[dehai-news] (Stratfor) Shrinking Remittances and the Developing World

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From: Biniam Tekle (biniamt@dehai.org)
Date: Tue Feb 03 2009 - 15:38:20 EST

Remittances and the Developing World February 3, 2009 | 2003 GMT
  Sean Gallup/Getty Images
Sale signs in a Berlin department store window, Jan. 14

As recession grinds on around the globe, immigrant workers from developing
countries are sending less of their income back home. From Mexico and Egypt
to Afghanistan and Pakistan, remittances from workers living abroad make up
a significant portion of capital inflows, and their decline will exacerbate
financial woes and increase the risk of social instability.

*Editor's Note: This is part one in a two-part series on countries that
depend on monetary remittances from their emigrant workers, who are
hard-pressed to send money home given the current economic crisis*

The global economic crisis has led to dramatic changes in capital flows
throughout the world as investors grow tight-fisted and flee risky assets.
The downturn is forcing immigrant workers all over the world to reduce the
amount of income they send home to support their families. As workers'
monetary remittances dwindle, countries that have grown reliant on such cash
flows will painfully feel their absence. In some cases, the loss of this
form of income could cause serious social upheaval.

Workers' remittances have grown rapidly in recent times. From 1996 onward
they surpassed official foreign aid in most developing countries and even
rivaled foreign direct investment (FDI). From 2002 to 2007 remittances
increased especially quickly, as a greater number of immigrants found new
and better-paying jobs in rising markets. Europe and Central Asia saw
remittances increase by 175 percent during this time, as former Soviet Union
countries awakened to freer movement and new labor markets. The World Bank
estimates that global remittance flows grew by 18 percent in 2006 to $229
billion and 16 percent in 2007 to $265 billion (remittance estimates are
known to be low because many transfers are difficult to monitor).

But in the third quarter of 2008, the most recent quarter for which data is
available, this growth began to slow, with the latest estimates putting the
total at $283 billion, only 7 percent higher than the previous year. The
economic slowdown in the United States and Europe forced workers to send
less of their income back home. Sub-Saharan Africa saw the most painful
slowdown, with remittances falling from a 42 percent rate of increase in
2007 to 6 percent in 2008, but Europe and Central Asia also suffered a
massive drop from a 31 percent growth rate in 2007 to 5 percent in 2008.
Mexico, the third greatest receiver of remittances in absolute value,
reported a 3.7 percent drop in 2008, after the construction bubble burst in
the United States.
 [image: global remittances]

The new year promises to be even bleaker for those countries that depend on
income earned abroad. In November 2008, the World Bank predicted the drop in
remittance flows in 2009 would range from .9 percent to 5.7 percent, and the
global economy has deteriorated rapidly since then, making the worst-case
scenario increasingly likely. This means that while remittances may not dry
up as quickly as FDI, they are nevertheless shrinking. The World Bank
predicts that the biggest reductions will come from Gulf Cooperation Council
(GCC) countries, where a burst bubble in construction and services could
cause foreign workers to send 9 percent less in remittances to their home
countries in North Africa, the Middle East and South Asia. The bank also
estimates that the eurozone, deep in recession, could send 7.6 percent less
to countries in Europe and Central Asia.

A dramatic tightening of remittance flows is terrible news for a number of
developing nations that are extremely dependent on remittances as one of
their only sources of revenue. Estimates vary, but Moldova, Tajikistan,
Kyrgyzstan, Eritrea and Laos all receive remittances worth more than a third
of their gross domestic products (GDPs). Afghanistan, Guyana and the
Palestinian Territories receive 30 percent of GDP from workers abroad.
Honduras, El Salvador, Albania, Bosnia-Herzegovina, Armenia and Georgia
receive remittances worth around a fifth of their GDPs. These excessively
dependent countries will suffer painful economic adjustments as this
component of their income vanishes. Already Tajikistan's Ministry of Economy
has revealed that from September to November 2008, remittances from its
workers, almost entirely in Russia, fell by 50 percent to 60 percent,
leaving a gaping hole in the economy. And the worse is yet to come.

Even countries accustomed to remittances that amount to far smaller shares
of their total economies will be impacted if the income subsides given the
size of the inflows. Top receivers include India ($30 billion in 2007),
China ($27 billion), Mexico ($24 billion), Poland ($11 billion), Nigeria
($10 billion), Egypt ($9.5 billion), Romania ($9 billion) and Pakistan ($7.1
billion). Remittance inflows amount to less than 5 percent of these
countries' total GDPs, but add a contraction of one or two percentage points
in countries already in recession, and the impact can be substantial.

 [image: global remittances emigrants]
(click here to enlarge)

Moreover, the effect will be a loss of highly liquid capital that
contributes directly to the well-being of the most vulnerable sectors of
society and props up domestic consumption. Remittances are usually not
investments they generally do not contribute to infrastructure
development, financial advancement or business creation. Almost exclusively
used for basic needs food, clothing and shelter most remittances
directly benefit the poorest families in any particular country. Shrinking
remittances could give rise to poverty, protests and social unrest.

Another potential problem is reverse emigration or ex-migration. Depending
on location, sector of employment and time abroad, many immigrants unable to
find work in their host country will, voluntarily or not, begin to head
home. This is especially likely if the countries are in close proximity.
Indonesia expects 100,000 of its workers in Malaysia's manufacturing sector
to return home in 2009. The Moldovan government has said it expects a total
of as many as 500,000 of its citizens to return home (mostly from Russia),
and the effects of such a movement could be catastrophic. Labor pressures
and domestic politics can cause host countries to deny foreigners work
permits or visas, or simply kick them out. Some 250,000 workers are said to
have left Russia, including Tajiks and many Georgians ejected after the war
with Russia in August, after the Kremlin cut in half the number of foreign
workers admitted from countries of the Commonwealth of Independent States.

Gulf Arab states, shuddering amid the slowdown in their once-thriving
construction sectors, are sending masses of workers back to South and
Southeast Asia to countries like Pakistan, Bangladesh and Indonesia. About
half the work force in GCC countries is said to be of foreign extraction,
and protectionist impulses are rising as economic stress heightens. On Feb.
2, Saudi Prince Turki al-Faisal bin Abdulaziz highlighted the controversy by
calling for employers to give preference to native citizens over
expatriates. The return of even a small portion of foreign workers to their
homelands could stir up competition in the local labor pool and spark social
instability as a result of unemployment.

Of course, many immigrant workers will stay in their host countries to wait
out the recession. Filipino workers, for example, many of whom are employed
in the health-care industry particularly in Japan are likely to retain
such relatively resilient jobs. Immigrant workers are also less likely to
leave the United States and Europe, where border controls are tighter,
constricting passage, and where low-wage immigrant workers are more likely
to retain jobs. These countries also are more likely to regenerate jobs in
the near to mid-term (in part because of major stimulus packages), and
immigrant workers are more likely to wait out the recession rather than face
a difficult and often risky return trip home. Nevertheless, the flow of
foreign workers to these countries will likely slow for the time being
(which already has been the case with Mexican immigration into the United

*Next: Countries and regions most affected by declining remittances,
including those with the greatest risk of serious social instability.

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