March 29, 2006

Remittances Revisited

This is going to contradict some of what I said below about how remittances are an extremely effective form of foreign aid, but Scientific American has an interesting piece on the subject, noting that the thinking on this issue has changed over time. In the 1980s, economists thought that remittances could "rot out [the] economy" of the country receiving them, since, the theory went, recipients often went on spending sprees at the mall rather than investing in farm equipment in the like.

In the 1990s, a number of economists changed their minds about this, and in one model, researchers found that $1 of remittances boosts the GDP of the recipient country by $3. "Compared with alternatives to catalyze economic development, such as government programs or foreign aid and investment, remittances are more accurately targeted to families' needs and more likely to reach the poor." That's what I was saying below. So far, so good. But that's not all:
Today the debate has settled into a "both sides are right" mode. Some towns achieve prosperity aided by remittances; others get trapped in a cycle of dependency. A number of cross-country analyses, such as one last year by economist Nikola Spatafora of the International Monetary Fund and his colleagues, have concluded that nations that rake in more remittances have a lower poverty rate--but only barely. A larger effect is to smooth out the business cycle, because migrants increase their giving during economic downturns in their homelands and scale it back during upswings. Averting the disruptive extremes of boom and bust can help bring about long-term growth.

One burning question is whether immigrants who sink roots into their adopted countries send less money. "Some people are actually saying that in Mexico remittances might stop in 10 years' time," says World Bank economist Dilip Ratha.
So there, whatever that's worth.
-- Brad Plumer 9:36 PM || ||