ON THE LEFT: Let migrants remit without control
International development organisations and academic researchers often suggest that remittances could have a beneficial impact on receiving countries. One of the key areas in which remittances have the potential to be particularly useful relates to business cycle fluctuations.
The term “business cycle” refers to economy-wide fluctuations in production involving shifts over time between periods of relatively rapid expansion and periods of contraction.
The potential usefulness of remittances is straightforward: If remittances are counter-cyclical and increase significantly when the home economy is in a downturn, these flows may then work as macroeconomic stabilisers that boost the recipient economy during downturns and cool off the economy during upturns. That is, remittances can have a “smoothing” effect on the business cycle of receiving countries.
The implications of this smoothing-out effect are major. It can be argued then that governments should not try to control remittances in the name of national development, but should rather let migrants remit without restraint.
In other words, the government should refrain from taking control over remittance flows in order to channel them toward more productive uses. The free flow of remittances should allow these transfers to adjust to cyclical fluctuations in receiving countries in a manner that has positive implications for economic stability.
However, there is also always the other possibility: remittances could be pro-cyclical, meaning that the flows decrease after downturns in the home economy. In this case, receiving countries may have to deal with an additional impact (that is, the amplification effect) of these downturns.
Given the importance of counter-cyclical versus pro-cyclical trends for policies towards remittances, a large literature which tests these possibilities has developed during the last decade (including some of my own work).
In a new paper which was recently published in the Journal Of Ethnic And Migration Studies (JEMS) and which is co-authored with Isabel Ruiz, we argue that the cyclical nature of remittances is unlikely to be stable over time. These flows may be counter-cyclical at some point and pro-cyclical at others.
Therefore, the potential of remittances to smooth out cyclical fluctuations in output is highly questionable.
Take for instance the growth rate of remittances to Mexico. There are noticeable increases in the growth rate of remittances during the 2001 and 2003 downturns. This relationship does not hold for the 2008 to 2009 downturn. In fact, there is a significant decrease in the growth rate for late 2009. There is an obvious explanation for this fact. The slowdown in the United States economy during 2008 and 2009 affected strongly those sectors that employed large numbers of Mexicans. The adverse economic conditions of many Mexican migrants may have discouraged them from increasing remittances to compensate their families affected by the poor economic conditions in Mexico.
More sophisticated analysis in the JEMS article supports the same conclusion. Remittances are not always countercyclical flows that come to the rescue in times of economic distress in the home country.
Instead of simply analysing the cyclical nature of remittances, future research should explore the reasons for the changes in the cyclical nature of remittances over time. Meanwhile, remittance-receiving countries should be wary about creating policies based on unstable relationships.
• Carlos Vargas-Silva is a senior researcher at University of Oxford.