Tuesday, July 12, 2011
Socio-economic impact of remittance
My latest article in Republica is on socioeconomic impact of remittance in Nepal. It is co-authored by Dr Vikas Raj Satyal, an ex-colleague from IIDS and Chair of the Statistics Department at Amrit Science Campus.
We have been going overseas for work ever since the British recruited us after the Anglo-Nepal war of 1814-1816. First, we were recruited in the British Army in India, then in the Indian Army after the British left India in 1947. However, the floodgates really opened after the democracy in 1990. The democracy, and the subsequent opening up of the Nepali economy and labor market, has meant that we have been going overseas, in droves every year, either for work or studies or both.
Nepal Rastra Bank has estimated that only 3 percent of Nepalis use banks to send money home. Similarly, the living standard survey discovered that only 0.8 percent of workers outside Nepal use other institutional channels. Last year, remittance received from official channels was about Rs 210 billion, which was 22 percent of the total GDP. However, this ratio is much higher if we include unofficial transactions. So, to say that remittance has become a significant player in our economy is an understatement.
Given this huge impact, it becomes imperative for economists and policymakers to assess what kind of socio-economic impact remittances have caused in Nepal. Some common consternation that experts have with remittance in Nepal is its impacts such as brain drain, general shortage of labor, trade imbalance, increasing inflation, impact on poverty, increasing fraud and rent-seeking in emigration procedures.
Obviously, the most significant impact is on the labor force. The trend of last few years shows that around 65 percent of those going overseas are between the ages of 15 and 29, and the rest are between the ages of 30 and 44. Those who have left the country have left behind a void in the labor market. However, growing sectors like education and banking require high skills and higher knowledge—both of which our youths lack. Therefore, despite such mass exodus of labor, around 13 percent of youths—between 15 and 24 years of age—in Nepal today still find themselves unemployed. Our failure to give them jobs means they will, eventually, leave the country, just like others.
But, going overseas for work is a process that has increased the inequality in Nepali society. The poor cannot afford to apply and go to lucrative destinations. Instead, they settle for jobs in India because it requires no visa and cost of reaching there is low. For them, even the acquisition of official emigration documents, such as a passport, is sometimes an insurmountable hurdle. Therefore, those who go to lucrative areas are already in the lower- to upper-middle class.
Given this context, it is difficult to swallow the claims of Nepali policymakers who are in praise of the remittance economy because they feel it reduces poverty. Let us look at the numbers. Workers from India send Rs 18,400 per year on average. Those in the Middle East and other countries send around Rs 80,000 per year on average. These numbers suggest that remittance income might help a lower-middle class family enter upper-middle class, or an upper-middle class family become rich. But, that is not what “reducing poverty” means. Remittance is not helping a poor family enter middle-class.
Also, there is a lack of empirical evidence to support the role of remittance on our economic growth. Instead, the product moment correlation shows a high positive correlation of remittance with consumption, imports and CPI. This means, remittance contributes to our gluttony, high imports, and high inflation. In remittance heavy economies, remittances do not serve as investments but rather as social insurance to help family members finance everyday purchases. Consumption does not cause economic growth. Consumption coupled with savings and investment does. And, the latter two are missing in today’s Nepali economy.
A cross sectional study of 111 countries showed empirical evidence of remittance fostering rent-seeking behaviour and corruption. Institutional quality, even after controlling for potential reverse causality, was found to be declining as a result of remittance. Creation of rent-seeking and corruption can be observed via various channels and brokers who send workers overseas. Often, poor and under-educated workers are cheated by middlemen and manpower agencies. Our newspapers have reported about workers receiving much lower wages than promised. And, news of abuse of Nepali workers in the Middle East has become a regular feature.
Households that receive remittance income also experience the “spoil effect”. It means that easy availability of remittance money sent from abroad creates distortion in the work efficiency and working mentality of the recipient members. A study in Kosovo showed that remittance made the youths reluctant toward seeking higher education and reduced their incentives to work. Similar results have been observed in remittance heavy economies like the Philippines, Egypt and Somalia. Are such spoil effects present in Nepali society? Do we risk losing our youths to poor education and poor skills?
On the face of constant hurdles and abuses that migrant laborers face from day one, even our policymakers understand that the talk of economic growth through remittance is nothing but a mirage. So, what have they done to reduce our dependency on remittance income? Not much. Instead, in 2010, our government initiated plans to train our workers according to the demand in source countries. It initiated negotiations with foreign governments to expand our overseas job markets. Also, the Department of Foreign Employment has formed teams to inspect and monitor the institutes that provide orientations and vocational trainings to workers seeking overseas employment.
These are not the actions of a government that is seeking to reduce remittance’s impact on Nepali economy. These are the actions of a government that has no idea how to create jobs at home. These are the actions of a government that does not know how to stop our labor force in its prime from going overseas to make someone else’s country better off.
This opinion piece was published in Republica on July 12, 2011.
We have been going overseas for work ever since the British recruited us after the Anglo-Nepal war of 1814-1816. First, we were recruited in the British Army in India, then in the Indian Army after the British left India in 1947. However, the floodgates really opened after the democracy in 1990. The democracy, and the subsequent opening up of the Nepali economy and labor market, has meant that we have been going overseas, in droves every year, either for work or studies or both.
Nepal Rastra Bank has estimated that only 3 percent of Nepalis use banks to send money home. Similarly, the living standard survey discovered that only 0.8 percent of workers outside Nepal use other institutional channels. Last year, remittance received from official channels was about Rs 210 billion, which was 22 percent of the total GDP. However, this ratio is much higher if we include unofficial transactions. So, to say that remittance has become a significant player in our economy is an understatement.
Given this huge impact, it becomes imperative for economists and policymakers to assess what kind of socio-economic impact remittances have caused in Nepal. Some common consternation that experts have with remittance in Nepal is its impacts such as brain drain, general shortage of labor, trade imbalance, increasing inflation, impact on poverty, increasing fraud and rent-seeking in emigration procedures.
Obviously, the most significant impact is on the labor force. The trend of last few years shows that around 65 percent of those going overseas are between the ages of 15 and 29, and the rest are between the ages of 30 and 44. Those who have left the country have left behind a void in the labor market. However, growing sectors like education and banking require high skills and higher knowledge—both of which our youths lack. Therefore, despite such mass exodus of labor, around 13 percent of youths—between 15 and 24 years of age—in Nepal today still find themselves unemployed. Our failure to give them jobs means they will, eventually, leave the country, just like others.
But, going overseas for work is a process that has increased the inequality in Nepali society. The poor cannot afford to apply and go to lucrative destinations. Instead, they settle for jobs in India because it requires no visa and cost of reaching there is low. For them, even the acquisition of official emigration documents, such as a passport, is sometimes an insurmountable hurdle. Therefore, those who go to lucrative areas are already in the lower- to upper-middle class.
Given this context, it is difficult to swallow the claims of Nepali policymakers who are in praise of the remittance economy because they feel it reduces poverty. Let us look at the numbers. Workers from India send Rs 18,400 per year on average. Those in the Middle East and other countries send around Rs 80,000 per year on average. These numbers suggest that remittance income might help a lower-middle class family enter upper-middle class, or an upper-middle class family become rich. But, that is not what “reducing poverty” means. Remittance is not helping a poor family enter middle-class.
Also, there is a lack of empirical evidence to support the role of remittance on our economic growth. Instead, the product moment correlation shows a high positive correlation of remittance with consumption, imports and CPI. This means, remittance contributes to our gluttony, high imports, and high inflation. In remittance heavy economies, remittances do not serve as investments but rather as social insurance to help family members finance everyday purchases. Consumption does not cause economic growth. Consumption coupled with savings and investment does. And, the latter two are missing in today’s Nepali economy.
A cross sectional study of 111 countries showed empirical evidence of remittance fostering rent-seeking behaviour and corruption. Institutional quality, even after controlling for potential reverse causality, was found to be declining as a result of remittance. Creation of rent-seeking and corruption can be observed via various channels and brokers who send workers overseas. Often, poor and under-educated workers are cheated by middlemen and manpower agencies. Our newspapers have reported about workers receiving much lower wages than promised. And, news of abuse of Nepali workers in the Middle East has become a regular feature.
Households that receive remittance income also experience the “spoil effect”. It means that easy availability of remittance money sent from abroad creates distortion in the work efficiency and working mentality of the recipient members. A study in Kosovo showed that remittance made the youths reluctant toward seeking higher education and reduced their incentives to work. Similar results have been observed in remittance heavy economies like the Philippines, Egypt and Somalia. Are such spoil effects present in Nepali society? Do we risk losing our youths to poor education and poor skills?
On the face of constant hurdles and abuses that migrant laborers face from day one, even our policymakers understand that the talk of economic growth through remittance is nothing but a mirage. So, what have they done to reduce our dependency on remittance income? Not much. Instead, in 2010, our government initiated plans to train our workers according to the demand in source countries. It initiated negotiations with foreign governments to expand our overseas job markets. Also, the Department of Foreign Employment has formed teams to inspect and monitor the institutes that provide orientations and vocational trainings to workers seeking overseas employment.
These are not the actions of a government that is seeking to reduce remittance’s impact on Nepali economy. These are the actions of a government that has no idea how to create jobs at home. These are the actions of a government that does not know how to stop our labor force in its prime from going overseas to make someone else’s country better off.
This opinion piece was published in Republica on July 12, 2011.
Labels: Nepalese Economy, remittance
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