ch 5 Flashcards
Remittances
shift income form the destination country to the source country and this has a positive impact on GDP in the source country since more goods and services are consumed.
evidence suggests that remittances may not be large enough to hurt the destination country substantially
Rather, immigrant remittances make possible the case where both countries gain in income.
Remittances have become an important component of
the balance of payments for many countries.
Remittances are recorded as unilateral transfers in the current account of a country’s balance of payments.
These unilateral transfers have become net negatives for high income countries and large net positives for low income countries
Balance of Payments
A record of exchange of goods, services or assets between businesses, individuals, and governments of one country with the rest of the world
Credit : receipt of payment from foreign source
Merchandise exports
Transportation & travel receipts
Gifts from foreign residents
Investment and transfers by foreign residents
Aid from foreign governments
Debit : payment to foreign source Merchandise imports Transportation & travel expenditures Gifts to foreign residents Foreign investment and transfers by local residents Aid given by local government
The Balance of Payments includes the Current Account and the Capital Account
I. Current Account
Monetary value of transactions in goods, services, income flows and unilateral transfers
Merchandise trade balance : includes all goods that U.S. exports or imports
Surplus (positive balance) implies exports > imports
Deficit (negative balance) implies imports > exports
Services balance: added to merchandise trade balance
Unilateral transfers: gifts of goods & services or financial assets between the a country and the rest of the world
II. Capital and Financial Account
International purchases & sales of real estate, stocks & bonds, government securities and bank deposits
Foreign Direct Investment: residents of one country acquire 10% or more of business in another country
Securities: private sector purchases
Bank claims: loans, overseas deposits, acceptances, foreign commercial paper
Official settlements transactions – movement of financial assets among official holders such as the Fed, ECB and Bank of England
The impact of new remittance technology
As money transfers are being subjected to more intense scrutiny by regulators, the remittance industry has experienced a shift in remittances from informal to formal channels.
Large money transfer operators have therefore benefited from the shifting flows (Western Union, Money Gram).
More recently, the remittance industry has also seen the introduction of cell phone-based remittances.
These changes may imply a shift from cash-based remittances to account-based remittances in future, which will allow for better remittance data in the future.
Reliability of remittance data
Estimates of immigrant remittances must be used with caution since money is often carried home in the form of cash.
Moreover, remittances are regulated and restricted in some developing countries which leads immigrants to use parallel markets with a more favorable exchange rate often.
Data on remittances has become more accurate since fewer countries restrict transactions, more remittance payments are made through official channels and there are more source of information.
How remittances are used at home
The welfare effect from remittances depends on how remittances are used at home.
If they are used for investments the long-run welfare effect will be greater than if they are used for consumption.
Remittances used for consumer durables, to improve housing and more importantly to increase education, can also raise the long-run welfare substantially.
They conclude that remittances have a negative impact on economic growth
This is mainly due to the moral hazard associated with remittances
Immigration and technology transfer
Immigration also helps build networks and channels that facilitate the flow of technology from technologically advanced countries to less advanced countries.
Immigrants maintain close ties with former colleagues and associates in the source country, and continue to influence each others’ research.
This positive effect of immigration is very important for countries such as India, China, Taiwan and others that have many university graduates living abroad.
Technology transfer benefits the source country the most, the weaker is intellectual property rights protection in the source country.
Immigration and international investment
Evidence suggest that expatriates living in Silicon Valley were responsible for a substantial share in new technology and investment in the source country (Light-1985, Saxenian- 2002).
Studies show that immigration stimulates international investment by reducing the transaction costs associated with culture, language and business practices (Gould-1994, Head & Ries-1998).
Finally, Lewer and Van den Berg (2009) find that a 10% increase in immigration is associated with a 5% increase in FDI from immigrants back to their native countries.
Lewer and Van den Berg (2009) find that immigrants also expand trade between the destination and source country for several reasons:
Immigrants create trade networks
They stimulate the presence of multinational firms in poorer source countries
They induce home governments to reduce trade barriers (tariffs, quotas and export subsidies)
The Brain Drain
The immigration of university graduates from developing countries to high income countries
Since human capital is believed to be beneficial for economic growth, the departure of highly educated and talented immigrants can be a serious cost of immigration for the source country.
Evidence for many countries shows that there is positive selection, immigrants are more educated and motivated then the average resident of their source country.
The Brain Drain and the lack of capital
The main reason for the brain drain is the lack of demand for highly skilled labor in developing countries.
The lack of demand may be a result of poor economic policies that repress the demand for technology, entrepreneurship, innovation…
Labor markets may not function properly and restrictions on wages paid, high taxation and even confiscation and theft of gains from innovation and successful enterprises may contribute to brain drain.
For human capital to earn a high return it must have other inputs to work with (capital).
The Brain Waste
Brain waste refers to a situation in which highly educated immigrants from poor countries perform lower-skilled jobs in high-income countries.
Özden (2006) finds that talents are fully exploited when the same language is spoken and there are cultural similarities between the source and the destination country.
Brain waste may also reflect ethnic discrimination in the labor market.
Immigration policies based on professional needs (Canada, Australia) are more likely to match immigrants with the demand for labor and reduce brain waste.
Brain Drain, Remittances & Educational Attainment
Highly educated workers are likely to remit more income back to the source economies since their earnings are higher.
Educational attainment has increased over the past two decades as brain drain also became a more prominent phenomenon.
Docquier and Rapoport and other economists developed models suggesting that overseas opportunities create incentives for people in the host country to acquire more education.
This induced increase in education can end up contributing to the source country’s growth even if some people end up migrating.
However, the impact be positive only if a substantial percentage of those acquiring more education end up staying in the source country.
