204 Final Term Paper.

8/3/2019 204 Final Term Paper.

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1. INTRODUCTION

Migration is a very old phenomenon. From the very beginning of human civilization peoplemigrated for food and security. Now people migrate for economic opportunity and incomesecurity. International migration gives a person an opportunity for higher income and better

lives. The higher income of the migrated person not only changes his destiny, but also haspositive impact of the lives of his family in the home country. Furthermore, migration reducesthe pressure of unemployment in the country. Remittance has become an important aspect for thedeveloping countries for socioeconomic development of the country. It plays a significant role tomaintain balance of payment and foreign currency reserve. Remittance also has a significantcontribution in Gross Domestic Product (GDP) of the country. So To boost the Remittance flow,nowadays government takes various initiatives and utilizes it for economic developments.

In 2003, the Global Development Finance Annual Report took formal notice of remittances as asource of external development finance for the first time. In the year 2000, remittance flow wasover US $72 billion and among this amount the developing countries represent a large proportion

of world financial flows and the amount was substantially more than global official developmentassistance, more than capital market flows and more than half of foreign direct investment flowsto these countries.1

Remittances have emerged as a key driver of economic growth and poverty reduction inBangladesh, increasing at an average annual rate of 19 percent in the last 30 years (1979-2008).As a huge labor surplus country from 1976 to 2004 total about 3.92 million people migratedtemporarily from Bangladesh. On an average the country exports 140,000 people annually andmost of the short-term migrated people were in semi-skilled and unskilled category. In early1990s the growth of short-term migration increased dramatically. The number of globalBangladeshi Diaspora living in developed countries is almost 1.178 million. The most of theBangladeshi immigrants live in North America and European countries. In 2005, the remittancesof Bangladesh crossed more than US$4 billion, which was 27 percent higher than the previousyear. Moreover, during the first three quarter from July to March remittance hits a record growthof 23 percent during the same period of previous fiscal year. The main source of remittance ofBangladesh is migrant workers living in Kingdom of Saudi Arabia, which contributed 39.3%remittance during 2005 Fiscal Year.

Finally, it can be concluded that, Remittance plays an important role in the accounts ofBangladesh and are crucial to the survival of poor individuals and communities around thecountry. It is one of the major sources of the foreign currency earning that maintains balance ofpayment of Bangladesh. So the government should give more emphasis to increase the flow of

remittances. To boost the flow of remittances the government should establish more technicalinstitutes, develop new foreign policy, encourage the utilization of remittances in productivesectors and create enabling environment to invest remittances in capital market.

2. Literature Review

1INAFI Asia International Conference on Migration and Development by - Rashed Al Hasan,Programme Officer, INAFI Bangladesh on April 30, 2006

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Remittances are the transfer of money by millions of migrants working worldwide back to their

family and friends staying in home country. Remittances facilitate economic growth all across

the World. The World stands as a globalised village. Many people go aboard for better education

or for a better lifestyle. Through Remittance they do not need to worry about their loved ones at

home anymore. Remittance transfers have existed for centuries, but have only garnered the

attention of people in the last couple of decades. For many countries, remittances are a very

important source of finance usually making up anywhere between 5% - 40% of the countrys

GDP. These same countries are highly dependent on remittances as a source of alleviating

poverty and contributing to development. Remittance Transfer could either be domestic or

International. If the money is remitted within the same country then it is said to be Domestic.

And if the money is remitted to another country, it is international. It is believed that almost 10%

of the worlds population is a part of the process of remittance.

2.1 Theoretical Determinants of Remittance

The theoretical debate about the determinants of remittances was triggered by Lucas and Stark(1985) with their ground-breaking paper Motivations to remit: Evidence from Botswana,which is still the basis of the current discussion and extensions. Lucas and Stark studiedremittances on a household level and hypothesized the main determinants to be pure altruism,pure self-interest and tempered altruism or enlightened self-interest. Any kind of contractualarrangements between the migrant and household left behind can be in the latter category, forexample co-insurance, exchange-motives, loan repayment etc.. The theoretical motives and theireffects on remittances are summarized in table 1.

Table1. Theoretical determinants of remittance

Effects of

On level of

remettance

Househol

d Income

Migrant

income

Household

shock

Migrant

risk level

Education

level of

migrant

Intent to

return

No. of

migrants

in HH

Time

Purealtruism

- + + + - -

Pure self-interest

+ +

Co-insurance

- + +

Loanrepayment +/- + + +, later -Exchangemotives

+/- + +

Strategicbehavior

- + +

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2.2 Different Forms of Remittance

1. Migrant worker Remittance: These remittances are the cash transfers transmitted bymigrant workers to their families and relatives back home. The migrant workerremittances are a part of huge flows of money between the people who have migrated to

another country in the search of money and livelihood to their families and friends whomay be staying in different cities and countries.

2. Family Remittance: Family Remittance is the remittance that is sent by individualimmigrants to their family, relatives and friends back home. The remittances sent everymonth or so help the families to survive. In the case of poor families, it is remittances thathelp the families fight poverty. Family remittances are the ones most observed all acrossthe world.

3. Community Remittance: Community Remittance is the remittance generally sent by

individual immigrants and by hometown associations to communities and organizationsin their home country. This money has traditionally been used for infrastructure, parks,church and roads and also providing health care to the poor.

4. Social Remittance: Social remittances basically constitute practices, ideas and socialcapital that form the backbone of many remittances that flow from people of one countryto another. Thus social remittances help the cultures and traditions of one community,class or race to intermingle with the cultures and traditions of another community.

2.3 Some Facts About Remittance

1. In the year 1995, the share of the global remittances which were sent to thedeveloping nations was about fifty seven percent but ten years later in the year 2005,it had risen to seventy two percent and was equivalent to an amount of $167 billion

2. The latest report submitted by the World Bank headquartered in Washington D.C.estimated are that almost US$250 billion was sent through remittance globally in theyear of 2006 and the amount of money has been increasing steadily at a rate of almostthirty percent every year for quiet some time now.

3. In the year 2003-2004, out of the top seven remittance recipient countries fivebelonged to Asia. The Asian countries were India, China, Philippines, Pakistan andBangladesh. The other two non Asian countries in the top seven were Mexico andFrance respectively.

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4. The United States of America is the country that provides the largest amount ofremittances, with $31 billion of remittances traveling across the globe every year.

5. About 10% of the population around the globe is directly involved with remittances.

2.4 Various Means of Remitting

1. Money Transfer Operators (MTOs) are organizations that offer services that only transfermoney between countries. Classical example would be Western Union Money Transferwhich is one of the preferred MTOs for safely remitting money all across the World.

2. Most of the Global Banks, such as Citibank, the Barclays and the Deutsche Bank are ableto transfer money if both sender and the person who will be receiving the money have

bank accounts in their respective names.

3. Money can also be sent over the World Wide Web through sites such as Moneybookers.But for the remittance through an internet site to occur, both parties should have access tothe internet and online banking facilities. Such online companies may charge a small feefor their service.

4. Other options which can be used for remittance include companies like the SmartTransfer and iKobo. They use different technologies for remitting purposes. A pre paid

debit card is sent to the recipient who can even withdraw cash without having a bankaccount in his/her name.

Remittance forms a huge part of the GDP and thus, it heavily contributes to economic growth ofa country. It helps to reduce poverty and unemployment in home country. Furthermore, it helpsto create a global economy rather than a local economy.

3. The Economic Impact of Remittance

Remittance plays a significant role for the economic development of Bangladesh. According tolatest economic and social survey of UN Economic and Social Commission for Asia and thePacific (UN-ESCAP), annual remittances exceed official development aid and foreign directinvestments in Bangladesh (Daily Star, April 01, 2006). Formal remittances stood at US$3.8

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billion in 2004, equivalent to around 6% of GDP. It is extremely hard to measure the informalremittance flow, but these channels are considered to be almost as much as formal remittances.Therefore, if informal channels are included this figure reaches US$5.9 billion, or around 9-10%of GDP. Formal remittances have been growing at over 10% annually since 2000, due toeffective government policies encouraging greater efficiency and confidence in formal

remittance payment channels. Formal remittances alone are equivalent to more than 50% of totalgovernment revenue, and are equivalent to around 4 times total annual aid flows in 2004.Remittances also represent around 40% of export values, and play a critical role in providingforeign currency and financing the countrys trade deficit (DFID Bangladesh, 2005).

Figure 1. Remittance as a % of GDP and Export Earnings 1992-2003

Source: Bangladesh Economic Survey-2004, Economic Trends (March 2004), Statistics Department,Bangladesh Bank

Remittances play a critical role in generating foreign exchange reserves for Bangladesh equivalent to around 40% of export revenues, and around 6% of GDP. The foreign currencyaspect of remittances is especially important as Bangladesh runs a trade deficit and is currentlysuffering from a serious foreign exchange crisis. Growth in remittances is likely to be one of thekey factors in the medium run in maintaining foreign exchange reserves and thereby maintainingeconomic stability. The following table shows the comparative position of Remittance, ForeignAid and Export receipt:

Table 2. Comparative position of Remittance, Foreign Aid and Export receipt

(In Million US Dollar)

Particulars 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005

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Remittance 1882.10 2501.13 3061.97 3371.97 3848.29

Foreign Aid 1369 1442 1585 1034 1491

Percentage of Foreign Aid in

comparison with Remittance

72.74% 57.65% 51.76% 30.66% 38.74%

Export Receipt 6467.30 5986.09 6548.44 7602.99 8654.5

Comparing Remittance as apercentage of Export Receipt

29.10% 41.78% 46.76% 44.35% 44.47%

Foreign DirectInvestment(FDI)

-- 302 368 458 --

Percentage Foreign DirectInvestment (FDI) incomparison with Remittance

-- 12.07% 12.02% 13.58% --

Source: Economic Relations Division, Ministry of Finance; Statistics Department, Bangladesh Bank; Export

Promotion Bureau; Board of Investment, July 2004; P- means Provisional and some figures of 2004-2005 isProvisional.

The table clearly depicts that remittance is increasing and the proportion of foreign aid isdeclining. In 2000-2001 Foreign Aid was equivalent to 72.74% of Remittance, whereas in 2004-2005 foreign aid declined to 38.74% of remittance. In comparison with export receipt, during2000-2001 remittance was only equivalent to 29.10%, but in 2004-2005 this proportion increasedto 44.47%. Although the countrys Foreign Direct Investment (FDI) is increasing, but it is stillinsignificant comparing with remittance earnings. In 2001-2002, FDI was only equivalent to12.07% of remittance earnings and in 2003-2004 this proportion increased to 13.58%.

3.1 Macroeconomic Benefit at Household Level

The remittance has significant macroeconomic impact at household level. The macroeconomicimpact of remittances at household level partially depends on the characteristics of the migrantsand hence the recipients i.e. whether they constitute the rural poor, or the more educated sectorsof the population generally residing in urban areas. The majority of Bangladeshi migrants abroadis unskilled, and originates from rural areas (de Bruyn 2005). Unskilled workers take jobs inSaudi Arabia, the United Arab Emirates, Malaysia, and to a lesser extent US and UK as domesticstaff and laborers. Saudi Arabia alone accounts for around 43% of migrants out of Bangladesh.According to official statistics, from 1976 to 2004, 46% of migrants were unskilled, lacked

access to land and resources. The poverty profile of migrants is looked at more closely in thesocial appraisal. However the evidence clearly shows that most short-term migrants abroad arepoor and from rural areas. The poorer the household, the more impact or benefits remittanceincome can have on alleviating poverty. In the short-term remittances help loosen the budgetconstraints of their recipients, allowing them to increase expenditures on both durables and non-durables products, and provides them with protection against negative income shocks.Remittances are cited as making up around 60% to 70% of recipient poor households totalincome (Bruyn 2005). Investment in health and education is valuable for long-term economic

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growth and poverty reduction. Studies conclusively found that migrant families invested more inthese areas (Murshid et al 2002). The most comprehensive review of the literature on remittancesin Bangladesh (Bruyn 2005) lays out a number of benefits that are listed in the table below:

Table 3. Socioeconomic Impact of Remittance at Community & Household

Levels in Bangladesh

Major Indicators Positive Impact of Remittances

Nutrition Allow families of migrants to meet basic nutritional needs

Living condition andHousing

Living condition and housing improved

Education Invest for education of children

Healthcare Increased investment for healthcare

Social security Social security for elderly people increased

Investment Increased investment in business or income generatingactivitiesSource: Modified from Tom de Bruyn 2005

It is found from a study that during migration the total income of migrant households increasedby 119 percent. It is also found that on an average each migrant remitted 55.65 percent of hisincome. Again remittance constituted 51.12 percent of the total income of these households10. Itis found from different survey that a higher portion of remittance is used for consumption.Another significant portion of remittance is used for purchase of land and home construction. It

may be mentioned here that while going abroad a migrant worker usually manages the fund forhis migration either by selling land or mortgaging land. So to retrieve the sold or mortgaged landand also purchase additional land remittance plays an important role. Moreover, some portion ofremittance is used for food, clothing, health care and childrens education. A very small portionof remittance is used by the recipients for investment in business or other ventures and savings.Besides, during returning home the migrant workers bring some luxurious products i.e. colortelevision, CD and VCD player, cosmetics and other electronics item for home use, which reducethe usual amount of remittance that could be sent by the migrant workers. If the utilization ofremittance is categorized as productive and non-productive purposes, then it will be found thatmost of the remittance goes to non-productive purposes and a very insignificant portion isutilized for productive purposes. The table below can clearly explore the utilization patterns of

remittances in Bangladesh:

Table 4. Utilization patterns of Remittances in Bangladesh

Purposes Remittances used (%)

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Food and Clothes 20.45

Medical Treatment 3.22

Child Education 2.75

Agricultural land purchase 11.24

Homestead land purchase 0.96

Home construction / repair 15.02

Release of mortgage land 2.24

Taking mortgage of land 1.99

Repayment of loan(for migration) 10.55

Repayment of loan (other purpose) 3.47

Investment in Business 4.76

Savings/Fixed deposit 3.07

Insurance 0.33

Social ceremonies 9.07

Gift/donation to relatives 0.94

Send relatives for pilgrimage 0.92

Community development activities 0.09

Sending family members abroad 7.19

Furniture 0.69

Others 1.05

Total 100

Source: Siddiqui, Tanseem (2003), Migrant worker remittances and Microfinance in Bangladesh

The above table explores the picture that a significant portion of remittances are used forhousehold consumption and non-productive investment. Only 4.76% of remittances are utilized

for productive investment.

4. An Overview of Remittance in Bangladesh

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Recent studies have proved that the flow of remittance is the second largest revenue earning

sector in Bangladesh. Remittance is playing a significant role to maintain balance of payment

and foreign currency reserve. Remittance also has a significant contribution in Gross Domestic

Product (GDP) of the country. To boost the remittance flow government has undertaken various

initiatives. Various savings products are offered for non-resident Bangladeshis. Moreover, to

encourage investment of Diaspora community, the government has provided tax holiday and tax

exemption facilities, quota during initial public offerings of floating shares etc.

In an economic analysis, it showed that remittances generate both micro- and macroeconomic

effects in a developing country like Bangladesh. In 2004, the formal remittances contributed 6%

of GDP. If informal channels were included this contribution reaches 9-10% of GDP. In 2004-

2005 fiscal year remittance was 44.47% of export receipt. The proportion of foreign aid was only

38.74% of remittances in 2004-2005 fiscal year and foreign direct investment was only 13.58%

of remittances in 2003-2004.

4.1 In microeconomic terms, remittances:

make an important welfare contribution to the receiving household and often provideemergency stopgap monies;

tend to increase during an economic downturn or following natural disasters;

improve the standard of living through funds that are typically invested in human and social

capital (e.g., health care, nutrition, education) and in building assets (e.g., real estate, business,

savings);

generate ripple effects that impact the extended family and community beyond the receivinghouseholds, due in part to the increased consumption.

4.2 In macroeconomic terms, remittances:

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provide a stable flow of funds that is often counter-cyclical (the increase during times of

economic downturn);

offer an important source of foreign exchange for many countries; and

exert upward pressure on the value of the local currency in cases of high inflows of

remittances.

At the macro-level, the benefits of remittances in Bangladesh are generally seen as positive,

though significant flows of remittances can mask problems and delay needed economic or

regulatory reforms.

4.3 Background of the Bangladesh

The economy of Bangladesh mainly agrarian base. It has undergone rapid structural

transformation towards manufacturing and services. The contribution of the agriculture sector to

GDP has declined from 50 percent in 1972-73 to around 20 percent in 1999-2000 and 15

percent in 2004-20053. Although the contribution of agriculture sector to GDP is moving

downward, but still this sector is the main employment provider. The growth of industrial

production has achieved more than 6% over the last 5 years. Moreover, the export sector has

also accelerated with the averaged growth of 30% over the last 5 years (Bangladesh Bank,

2006).

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204 Final Term Paper.

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