Large-Scale Migration and Remittances: Benefits and Costs

Hisanobu Shishido

Policy Cluster LeaderWorld Bank

The scale of migration and remittances in Nepal is

staggering

• Almost half of Nepali households have at least one migrant abroad or returnee

• Remittances constitute 1/4 of income of all Nepali households

• 1/3 of working male population may be abroad remitting 25 percent of GDP

Nepal is the Largest Remittance RecipientAmong Countries with At Least 10 million Population more than even Bangladesh and Philippines

Nepal Bangladesh Philippines Senegal Vietnam Morocco Sri Lanka

Remittances Now the Biggest Foreign Exchange Earner

Recorded Remittances Exports of goods and services

Official development assistance Tourism Receipts

Disposal Income Growth Fluctuates

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2004/05 2005/06 2006/07 2007/08 2008/09 2009/10R 2010/11P*

Real growth rates of GDP and GNDI FY05-11 (In percent change)

GDP growth rate GNDI growth rate

0

50000

100000

150000

200000

250000

300000

350000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*

Saudi Arabia Qatar U. A. E. Malaysia OthersSource:DoFE. *First ten monts data only for FY 2011

Annual Departures by Destination

2.1 million

total migrants

India - 867000Gulf - 810000

Malaysia - 245000

Others - 186000Unknown - 29000

Ages 20-44 Migrate

Wealth and Migration0

.1.2

.3.4

.5

0 20 40 60 80 100Centiles of Wealth Index

Any Work Migrant

in Nepal Abroad

0

.05

.1.1

5.2

.25

0 20 40 60 80 100Centiles of Wealth Index

in India in the Gulf

in Malaysia in other CountryPro

babili

ty o

f a H

ouse

hold

havi

ng

a w

ork

mig

rant:

Migration Probability and Household Wealth

Migrant Destinations Differby their Place of Origin

Migrant Destinations Differby their Place of Origin

Migrant Destinations Differby their Place of Origin

Migrant Destinations Differby their Place of Origin

FY 09 remittances were $2.5 billion, 20 percent of GDP, coming from:

48.9

19.2

10.5

21.4

Gulf India Malaysia Others

Total Remittances by Districts

Remittance Share of Household Income by District

Returnees: Most Returned Recently

0

20,000

40,000

60,000

80,000

100000

120000

140000

160000

180000

200000

>2000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009*

*Only till May-Jul

India Gulf

Malaysia Others

And Many Would Like to Go Back Abroad Very Soon

37

20

9

34

0

5

10

15

20

25

30

35

40

Very likely Somewhat likely Rather unlikely Very unlikely

Most Come Back to their Previous Jobs: Agriculture and Inactivity

28

39

1 2

8

2 1

14

5

20

48

2 1

64

1

10 9

49

34

4

02 1

0

46

0

10

20

30

40

50

60

Inactive Agriculture Office / Professionals

Guards/ Army Technical Workers

Drivers, Helpers Cook/ Waiter Daily Wage Laborers

Others

Before (returnees) Currrent (returnees) Current (Non-migrants)

And from Agriculture and Inactivity, They Migrate Again

19

50

0 0

5 4

2

16

4

16

43

5

1

6 6

0

6

17

0

10

20

30

40

50

60

Inactive Agriculture *Office / Professional

Guards/ Army Technical Workers Drivers, Helpers *Cook/ Waiter *Daily Wage Laborers

*Others

Actual Response

Very likely to migrate again Very unlikely to migrate again

Benefits of Migration

and Remittances Huge

• At household level

• At macro level

Household Level Benefits• Poverty reduction from 42 % (NLSS-I) to 31 %

(NLSS II) and much less (NLSS III)

• Almost everyone migrate – the rich, the poor, people from the Mountains, Hills, and Terai, and from all the development regions

• Appears to have contributed to declining income inequality

• Provides jobs to those who could not have otherwise obtained work (at the wage levels)

More on Benefits at Household Level

• More income to a large number of population

• More consumption

• More leisure - Males of remittance-receiving households have reduced own labor supply by almost 15 %

• More education to children

• Better healthcare

• Improvement in houses

• Investing in real estate

Macro Level Benefits

• Provides foreign exchange and supports BOP stability– Allow more imports

– Allow maintaining foreign reserves even with higher imports

• Helps maintain currency peg with India

• Disposable income increases—higher aggregate consumption, higher investment possible

But, at what cost?

At Household Level

• Social cost of family separation (option vsnecessity)

• Poor recruitment process/abuses Overcharging Misinformation different understanding Trafficking and other abuses

• Expensive remittance services

At Macroeconomic level

• Loss of external competitiveness (DD)

• Declining manufacturing/agriculture sectors (DD)

• Laxity of policy reforms

• Real estate bubble (?)

• Cost of declining remittance very high

Overcharging: Migrant Recruitment

AirfareNR25,000

36%

Recruitment Agency’s Profit

NR8,64012%

InsuranceNR3,000

4%

Airport TaxNR1,160

2%

Welfare FundNR1,000

1%

OrientationNR700

1%

Government feeNR500

1%

Commission to Recruitment Service

Company or Middleman in Qatar

NR30,00043%

Qatar Example

Dutch Disease

• Demand increases. This causes overall prices to go up, but as import/export prices are fixed by the exchange rates and foreign prices, relative prices of non-tradable services and wages rise. This raises the cost of producing exportables or import substitutes. Loss of competitiveness.

• Wages can also rise due to a decline in labor supply—through out-migration and reduced willingness to work because remittance increases family income of those at home

Is Dutch Disease Happening?

More Worrisome: Vicious Policy Cycle

More remittances

Little pressureto improve

policyweaknesses

InadequateInvestment

Climate

Low Private InvestmentLow Growth

Limited Job Opportunities

More Migration

Policies to Reduce Costs

• Recruitment Processes

• Remittance Services

• Macroeconomic and Economy-wide Policies

Policy Recommendations: Recruitment

• Enhance dialogue between govts of India, Gulf states, and Malaysia to enforce mutual laws and agreed guidelines for migrant recruitment

• Enter into bilateral agreements with more countries

• Strengthen role of Nepali embassies in destination countries and ask them to open embassies in Nepal

Policy Recommendations: Recruitment

• Provide information to potential migrants on recruitment process to raise awareness

• Provide effective orientation/training programs (focus on basic information, financial literacy, language and customs)

• Effectively monitor recruitment companies and penalize malpractices

• Simplify and systematize the process

Policy Recommendations: Remittance Services

• Develop efficient electric transfer mechanism• Introduce mobile phone banking and prepaid

cards, while encouraging involvement of post offices

• Improve legal regulatory frameworks for remittance service providers

• Improve communication with destination country authorities—request issuing ID cards for migrants to open bank account at the destination

• Pre-departure orientation to strengthen migrants’ financial literacy

What to do with Dutch Disease?

• Cannot fight inflows of 25-30 percent of GDP

• Lean against the wind, do not exacerbate.

Prudent macroeconomic management (especially fiscal)

Improve investment climate (increase job opportunities at home)

Better Investment Climate Will Also Help Reduce RiskNow and in the Future

• Ensures remittance flows will be invested productively• Increased (incentive for) domestic investment and domestic job creation

Make migration an option

rather than necessity for survival

THANK YOU