By Gemma Osborne
In many countries, low wages and rare opportunities for employment make working abroad seem favourable. As workers migrate in response to such economic hardships, seeking out higher wages, they leave families and friends behind. Remittances are the way these migrant workers realise their higher wages earned abroad, through monetary transfers back home. Due to differences in the cost of living, these transfers have great value to the recipients, enabling the purchase of housing, education and more, significantly increasing the standard of living for many in the migrant’s home country.
The onset of Covid-19 in March of 2020 presented a worldwide shock, affecting those receiving and sending remittances. Just before this, in 2019, remittances exceeded official developmental assistance by three times, rising to $548 billion, showing their growing importance in the global economy and development. Due to Covid-19, it was predicted that by 2021, these flows would fall by 14% to lower middle-income countries, but were also predicted to eventually rebound. These predictions were due to the anticipation of economic downturns in all economies causing an increase in unemployment, especially in sectors employing migrant workers.
It was anticipated that migration as a whole would decline, due to a combination of increased return migration and a decrease in new migration due to travel restrictions implemented by governments to stop transmission of Covid-19. Since the lifting of such lockdowns, there were reports of return migration. This would mean that there are fewer migrant workers earning wages in higher income economies that have the resources to send remittances, which would contribute to their expected decline.
Many reasons were given to support the prediction, namely that lockdowns in most countries caused the shut-down of banks and post offices, making the sending and receiving of cash more difficult. With 80-85% of transactions involving cash, this was expected to present itself as a decline in remittances. A further reason was because the sectors that most commonly employ migrant labour are construction, tourism and transport, which were some of the sectors hardest hit by reaction policies to the pandemic, such as lockdowns.
However, in the past, remittances have shown to be more resilient to such shocks, remaining relatively steady throughout the financial crises of the 2000s. This could be due to migrant workers not displaying strong herd behaviour, often not acting as a group, contradicting the idea that there would be mass return migration to fuel the decrease in remittances.
Despite initial bleak predictions, official data has now shown that remittances have actually been increasing after a short period of decline in April of 2020, with remittances in some developing countries actually increasing in the first months of the pandemic. This reflects the robustness of remittances seen in past financial crises. This can lead us to once again question why economist’s predictions failed to materialise. Looking back, we can now observe how the economic recovery in remittance-sending economies was quicker than expected, such as in the U.S., the largest source of remittances. This would mean that the decline in income experienced by workers was temporary, enabling remittances to bounce back quickly.
Remittances are a large proportion of the economy in many countries. This reliance on remittances was thought to be detrimental at the onset of the pandemic. This can be illustrated in the case of Mexico, which receives a large proportion of remittances from migrants working in service-providing sectors in the US economy. Lockdown policies implemented by the US in reaction to the pandemic shut down much of the economy, causing many of these migrants to experience a decrease in wages and unemployment. This was predicted to cause a downturn in the amount of remittances Mexico would receive, in turn affecting the standard of living of its population.
However, reports of increases in remittances could be illusionary, as they only represent changes through official channels. It is therefore possible that the increases merely show a switch from the use of unofficial channels (e.g., border crossings) to official ones (e.g., bank transfers).
So far, the reasons given would affect both the official and unofficial methods of remittances. However, only changes to flows able to be measured officially will be shown in the data. Some Covid-19 policies solely affect the unofficial channels, such as travel bans disrupting monetary transfers conducted via the worker themselves transporting cash across the borders, which is not recorded in the World Bank’s data.
Data collected in Mexico supports this idea. Households closer the border are more likely to receive remittances through unofficial instead of official routes. This is because they are closer in proximity to possible border crossing points, where cash can be transported more easily. It has been shown that there was a rise in registered remittances in municipalities that were closer to these border crossings. These same municipalities also experienced a disproportionate increase in the number of bank accounts opened relative to the rest of the country since the implementation of lockdowns, indicating a switch to official channels.
It is therefore not a surprise that Mexico has experienced an increase in remittances through official channels. Household surveys are a data collection method that would estimate remittance flows from both official and unofficial channels, while official statistics rely on recorded financial transactions. This means that there is an opportunity to investigate impacts on remittances even further, as if it is found that there was a decrease in flows through unofficial channels, this could eliminate or outweigh the shown increase in flows through official channels.
Nepal is one of the countries that experienced a decrease in remittances, of 51% in 2020 compared to the same period in 2019. What makes Nepal susceptible to reductions in remittances is that it is now the fifth most remittance-dependent economy in the world, accounting for around a third of Nepal’s economy. This means that Nepal is highly sensitive to changes in remittance flows, affecting a large proportion of the population.
Many migrant Nepalese workers find work in Gulf countries, who due to the pandemic found their oil dependent economies take a significant hit due to subsequent decreases in transport and production and an increase in supply resulting in a drop of demand and price of oil. April 2020 saw the lowest price of oil since February 2002. This in turn affected the Nepalese workers greatly, many with visas preventing them from finding new jobs once facing unemployment and a decrease in work opportunities, all while being stranded in foreign countries, unable to make it back home due to travel restrictions. These reasons can be attributed to the decrease in remittance flows.
However, Nepal also experienced the same bounce-back as many of the other economies, with remittances increasing in the fiscal year 2020-21 by 9.8%. This could be attributed to recovery of the oil-dependent economies restoring work for migrants, and empathy of the workers for their family back home causing them to send more money to support those at home, as remittance-dependent economies were hardest hit. This may be because migrant workers have a tendency to send more money home during a time of crisis in Nepal, when families require a greater level of aid. Again, more workers also sent remittances via official channels while the unofficial were blocked by Covid-19 policies.
Without information about unofficial channels, we are unable to gain a clear insight into the true movements of remittance flows during the pandemic. What can be taken from this is that participation in official channels has allowed remittances to continue where they may have otherwise been blocked, emphasising their importance in today’s global economy. The fact that these official channels have helped remittance-receiving economies through Covid-19 shows that there is an argument for widening of these channels and making them more robust. These policies can only be advantageous to migrant workers and help to spread the benefits of higher wages to their home countries, and to ensure greater stability during such times of crisis. Introducing competition would also bring the price of participating in the official channels available to more workers.
Competition is currently low due to regulations intended to guard against activities such as money laundering. At 10.9% of the transaction, banks are the costliest method of which to send remittances, acting as a deterrent to participating in these official channels. Approaching regulation differently is therefore vital to bringing official methods to a more affordable level, and enabling migrant workers to utilise the more resilient of the channels.
We are able to now see why predictions were wrong about remittances, and that reliance on them should not be such a source of worry, as they once again have proven their steadfastness in a time of crisis. However, if we are to assess the usefulness of remittances as a method of financing in economies with high reliance on this method, then research also has to be conducted into changes in flows through unofficial channels. This will enable greater certainty about the future in economies that need this to fuel economic development – those that send migrant workers abroad in search of greater opportunities.
The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.