Background Information
Remittances have been defined as the proportion of migrants’ earnings sent from their destination of employment to their origin or communities (Samal, 2006). As financial flows that do not require a quid pro quo in economic value, they can be termed transfer payment in Balance of Payment Accounting. Remittances are considered as compensation (brain gain) for the loss of human capital (brain drain) by a net labour exporting country (Ratha & Xu, 2006). Relevant classification of remittances include: monetary versus non-monetary remittances; domestic versus international remittances, and inward versus outward remittances. The principal concern in this research is monetary- international-inward remittances to Nigeria. Domestic remittances will also be important elements of analyses.
Remittances are normal concomitant to migration which has been an integral part of human history. For example, Italy enacted a law to protect her remittance inflows in 1901 and remittances were also vital in her post-1945 development (Miluka, Carletto, Davis & Zezza, 2007). In Spain, rural banks and credit unions were formed after the second World War to receive much-needed foreign currency sent home by migrants working in the US and South America (Miluka et al, 2007). In recent history, declining wages, increasing unemployment and underemployment motivated further migrations of skilled and unskilled labour from the agrarian sector of the developing countries to the advanced world.
Globalization, accentuated by economic integration, collapse of many international trade barriers with a somewhat relapse of tight immigration laws made migration even more pronounced with a commensurate growth in remittances. Given their fast growths in the last 2 decades, remittances are now recognised as the foremost benefits of migration. They have also attracted attention in empirical studies with some concentration on their determinants and developmental impacts (Adenutsi, 2010). Also, a few multilateral, bilateral and governmental initiatives on remittances are emerging. Some of them are discussed in chapter 2.
Developing countries as a whole have consistently been the largest recipient of international remittances in the world. Formal remittance flows to this region is twice as large as Official Development Assistance (ODA) and nearly two-third of Foreign Direct Investment (FDI). Between 1995 and 2005 the total amount of official migrant remittances received by developing countries increased by more than 300% (Adenutsi, 2010). Remittances to developing economies reach US$338 billion in 2008, higher than its estimated value of US$328 billion (World Bank, 2009). The actual total amount of migrant remittances received by developing countries is much higher. It is probably 2.5 times the amount of official flows since a significant amount of these transfers is likely sent through the informal channels (World Bank, n.d. as cited in Mutume, 2005).
Nigeria received US$1.92 billion as remittances in 1997, a value that is incomparable with the US$20 million received 20 years earlier (1977) (IFAD, 2006). The country received 65 per cent of remittances to Sub Saharan Africa in 2000 (World Bank, 2002 in: Orozco, 2005), with most migrants sending between 2000 and 3000 US$ (20 and 30 per cent of their earnings) per year (Ruiz-Arren, 2006). Annual estimates exceeded $1.3 billion, ranking second only to oil exports as a source of foreign exchange earnings for the country in 1997 (Mutume, 2005). Nigeria was the sixth highest destination of remittances from citizens of developing nations in the diaspora (Mobile Money Africa, 2009). The nation received $3.3billion in remittances which accounted for 3.4 per cent of the GDP and seven times the value of ODA to the country in 2005 (IFAD, 2006). Nigeria ranked third largest recipient in Africa in 2006, receiving US$ 5.397 billion (36 percent of total remittances to the continent) (Ruiz & Vargas-Saliva, 2009).
Approximately 55 percent of total remittance flows to Nigeria come from the United States and 10 percent from the United Kingdom. Significant inflows also arise from Germany, Greece, Italy, Netherlands, Spain, South Africa and Ghana (Hernandez-Coss & Bun, 2007). The relative participation of Money Transfer Operators (MTOs) in the Nigerian remittance market include: Western Union (47 percent), Moneygram (35 percent) and Coinstar (17 percent) (IFAD, 2009). Eighty one percent of formal remittances coming into Nigeria are transferred through banks (IFAD, 2009). This creates incentive for savings by the unbanked remittance recipients. Bank bound remittances are also beneficial to the recipient households in terms of creditworthiness. Moreover, it places capital at investors’ disposal thereby contributing to national development.
Chami et al (2005) found that most migrants send money home for family maintenance based on altruistic motives; making family ties important motivations for remitting funds from abroad (as cited in Mallick, 2008). In contrast, migrants who invest the remittances on real estate or physical capital, do so with profit motive, and conform to the self-interest theory of remittances. Other variant theories of motivation to remit include: implicit family agreement (co-insurance and loan), migrant’s saving target and portfolio management decisions.
Remittances have been found to be a more reliable and less variable source of funds from year to year than ODA and FDI (Ross, Forsyth & Hug, 2009 in Abdih et al, 2008). They provide a bottom-up approach to delivering resources to those who actually use them, and by-pass costly bureaucratic and administrative procedures associated with most development assistance. They are person-to-person flows, well targeted to the needs of the recipients, who are often poor. This makes remittances very important source of finance for the rural households traditionally known for high level of poverty and low access to foreign aid, government grants or bank loans. Remittances to rural areas are significant and predominantly related to intraregional migration in Africa. Two-third of Nigerians and other West African migrants in Ghana, for example, remit to the rural areas of their countries of origin (IFAD, 2010).
As Lennart Bage, the president of IFAD would say, “remittances represent a lifeline to struggling economies,” during an economic downturn in the home country, increased remittances, an equivalent of a private “welfare payment” are sent from abroad to help smoothen consumption of the recipients (Martin, 2005). Welfare in this context represents wellbeing of remittance receiving households, measurable in terms of the total households’ consumption expenditure (Duong, 2003). Another definition of welfare which may be considered as a function of sustainability is relative poverty (Foster, Seth, Lokshin & Sajaia 2013). In this research, relative poverty was analysed from the perspective of consumption distribution.
It has been reported that remittances stimulate consumption and investment notably in sub-Saharan Africa and South Asia, as well as contribute to households’ welfare (Osili, 2007 & Siddiqui, 2008). Precisely 5.5% of the average household income in Nigeria was from remittances. And recipient households seem to have better access to food and nutrition than non-recipients households (Oseni & Winter, 2009 as cited in Babatunde & Martinetti , 2010). Also, 61 percent of a group of Nigerians in diaspora remit for sustenance of those at home (DFID, 2005), implying that remittances could alleviate food insecurity thereby enhancing the welfare of the households. This view is further warranted given that international remittances had ameliorative effects on rural poverty in Western Nigeria (Olowa & Olowa, 2008); and decreased income inequality in rural Nigeria (Babatunde, 2008). This is corroborated by World Bank (2009) claim that meeting consumption needs including health care and education constitutes 80-90 per cent of remittance spending.
In spite of the fact that only 10 to 20 percent of remittance spending constitutes savings and investments whereas a whopping 80 – 90 percent goes for consumption spending (World Bank, 2009), remittance spent on consumption cannot be classified as unproductive. This is because remittance pushed consumption still leads to economic growth as consumption creates investment demand through its multiplier effect. Buttressing this fact are significant empirical evidences pointing out that remittances lead to positive economic growth, be it through increased consumption, savings or investment (Mallick, 2008). At the microeconomic level, for example, increased household spending on consumption in form of healthcare, schooling and housing can have important favourable effects on human capital and productivity. This implies higher labour efficiency and greater outputs for remittance receiving farming households. Positive multiplier effects will also help to spread the benefits to non-migrants’ households. These ripple effects that impact the extended family and community beyond the receiving households, is due in part to the increased consumption. The combined effects of remittances on investment and consumption can further increase output and growth. They can boost aggregate demand and therefore output and income with a multiplier effect as high as 1: 3 or even more (Van Doorn, 2003 as cited in Thao, 2009). Remittances can therefore be associated with better development outcomes.
Remittances also contribute to development by providing a stable flow of funds that are often counter-cyclical (i.e. they increase during times of economic downturn). They help poor families deal with negative economic shocks (World Bank, 2009). Remittances enable the hitherto risk averse farming households insured by remittances, to shift their portfolios towards riskier investments (Paulson & Miler, 2000 as cited in Chukwuone et al, 2007). By diversifying risk and relaxing liquidity and credit constraints through remittances, migration can be seen as part of a household strategy to overcome these restrictions, thus inducing productive investments (Miluka et al, 2007). Remittances are therefore an important informal insurance strategy.
Gender mainstreaming of remittances could have significant impact on the households as well as on the macro economy. IFAD (2007) found that slightly more women than men receive remittances, whereas average volume of remittances received was higher for men than women. Women spend most of their remittances on their families’ basic needs while men spend more on non-necessities (IFAD, 2007). However, if women succeed to cover basic consumption needs, education and health, they invest in building project or in land for agriculture (UN-INSTRAW, 2009). Nigerian evidence shows that although women may neither save nor invest remittance income as much as men, they use the funds to realise the welfare goals of the households than men. In a study of US-Nigeria remittance corridor, it was found that if the sender is a spouse of the recipient, the amount sent is on average 2.2 percent higher than the amounts sent by other family members and friends, with wives sending slightly more home than husbands (Orozco & Millis, 2007). Also poorer origin-families (often headed by women) in Nigeria received larger transfers (Osili, 2006). Gender interactions are hence, a vital force in the concurrent realisation of the welfare and developmental goals of remittances in the agrarian economy.
Considering its beneficial impact on poverty and gender, remittances can foster the realisation of MDGs 1 and 3: to eradicate poverty and hunger; and to promote gender equality and empower women. Although, remittances would not replace aids or credit schemes, they could be included in future NEEDS and SEEDS which are medium-term economic strategies for tackling Nigeria’s economic and structural problems and reduce poverty. In line with this idea, NEEDS document states that “if appropriate incentives are in place, the brain drain of Nigerians could be turned into a brain gain through increased remittances (Nigerian National Planning Commission, 2004). The lofty prospects enumerated about remittances can be brought to fore by policies that ensure the sustainability of its inflows. Sustainability here does not only mean stability of remittance flows, it also entails the inequality reducing effect and the spread of remittance outcomes beyond the recipients’ households thereby guaranteeing long-run impact”.
Sustainability of remittance flows will depend on the consideration of opportunities such as: strengthening the financial sector, banking in the rural areas, deregulating the remittance market (increase competition and lower costs), disseminating technology (SMS and Internet) to the rural remittance recipients, and leveraging the informal remittance transfer mechanism (Hanson, 2008). The informal systems of remittance transfer currently work efficiently and reliably, particularly for small transfers to the rural areas. Developing or integrating this system with the formal transfer mechanism will further promote remittance flows to the rural areas. There is need for greater involvement of credit unions, micro-finance institutions and migrant associations in leveraging remittances for development. Importantly, the preceding step will be to evaluate the present and potential welfare effects of remittances to assure us that these lofty policies are warranted. This research is therefore meant to begin the process.
