GDP (World Bank, 2008). Regarding its characteristics, remittances have been found to be relatively more stable than other forms of foreign inflows (Ratha, 2003) even during the recent global financial crisis. Contrary to a projected decline of 6.7 percent between 2007 and 2008, remittance inflows to developing countries increased by 28 percent from 265 billion US dollars in 2007 to 338 billion US dollars in 2008, and declined by a meager 6 percent to 316 billion US dollars from 2008 to 2009.
FDI on the other hand fell by approximately 30 percent, coupled with a total collapse in private portfolio investment and scarce donor funds to developing countries due to the credit crunch during this period (World Bank, 2010). Remittances are also unrequited funds, thus they do not result in any contractual or debt servicing obligations (Kapur, 2005). Furthermore, unlike other forms of foreign inflows, remittances are not usually withdrawn ex post from a recipient economy. Consequently, they have been found to sometimes mitigate volatility and reversibility in other capital inflows (Bugamelli and Patterno, 2006). With respect to its economic impact, remittances have emerged as both a positive and negative externality to migration. As a positive externality, remittances have been found to smooth consumption and income for households thereby reducing poverty (Ratha, 2003). Remittances have contributed to employment creation by providing capital for microenterprises (Woodruff et al., 2000). In countries with underdeveloped financial systems remittance inflows have enhanced access to finance for the poor and financially excluded (Gupta et al., 2007). Furthermore, remittances have increased economic growth by providing finance for investment (Guiliano and Ruiz-Arranz, 2005). Due to the multiplier effect of remittance inflows, non-recipient households have also benefited indirectly through labour income and payment for goods and services by recipient households (Durand et al., 1986). Remittances have served as a vital source of foreign exchange for some developing countries in the Euro-Mediterranean region, improved their sovereign rating and enhanced their access to international capital markets to raise finance for development (Herzberg, 2006). As a negative externality remittance inflows have been known to widen the poverty gap due to the creation of pockets of more affluent remittance receiving households in relatively poor neighbourhoods (Carrasco and Ro, 2007). Recipient households have sometimes supplied less labour than non-recipient households, thereby aggravating unemployment (Funkhouser, 1992; Amuedo-Dorantes and Pozo, 2004). From the labour supply perspective remittance inflows have been found to reduce economic growth (Chami et al., 2003). Most remittances are spent on consumption goods, thereby generating inflationary pressures on the domestic economy (Gupta et al., 2007). Remittances could also appreciate the domestic exchange rate in small open economies. This adversely affects export competitiveness thereby worsening the current account deficit (Corden and Neary, 1982). As a result of high transaction costs, eligibility and identification constraints, informal channels are often used by migrants to remit home. This remains a major policy challenge worldwide with serious implications for money laundering, terrorism finance, illegal foreign exchange markets and fraud (Pearce, 2006). These trends, characteristics and varying economic impact of remittances have generated substantial research and policy interest. The aim is to ascertain the specific impact of remittance inflows on various regions and corridors and how the benefits of these inflows could be optimised, whiles effectively addressing the associated negative externalities. This research posits that a critical step to achieving this is to first of all establish which factors drive and constrain these inflows and how remittance inflows respond to changes in these factors. Countries which have been able to achieve this critical step have realised substantial net benefits from remittance inflows by implementing the necessary regulatory, market and technological reforms at the required levels (Ratha, 2006; Ketley, 2006; Herzberg, 2006). Sub-Saharan Africa lags woefully behind other regions in efforts at effectively harnessing the benefits of remittance inflows whiles minimising negative externalities associated therewith. This has been attributed to several factors such as inadequate awareness of the drivers and constraints to these inflows through formal channels, overregulation, underdeveloped financial systems and markets, lack of the requisite structures and enabling environment (Ketley, 2006; Bokkerind, 2006; Bester, 2006). Consequently, Sub-Saharan Africa receives only 5 percent of formal global remittances to developing countries as compared to 25 percent that goes to Latin America, 14.4 percent to the Middle East and North Africa, 24 percent to East Asia and Pacific, 20 percent to South Asia and 13 percent to East and Central Asia. Informal inflows to Sub- Saharan Africa have been estimated to be between 45 to 65 percent of formal inflows, as compared to 5 to 20 percent for Latin America (IMF, 2006; Freud and Spatafora, 2005).
TABLE OF CONTENTS :
- 1. Introduction
- 1.1 Background
- 1.2 Problem Statement
- 1.3 Objectives of this study
- 1.4 Importance and benefits of the study
- 1.5 Delimitations
- 1.6 Outline of the Study
- 2. What drives remittance inflows to Sub-Saharan Africa. A dynamic panel approach
- 2.1 Introduction
- 2.2 Theoretical framework
- 2.3 Data and methodology
- 2.4 Empirical results
- 2.5 Conclusion, policy implications and future research
- 3. Remittances and the Dutch disease in Sub-Saharan Africa
- 3.1 Introduction
- 3.2 Relevant literature
- 3.3 Data and methodology
- 3.5 Conclusion and future research
- 4. Remittances inflows to Sub-Saharan Africa. The case of SADC
- 4.1 Introduction
- 4.3 Data and methodology
- 4.4 Empirical results
- 4.5 Conclusion, policy implications and future research
- 5. Conclusion of study and policy recommendations
- 5.1 Conclusion of the study
- 5.2 Policy recommendations
