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.