Dear Editor,
During August-September 2005, I wrote a series of letters on remittances. There were several subsequent letters by others, including Tarron Khemraj, Emile Mervin, and Claude V Chang. This letter may be seen as a continuation of the discussion.
In its broadest terms, remittance is usually defined as the sum of workers remittances, migrant transfers and compensation of employees, all three of which are generally reported and recorded in the Balance of Payments (BoP). The Inter-national Monetary Fund defines worker remittances as transfers from migrants employed in new economies where they have taken up residency. Compen-sation of employees comprises individuals staying abroad for less than one year, while migrant transfers include goods and financial assets linked to the migrants returning home. Worker remittances are the dominant transfer type in Guyana; the other two types are insignificant.
Remittances are not counted directly in GDP, which is the value of total goods and services produced within the borders of a country in a given period. They are, however, included in the current account of the BoP, which is a record of international transactions over a period of time, including commodity and service transactions, capital transactions and gold movements. While these two great accounts record different things, they are not disconnected. Goods and services (such as oil, food, medicine, and fertilizers) purchased from other countries and recorded in the BoP are used within the county that makes the purchase; capital flowing from abroad is invested in the domestic economy; and people use international remittances to purchase (demand) various commodities. All of these purchases contribute to GDP.
Every time there is an injection of new demand into the circular flow (which describes the flow of money and commodities throughout the economy) there is likely to be a multiplier effect. This is because the addition of extra income into the economy leads to more spending, which creates more income, more spending, more income, and so on. To illustrate, take remittances in 2014, which amounted US$341 million. Recipients of migrants’ largesse do not bury the money in their back yards or hide it under the mattress. If this were the case, remittances would be lost to the economy and have no impact on GDP, since they are withdrawn from the circular flow. Instead, recipients spend remittances on food, clothing, rent, education, repairs, jewellery, vehicles, consumer electronics, and perhaps invest a little in a bank account, a land purchase or ‘buy and sell’ little things. This first round of (remittance) spending will be followed by other rounds of spending; those who receive remittance spending will, in turn spend it, and so the process goes on. By the time spending peters out, the sum of all spending would be much greater than the initial spending. The multiplier effect refers to the increase in final income arising from any new injection of spending.
A few empirical studies suggest that the multiplier effect of remittances is significantly greater than 1. Glytos (1993) examined the direct and indirect effects of international remittances on production, imports and employment on the Greek economy. He found that remittances generate a multiplier effect of 1.7 on GDP. In other words, a remittance of $1 million would increase Greek output by $1.7 million. In a micro-based study in one rural Mexican village, Taylor (1995) examined the direct and indirect effects of international remittances on the village economy. He found that international remittance generates a multiplier effect of 1.6.
Using household survey data from China, Taylor and colleagues (2003) examined the impact of internal migration and remittances on crop and household income. They found that migration and remittances have multiple and contradictory effects on rural household income. On the one hand, when a migrant leaves a household, crop yields fall and crop income declines by about 33 per cent. How-ever, remittances sent home by the migrant have a positive, countervailing effect on household income. For example, rural households tend to use remittances to purchase more inputs and to substitute capital for labour. Taking into account all of these various effects, the authors find that migration increases per capita household income in rural China, for those left behind, by between 16 and 43 per cent.
So this is how – through spending ‒ that remittances play an important role in GDP, boosting it way beyond what it would have been in the absence of remittances. On the other hand, a slow-down in remittances, which help to finance trade imbalances, could put pressure on the current account deficit, which negatively influences overall economic performance and thus GDP. The multiplier effect of remittances is most likely larger in poorer countries, since most of remittances will be spent.
A remarkable feature characterizes remittances to Guyana: a sudden and precipitous leap from 2002. According to the data, the flow of remittances was a mere trickle in 1996 (US$15 million). Thereafter it rose gradually until 2002, when it amounted to US$51 million. But in 2005 remittances were almost four times as large as in 2002. A new landmark was set in 2010, when migrant largesse reached US$368 million and peaked at US$469 million in 2012. Remittances then declined during the next two years. Even so, remittances in 2014 were 22.7 times as large as in 1996.
While the volume of remittances has been high over the last decade or so, this still does not convey a feel for their relative importance to the domestic economy. A handy gauge for this is supplied by remittances as a share of GDP. Remittances accounted for only 2.1 per cent of GDP in 1996, but skyrocketed to 13.3 per cent in 2003. Remittances reached the highest point two years later at almost a quarter of GDP. While a decline followed, remittances were still around 11 per cent of GDP during the last two years.
There were only 22 countries in the world with remittances as a share of GDP exceeding 10 per cent in 2013. Among these countries, Guyana was ranked 19th, with Tajikistan at the top (48.8 per cent) and tiny Tuvalu – located in the Pacific Ocean ‒ at the bottom (10.6 per cent). Even if it is conservatively assumed that the remittance multiplier in Guyana is 1.5, this means that remittances were responsible for about 17 per cent of the total value of goods and services produced by economy in 2014. Sugar contributed a measly 2.3 per cent of GDP in 2104; rice, 5.9 per cent.
Consider another indicator. Remittances were only 10.6 per cent of all official development assistance and aid (ODA, US$141.8 million) received in 1996. By 2003, remittances were as large as ODA and continued to climb until they peaked in 2012, when they were 4.7 times as big as ODA.
Yours faithfully,
Ramesh Gampat
