Friday, May 8, 2009

Remittances and International Aid: How to make them work?

Overview: This essay evaluates both the public and the private foreign aid and their impact on the economy of the developing countries.

Remittances and Its Impact

With about 175 million people now living outside their countries of birth, migrant remittances are emerging as a new strategy for poverty alleviation in developing countries. 1 It provides valuable financial resources to the poor and it help “to stabilize irregular incomes and to build human and social capital” (the World Bank).

In the Philippines alone, almost 10% of the population works overseas. The country has become the third largest-migrant sending country next to Mexico and India, with more than 7.5 million Filipinos residing and/or working overseas. In 2003, US$7.6 billion in remittances were recorded to have flowed through formal channels to the Philippines. But this amount is believed to be only half of what is actually sent or received due to money transfers made through unregulated channels. 2 For more than three decades now, the overseas workers have become the pillar of the economy.

If remittances are indeed a vital tool in creating wealth in the poorest conditions, why is the Philippines economy, once one of the strongest in Asia, now ranks near the bottom? How exactly do remittances help the migrants’ families back home?
Remittances have direct impact on families as well as indirect impact to the country. The economic standing of many Filipinos has improved because their breadwinners had earned salaries overseas many times over what they could have earned in the Philippines. Over the years, a significant proportion of Filipino families have relied on foreign remittances or income from abroad as a main source of income. Remittances are then spent for family consumptions: education, health and housing, etc. This consumptive behavior does have its multiplier effects which contribute to human development. Migration also eases the burden of the government of the Philippines in dealing with a high unemployment rate which recently has hit 12.4%, while remittances act as a buffer to balance of payments deficits and the country’s reserves in times of crisis.3

Where the importance of remittances is recognized in reducing poverty, too much dependence on the “diaspora” left its downsides unexamined. The question remains on whether the benefits of migration compensate for the costs of the sending country, such as the brain drain and the social disruptions of families. The drain of often the best and the brightest – industrious and skilled workers, engineers, teachers and entrepreneurs, mothers and fathers – from a sending country reduces the country’s capacity for long-term economic growth and human development. For the OECD countries as a whole, there are around 3 million migrants with a tertiary education. It has been suggested that if it costs say US$ 20, 000 to educate someone to this level, then the total wealth transferred from poor countries to rich countries is roughly now around US$ 60 billion. 4

Dependence on the export of people also presents a moral hazard. The bulk of remittances sent to the families are used excessively to buy consumer goods instead of going into productive activities or investment projects. The Philippine government, instead of creating jobs needed to keep up population growth, helps find job in other countries, encourages workers to go abroad and processes some job applications. The government invests little money in manufacturing, education and healthcare. 5 The inflows of remittances allow the government to postpone painful but necessary reforms in governance, in improving income distribution through direct equity measures and in facing up to the need of population control.6

On the horizon of open borders, where labor has moved and scattered, the host country has only felt benefits. Migrants and overseas workers had not only made up the shortfall in skilled and unskilled labor, but they also contributed to the local economy as consumers and investors, taxpayers even. Despite such positive effects on the host economy, international labor mobility is severely curtailed. 7

Beneath the Surface of Public Foreign Aid

Public Foreign Aid has long been seen as a tool for promoting economic growth in developing countries. Since 1951, Western countries have given developing countries more than $1 trillion in economic and humanitarian aid. Aid amounts have been on a constant rise in recent years. In 2004, official development assistance to poor countries was reported to reach its highest level ever. 8 The United States alone provided almost $19 billion in aid.9

How has this money improved the lives of the people in poor countries?

On the surface it appears that the vast of money given as aid will suffice to alleviate the poor from poverty. However, in depth evaluation of the case will bring essential questions to attention. What happened to the billions of people who are still living in poverty? How far does the development aid able to bring us in meeting the Millennium Development Goals (MDGs), the most important of which is to reduce absolute poverty by half by 2015? To what extent is the distribution of development assistance directed to the poorest countries?

Several reasons were identified why aid does not work well in enhancing the economy of poor countries.

1. The maldistribution of international aid.
The way in which donors distribute their international aid differs markedly across countries. The Netherlands and the Uk broadly direct their bi-lateral development
assistance to the poorest countries. In marked contrast, Japan and the US spend large amounts of their development assistance in small, relatively well-off countries. France and Germany’s aid programs are neither particularly pro nor anti-poor. Much of the development assistance provided by the World Bank goes to the large developing countries (such as China, India and Indonesia) which account for a large share of world’s poverty. In contrast, the European Union spends a large proportion of its aid on relatively well-off middle income countries. The UN system occupies an intermediate position giving large amounts of aid to the poorest countries, but also spending considerable amounts in rather better of countries in Eastern Europe, North Africa and Latin America. 10

2. Failure to meet the elusive 0.7 percent target.
In 1970, the United Nations General Assembly adopted a resolution affirming that the rich countries should progressively increase their official development assistance (ODA) spending. The donors were said to “exert their best efforts” to reach the aid target of 0.7 percent of their Gross National Income (GNI) by the middle of the decade. By 1975, only two countries, the Netherlands and Sweden, had succeeded in living up to that promise. Today, only five of the 22 Development Assistance Committee (DAC) member countries – Denmark, Luxemburg, the Netherlands, Norway and Sweden – have reached the goal. Japan, on the other hand, has cut its aid budget from 29 percent (between 2003-2004) to currently 0.19 percent of the countries national income. Canada and Australia though seem charitable, have decreased aid funding from the mid-1990s. 11

3. Aid to support a geopolitical mindset.
Instead of allocating their aid based on where it is more needed, rich countries often favor recipients that are of direct political or economic interest to them. Many European donors favor countries in former Yugoslavia, Europe’s own restless backyard. In 2002-2003, ex Yugoslavs states ranked as number one recipient of aid from Austria, Germany, Greece, Switzerland, Norway and European Union. Over 79 percent of all Greek development assistance went to other European nations. Much of this aid is motivated by domestic political concerns, above all fear of uncontrolled immigration from crisis-stricken countries nearby. Many European nations also favor their old colonies where European companies often have strong presence. In 1982-1983, Israel and Egypt, both key US allies, ranked as biggest recipients of US foreign aid. The US has indeed succeeded in boosting its development assistance; however, the vast of new money has not gone to the world’s poor but to advance US strategic goals in the “war on terror” in Iraq, Afghanistan and other countries. 12

4. Tied aid and the Overpriced technical assistance.
Many rich nations tie their development assistance to purchases of goods and services from the donor countries. Poor countries get aid but only under the condition that they spend it in a way that benefits businesses in the donor countries. Tied aid constitutes a form of government subsidy because taxpayer money is used to buy goods and services from domestic companies and aid recipients only get the product. The overpriced technical assistance, similar to tying, is another inefficient form of aid where poor countries – in need of expertise – are heavily charged. In 2003, an estimated 18 billion – more than a quarter of total aid – was spent on technical assistance, mainly on consultants advising and supporting recipients governments. 13

5. Inflating the Statistics.
Some rich countries often include non-aid expenses in official development assistance statistics – to boost ODA figures artificially. Examples of this include counting debt relief and classifying immigration-related costs within the donor country as development assistance, or including refugee-related expenditures in the figures of development aid. 14

A significant number of people from rich countries have had doubts about the effectiveness of foreign aid, including concerns about corrupt foreign governments. Yet, if the entire bureaucracy in the system of public foreign aid will continue to motivate its distribution as well as the practices of inefficient forms of aid, how genuinely could development aid help in moving towards the Millennium goal?

Could Private and Public Foreign Aid Intersect?

The trend of migration and remittances due to a failing economy illustrates the concept of the Knowledge Problem – the complex question of how we choose to organize and use the resources to make us better off15; the idea of Property Rights – the bundle of rights not limited to physical goods such as land or other possessions but also include ones labor and intellectual property16; and an example of what philosophers have referred to as Spontaneous Order – where it is unnecessary to have an understanding of economic phenomena in order to have coordinated social cooperation that leads to economic progress. 17

For developing countries such as India (which received $23 billion in 2004 in remittances, up from $17.4 billion in 2003) 18, Pakistan (where migrant workers sent home almost $260 million in 2004), 19 Mexico (the nation’s annual remittance inflows has doubled since 2002 and reached $20 billion in 2005)20 and the Philippines, the idea of using remittances to face the demand of survival, human resources – labor and intellect – seem to be the last hope standing. It is also of big help that in the global market, there is a shortage of workers where skilled labor is in demand and well paid. While in their own yard, day to day survival is a struggle and opportunities are meager, people from poor countries migrate to foreign land with a thirst of success. The government, seeing the impact of remittances on families and to the country as a whole, finds ways to enhance the flow of its people.

Why do poor countries turned to remittances as their last hope in the first place? Is it because of the insufficient development assistance they received? Is it possibly caused by the bundles of debts that most of their money goes to? Or is it simply due to poor governance?

Public Foreign aid is undeniably a great help in financing development in developing countries. However, to make aid work for the poor, there is an urgent need of reform in the aid system. Donors should end their practices of tied aid and artificial boosting of aid figures. Donors must also refrain from prioritizing geopolitical objectives that result to an unfair distribution of aid. The funds must be allocated where it is more needed. Or perhaps it is better if “most aid will be allocated through cooperative, multilateral channels rather than bilateral ones that are too easily influenced by short-term political and economic considerations”.21

The poor countries, recipients of both the private and public foreign aid, must – on their own – maximize and mobilize resources, and execute reforms in governance. The bulk of remittances, if properly harnessed with fiscal discipline and mobilization of savings, could in the long term serve as a driver for economic reform for migrant countries of origin. In the Philippines for example, where remittances had been used mostly to excessive consumption, more can and should be done to educate not only the overseas Filipino workers (OFWs) but also the beneficiary of remittances as to savings and other productive use of remittances.22 The productive use of the [fairly distributed] public foreign aid, can help in strengthening the economic growth of developing countries that can sufficiently oppose the forces of brain drain and remittances [dependency] syndrome. While reforms in governance must include – dealing with economic, political and social problems, developing effective governance, eliminating corrupt leaders and officials, and implementing stable government policies to protect the interest of mankind and not to favor the perpetuation of power groups and the elite.

At the point where private foreign aid and public foreign aid will intersect, and coupled with genuine reforms in governance, absolute reduction of poverty will certainly be at hand.

1 Jet Damazo, “Overseas Workers’ Remittances can be Harnessed for Poverty Reduction in the Philippines” available:
2 Ibid.
3 I. F. Bagasao, “Migration and Development:The Philippine Experience”
4 Ibid.
5 Richard C. Paddock, “The Overseas Class” A World Cconnected Essay, April 20 2006
6 I. F. Bagasao, “Migration and …”
7 Marina Durano, “Finance and Development: Issues Arising from the Asian Crisis, A View from the Philippines”, March 15, 1999
8 Official Development Assistance increases further – but 2006 targets still a challenge”, OECD Press Release, April 11, 2005
9 USAID:Chapter 6 – Objectives, Outcomes and Amounts of Foreign Aid
10 Bob Baulch, “AID FOR THE POOREST:The distribution and maldistribution of international development assistance”, Institute of Development Studies, CPRC Working Paper No 35.
11 Pekka Hirvonen, “Stingy Samaritans: Why Recent Increases in Development Aid Fail to Help the Poor”, Global Policy Forum, August 2005
12 Ibid.
13 Ibid.
14 Ibid.
15 “Knowledge Problem” A World Connected Essay Competition
16 ”Proper Rights” A World Connected Essay Competition
17 “Spontaneous Order” A World Connected Essay Competiton
18 “Global: Remittances make the world go round” .
19 Ibid.
20 Richard Boudreaux, “The Seads of Promise” A World Connected Essay
21 United Women’s Action Network, “Action Alert: Is 1% of Foreign Aid Enough?” Women’s Division – General Board of Global Ministries. Available:
22 Jet Damazo, “Overseas Workers’ Remittances…”

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