Remittances Dwarf Aid, Investment in Kenya
Wednesday, February 22, 2006
Kenyans in the diaspora are contributing an equivalent of 3.8 per cent of national income through remittances.
In the year 2004, for instance, Kenyans living and working abroad remitted about Ksh35 billion ($464 million), which overshadows the net foreign direct investment (FDI) of Ksh3.6 billion ($50.4 million), which accounted for 0.41 per cent of the country’s gross domestic product.
“Migration is an important issue in Kenya, with the country both a significant destination and a source of migrants,” said Francis Mwega of the Department of Economics at the University of Nairobi during the launch of the World Bank’s 2006 Global Economic Prospects report in Nairobi.
In 2004, said Mr Mwega, net official development aid (ODA) to Kenya was about $200 million, or about 2 per cent of GDP. “Remittances were therefore about nine times the size of net FDI and about twice the size of net ODA.”
At its peak in 1990, the country received $1.6 billion in ODA, which was about 20 per cent of GDP.
Remittances may also have adverse macro effects, he added. “These effects may include the possibility of Dutch disease, with the remittances appreciating the real exchange rate and undermining the production of cost-sensitive tradeables such as cash crops and manufactured goods.”
This problem may however be minor as remittances are distributed widely among households.
According to the report, inter-national “brain drain” can boost the wealth of migrants as well as the countries they originate from. If remittance policies are improved, migration can be of all-round benefit.
This year’s edition, entitled, “The Economic Implications of Remittances and Migration,” focused on the flow of international migrant remittances and improving their development impact. It presented available data on migration flows and examined current thinking on issues pertaining to migration and its development impact.
Officially recorded remittances worldwide exceeded $232 billion in 2005. Of this, developing countries received $167 billion, more than twice the level of development aid from all sources. The GEP authors suggest that remittances sent through informal channels could add at least 50 per cent to the official estimate, making remittances the largest source of external capital in many developing countries.
Despite the emphasis on remittances from developed countries, remittances sent from developing countries – the so-called “South-South flows” – represent 30-45 per cent of total remittances.
The report also forecasts that economic growth in developing countries will slow to 5.9 per cent this year, and to 5.7 per cent in 2006, down from 6.8 per cent in 2004.
Developing economies will continue to grow at historically high rates, and more than twice as fast as high-income economies. Economic growth in the latter is also expected to slow from 3.1 per cent growth in 2004 to around 2.5 per cent in 2005 and 2006.
The report presented evidence that an increase in migrants that raises the work force in high-income countries by three per cent by 2025 could increase global real income by 0.6 per cent, or $356 billion. Such an increase in migrant stock would be in line with the migration trend observed during the past three decades.
“The relative gains are much higher for developing-country households than rich-country households, rivalling potential gains from global reform of merchandise trade,” the authors concluded.
The report proposes that developing countries seek agreements with countries to which their nationals migrate, to improve the conditions under which they cross borders, seek and maintain employment, and send a part of their earnings home.
Analysis of household surveys indicates that remittances have been associated with significant declines in poverty in several low-income countries, including Uganda (11 per cent), Bangladesh (six per cent) and Ghana (5 per cent). In addition, remittances appear to help households maintain their consumption levels through economic shocks and adversity.
They are also associated with increased household investments in education and health, as well as increased entrepreneurship. These conclusions are borne out by findings of a recent World Bank research study, International Migration, Remittances and the Brain Drain, co-edited by Caglar Ozden and Maurice Schiff.
The report estimated that remittances reduced the number of people living in absolute poverty in Kenya.
Further, migration relieves labour market pressures by reducing unemployment and increasing domestic wages.
“This effect may however be minor in Kenya since only a small share of the labour force (about 15 per cent) is in formal wage employment, with many of them employed in the public sector, the report says.