Emerging economies have been affected in numerous ways by Covid-19. The following are just some:
Limited movement of their population
loss of export earnings
drop in foreign direct investment
fall in remittances.
Regarding the last one – the World Bank have estimated that global remittances will decline by 20% in 2020 – more than US$100bn – due to the Covid-19 pandemic and shutdown. There are expected to fall across the regions – see graph below:
In 2019 remittances reached a record US$554 billion but are estimated to be US$445bn in 2020. With the fall in foreign direct investment they have become even more important to low and middle income countries (LMIC). In 2019 remittances were greater than foreign direct investment and were the biggest source of capital in LMIC – 8.9% of GDP. This is especially prevalent when you consider that FDI is expected to plunge by more than 35% to LMIC in 2020.
The importance of remittances is also significant when pooling a poverty figures – it is estimated that a 10% increase in remittances reduces poverty by 3%.
A fall in remittances means:
less spending the economy as a whole
more people below the poverty line
more people unable to afford food, healthcare and basic needs
The World Bank estimate that in 2019 there were 272m international migrants of which 26m were refugees. As well there were in 700m migrants within a country providing financial support elsewhere. However with a downturn in the economy due to Covid-19 it is the foreign workers who are first to lose their job. 2021 might see a slight recovery with remittances set to rise by 5.6% to US$470bn but many things can eventuate over the next year.
Remittances come up in the CIE A2 Economics Syllabus under Developing Economies. The Economist in their ‘Economic and Financial Indicators’ sections has an informative graph and commentary of 2015 remittances. Key points for 2015:
Migrants from developing countries sent home $439bn
25% of GDP in Haiti is made up of remittances
Flows into Europe and central Asia fell by 23% in 2015 mainly due to the weak Russian economy
India received $69bn in remittances – the most of any country.
The figures quoted might even be higher as it is a lot harder to track transactions from smaller money shops. Below are some examples of the importance of remittances in some developing countries:
Sri Lanka – remittances > tea exports receipts
Nepal – remittances > tourism receipts
Morocco – remittances > tourism receipts
Egypt – remittances > revenue from the Suez Canal
Advantages of Remittances
money goes directly to the people it is intend for which means is less opportunity for waste or corruption
money can be spent by the individual on areas like education and healthcare which may not be possible with official aid
the consumer has considerably more sovereignty
the sender is confident that the money will be used effectively which might not be the case with official aid.
Limitations of Remittances
the development of infrastructure projects need sizeable funds which individual remittances cannot provide. For instance schools, hospitals, roads, bridges etc. need concentrated funds.
relying on remittances may mean that you lose some of your skilled labour force, although money does flow into the economy. However, some suggest that this should motivate others into the same job.
they tend not to target those who are desperately in need – both countries and individuals.
some countries are too isolated for their population to go and find work and ultimately they earn very little from remittances. To them foreign aid is essential.
Although remittances do generate substantial income they will never replace aid as some poorer countries will always require assistance from their developed counterparts. A challenge to those countries that receive remittances is to guide this flow of money into projects that will benefit their country as whole rather than just the individual.
To give an indication of the scale of remittances, the World Bank has estimated that in 2010 the volume of remittances was three times that of official aid – $375bn as opposed to $125bn. The consumer has considerably more sovereignty and the sender is confident that the money will be used effectively which might not be the case with
Below are some examples of the importance of remittances in some developing countries:
Sri Lanka – remittances > tea exports receipts Nepal – remittances > tourism receipts Morocco – remittances > tourism receipts Egypt – remittances > revenue from the Suez Canal
Although remittances do generate substantial income they will never replace aid as some poorer countries will always require assistance from their developed counterparts. A challenge to those countries that receive remittances is to guide this flow of money into projects that will benefit their country as whole rather than just the individual. One of the key questions a country must ask refers to the opportunity cost of losing a productive worker to a developed country but gaining the income of that worker in remittances.
The above is a brief extract from an article published in this month’s econoMAX – click below to subscribe to econoMAX the online magazine of Tutor2u. Each month there are 8 articles of around 600 words on current economic issues.