The nature of migration from developing countries today is quite different from the migration from Europe that occured in the pre-war period. Today, there are basically two different kinds of migration — migration among developing countries and migration from developing countries to the developed countries. The first among devloping countries is often temporary as workers go on contract employment with the purpose of earning higher wages and so increasing their savings. The second is mainly of skilled workers as the receiving countries are increasing allowing only inflow of highly qualified individuals.
This latter form of migration has raised concerns about brain drain since the emigration of well qualified people was believed to harm the growth prospects of the home country. In more recent years, this type of migration is seen to have benefits also. Firstly, there are remittances from the migrants, although it is not clear who the major remitters are — those leaving for temporary migration or the permanent migrants who soon adopt the living style of their new country. But remittances have been important. The second benefit that is mentioned is that there is a certain amount of return migration and the return migrants bring in new technology.[1]
The remittances are making an important contribution to sustaining growth in the developing world. While it is unclear to what extent the remittances are used for business investment and to what extent for house construction or purely consumption, the remittances have prevented the emergence of a balance of payments (BOP) crisis; BOP crises had, in the past, resulted in policies that had slowed growth.[2]
Emigration from the main developing country regions increased between the early 1990s and the early years of this century. Emigration is particularly high for Sub-Saharan Africa SSA) (Table 1), though it has also increased substantially for South Asia (SA). Of course, except in the case of SSA, these levels of emigration are nowhere near what the emigration was from Europe in the pre-WW period. Also, about 75% of migration from SSA is to other countries in SSA and not to the developed economies (International Organization for Migration, 2011). Remittances are considerably higher than the current account surplus for Latin America and the Caribbean (LAC) and SSA (Table 2) and without the very substantial remittances the current account deficit of SA would be unmanageable.
Source: World Development Indicators, 2007. Note: EAP is East Asia and Pacific, LAC is Latin America and Caribbean, SA is South Asia, SSA is Sub-Saharan Africa. These categories of regions are as defined by the World Bank.
Source: World Development Indicators 2011, World Bank Data Bank, World Bank. Washington D.C.
Higher remittances have meant that the current account deficits have been small despite the increasing deficit on trade in goods and services. The deficit on trade in goods and services increased between 1990 and 2007 by 3% of GDP in LAC and by 5% in SSA, but because of higher remittances the current account deficit worsened by only 1% in the case of SSA (World Bank, 2011). While migration has not directly contributed to higher wages and living standards in developing countries, the remittances have resulted in a relaxation of the foreign exchange constraint and so contributed to higher growth. Remittances have in part played the role that aid was expected to play in the two gap models of economic growth.[3] The capital output ratio in Asia, both SA and EAP is 4, so if remittances are 4% in GDP as they are in SA they would raise the growth rate of per capita GDP by 1% if it was all invested and by .5% if half was invested.[4] Since the capital output ratio has been higher in SSA the effect on growth would be lower by about 0.25-0.5%. But even with this higher capital output ratio the growth in the least developed countries would have increased by about 0.7 to over 1% a year.[5] The growth effect in LAC and EAP would be negligible because of smaller inflows of remittances coupled in the case of LAC with a higher capital output ratio.
The poorest regions, South Asia, Sub-Saharan Africa and the least developed countries are the most dependent on remittances and these have continued to grow even after the 2008 crisis, though for a number of regions the share of remittances in GDP has fallen after the crisis (Table 2).
The importance of remittances can be seen when we can compare their amount with that of aid. Not only has the importance of aid been declining for most regions (Table 3) but it is insignificant for many regions. For regions such as EAP and LAC, remittances are about 7 times as large as aid and for SA they are nearly 5 times as important. Only for SSA and the least developed countries is aid still more important than remittances and even for these areas, remittances are becoming more important.
Source: World Development Indicators 2011, World Bank Data Bank, World Bank. Washington D.C.
Remittances have a substantial effect on poverty and well-being. For instance, in the case of Pakistan a rise in the percent of remittances to GDP by 1 % would reduce the head count poverty ratio by 1.5% (ADB, 2012). The report also notes that 73% of remittances are used for consumption in Vietnam. But very often the increased consumption is on health care, education and better housing, all of which lead to improved living standards and reduction in other dimensions of poverty.
[1] This was important even in the pre First World War period particularly in the case of Italy. While few Irish or Swedes returned, an estimated 49% of Italian migrants to the Americas between 1905 and 1920 returned, many having accumulated the money needed to buy a farm in Italy (Hatton and Williamson, 1998)
[2] Stop go policies were a feature of not only the UK in the 1950s and 1960s, they were also a feature of many countries in Latin America and had sparked a vigorous debate between monetarists and structuralists (Corbo, 1974).
[3] This can be seen most clearly in terms of the two gap model developed by Chenery and Bruno (1962) and Chenery and Strout (1966), According to traditional aid analysis, e.g. Rosenstein-Rodan (1943), aid was needed to augment domestic savings in order to raise the level of investment. But Chenery and his co-authors argued that apart from this domestic gap there was a foreign gap. Developing countries needed to import more capital goods if they were to raise their investment levels and since earnings from exports of primary products would not keep up, aid would be needed to fill this foreign gap.
[4] It is irrelevant whether this investment was in housing.
[5] Estimates in the ADB 2012 report suggest a 0.2% increase in GDP growth for a 1% increase in the remittances to GDP percentso that a 4% share of remittances in GDP would raise growth by 0.8%.