In a 1965 essay, the great development economist Albert Hirschman bemoaned the tendency of those in his profession to look for the next panacea. Unfortunately, various panaceas have come in and out of fashion since Hirschman wrote.
During three decades of neo-liberalism, development economists and policymakers have celebrated three inter-related strategies: (1) free markets, (2) private ownership, and (3) private international capital flows. The latter refers to several types of flows — loans by foreign banks, foreign direct investment (i.e., the purchase of more than 10% of the assets of a foreign corporation), portfolio investment (i.e., the purchase of foreign financial assets, such as stocks or bonds), and worker remittances (i.e., the funds that migrant workers send home generally to their families, but sometimes also send collectively through “home town associations” to fund infrastructure projects in their towns of origin). Policy in the neo-liberal era sought to maximize all four of these financial flows.
Especially after the Asian financial crisis of 1997-98, many policymakers turned particular attention to maximizing the receipt and the developmental impact of remittances. This was especially the case among those developing countries that were not terribly successful in attracting other types of international private financial flows, as these have long been highly concentrated among a small handful of large, rapidly growing developing economies. Indeed, maximizing the migration of healthy workers and garnering the remittances they sent home became a kind of default development strategy in many countries. Jamaica and the Philippines are examples of countries where policymakers came to conflate the export of their people (especially nurses and domestic servants, respectively) and the import of their remittances with a real national development strategy.
For a while, the strategy seemed to work. Remittance flows to developing and post-Communist countries grew rapidly between 2002 and 2007. Remittance inflows are more than twice as large as foreign aid inflows, and nearly half as large as total foreign direct and portfolio investment to the developing world. They are also far less concentrated in larger developing countries than are other types of international private capital flows. In many developing countries, recorded remittances were and still are the largest source of external finance of any sort. Remittances are also less volatile than other international private capital flows. And, historically, they have been counter-cyclical, since migrants tend to send more remittances to their countries of origin following downturns, crises, natural disasters, and political and civil conflicts in their countries of origin. This counter-cyclicality contrasts sharply with all other international private flows, which are strongly pro-cyclical and hence can contribute to economic instability during crisis.
Research on remittances has established that they are an important source of social and economic support to families, regions, and even governments since they augment consumption after crises, they often allow poor families to pay for school, medical expenses, and housing, they fund small business development, and, in some cases (such as in Mexico) they have provided financial support to infrastructure projects.
Less well-known research on remittances also revealed that they have other more complex, sometimes negative political, economic, and social effects on recipient countries. For example, in a paper on the political economy of remittances, I review evidence from studies that find that large inflows can cause exchange rates to appreciate. I argue there as well that dependence on remittances can induce what I term “public moral hazard.” By public moral hazard I mean that the receipt of large volumes of remittances can cause states in the developing world to reduce expenditures on public goods that have traditionally depended on public support, such as public investment in infrastructure and social services.
Relatedly, others have argued that remittances can protect governments from the political consequences of poor policy choices. Some also argue that migration and the receipt of remittances undermines “political voice” in recipient economies (using another of Hirshman’s concepts) because they reduce the incentives for the efficacious members of society to advocate for governance improvements.
Notwithstanding these complex effects, many policymakers worried at the start of the global crisis that the number of migrants and the amount of money that they sent home would diminish dramatically because so many countries are making migrants unwelcome and because job opportunities in some of the main host countries were drying up. Initially this seemed to be the case — officially recorded remittance flows to developing countries fell by around 6 percent in 2009 from their level in 2008. This fall was far more modest than initially forecast. It seems that migrants — many of them very poor — are doing all they can to continue to live abroad and to send money home to their even poorer families, even when this means that those already living on the edge have to make even greater sacrifices.
As a recent Oxfam study reports, these sacrifices are being borne most heavily by women and children in both sending and recipient countries. Anecdotal evidence also suggests that “reverse remittances” are now occurring, as some families in the countries of origin send money to migrants so that they can remain in their adopted country.
At present, those who forecast remittances are surprisingly upbeat. They predict a recovery of global remittance flows in 2010-11 (though, to be fair, the forecast acknowledges numerous possibly mitigating factors, such as rising anti-immigration sentiment in many countries, the fragility of the global recovery, etc.). The most reasonable explanation for this optimistic forecast is in fact quite dismal: conditions in the poorest countries may become so bad in the next few years that further migration is induced despite the myriad obstacles, and migrants will continue to send money home to desperate families, even at the cost of their own consumption.
On the other hand, remittances may well slow to a trickle, given the likelihood that the recession will worsen in some of the world’s wealthiest economies (no doubt thanks to the austerity-obsessed G-20), which may in turn induce legislation or activism that makes migration even more untenable. Were this to occur, we might find that members of the policy community who, just a few years ago, celebrated the developmental impact of remittances are compelled to recognize the limitations of these and other international private capital flows. We may learn that remittances do not suffice as substitutes for economic development strategies that mobilize and channel domestically-generated resources.
Utopian thinking that features one panacea or another is habit forming. Indeed, we see that the Indian government has recently fallen back on external capital flows by taking steps to make it easier for foreigners to engage in portfolio investment in the country. But we can hope that this is among the last gasps of a discredited development strategy. Indeed, this seems to be the case, as several TripleCrisis bloggers have noted in their discussions of the new thinking and institutions that are emerging in the developing world (e.g., Diana Tussie, Matias Vernengo, Kavin Gallagher, and myself). None of these initiatives points to a single panacea, and that is something that we can be sure Hirschman himself would appreciate.
Ilene Grabel is Professor of Economics at the University of Denver. This article was first published by TripleCrisis on 24 August 2010; it is reproduced here for non-profit educational purposes.