The Curse of the Remittances

Truth or fiction?

Some in the UAE consider it a problem that foreign workers send money home instead of spending it in the UAE. I don't. But what about what remittances do to the receiving country's economy? Is it all good news?

From Foreign Policy :

According to a new study by the International Monetary Fund (IMF), remittances may actually encourage government corruption and ineffectiveness. In an analysis of 111 countries between 1990 and 2000, researchers found that high levels of remittances often lead to greater corruption and irresponsible economic policies. In other words, officials in remittance-rich countries are often let off the hook for failing to provide basic services, freeing them to divert resources for their own purposes. “[T]here’s less of an incentive for citizens to demand reforms” when remittances are high, explains Ralph Chami, a division chief at the IMF Institute and a coauthor of the report. And because the government assumes citizens with help from abroad will turn to the private sector for essential services such as healthcare and education, leaders face little pressure to change. “The government says, ‘I know you’re getting money; what’s my incentive to fix [the] situation?’” says Chami.

Here's a link to the paper (PDF).

Economists often argue that exporting workers and receiving their remittances (sent to their families) is just another form of exports. Putting these two arguments together, are we to conclude that exports take governments off the hook and lead to greater corruption and irresponsible government projects? Of course not.

I suspect that exporting labor is often the result of bad government policy. People leave because of government failure: the economy is over regulated, excessively managed (and, hence, mismanaged), or -- at the other extreme -- does not provide basic infrastructure like roads. But in such an environment remittances may serve as a safety valve that takes the pressure off fundamental reform.

We don't have to just look for present day examples like Bangladesh or the Philippines. The Irish diaspora might also be an example. Ireland of course is also a shining example of what can happen when market reforms are instituted.