Dollars wrapped with love

A couple of weeks ago, I came across a talk by Economist Dilip Ratha on TED Talk about remittances from international emigrants. In his talk which you can watch below, Dilip Ratha referred to these remittances as “dollars wrapped with love”. Coming from a family with overseas emigrants and being an overseas Vietnamese myself, the idea hit home – literally.

Dilip Ratha @ TED talk

Dilip Ratha @ TED talk

https://embed-ssl.ted.com/talks/dilip_ratha_the_hidden_force_in_global_economics_sending_money_home.html

Dilip Ratha is the first Economist to conduct extensive research and analysis on the significance of international remittances. According to a press release in April 2014 by the World Bank, this year’s remittance inflows to developing countries will rise to $436 billion – a 7.8% growth over 2013 figure of $404 billion. To put it in perspective, this figure was more than 300% of total global foreign aids. In many of the developing countries receiving these remittances, the money has been the main source of external capital. Nepal received nearly double its revenues from export while top receiver – India with $70 billion surpassed its revenues from software services export of $65 billion. More “modest” figures were seen in Sri Lanka and the Philippines where these numbers were over 50% and 38% of their exports respectively. Figure below shows the top 10 remittance corridors in 2010 and % of GDP for receiving countries.

remittance2010

Apart from its significance in size, Dilip Ratha pointed out two key features of these dollars wrapped with love. The first was that this source of external capital represents a more stable and steady-growth inflow as compared to foreign aids and investments. While investors have higher propensity to pull out during times of crisis, remittances often remain stable and even grow in face of adversity at receiving countries. The second was the practical use and direct impact remittances have on the lives of families and relatives receiving them. While foreign aids and investments are often subjected to layers of processing and approvals, remittances are almost immediately channeled to use. More importantly, these usages are often prioritized towards improving lives and education for the younger generations.

remittances-and-oda

At $11 billion as of 2013 Vietnam ranks 7th in the world for remittances. This reported number is however, often understated by approximately 30% as overseas Vietnamese send money home using informal remittance services. The preference for informal services stems from a variety of reasons from tax incentive, favorable exchange rate to cultural familiarity and/or habit of senders. Compared to emigrant workers, overseas Vietnamese who left after the war due to social-political reasons often send larger sum of money. However, this group also has higher tendency to use informal channel due to their lack of trust in the government. While Foreign Minister Pham Binh Minh claimed that remittances sold to bank in 2012 has increased to 30% as compared to 14% in 2011 due largely to improvements in transaction procedures, exchange rate stability and narrowing difference between bank rates and black market rates, there are rooms left for development.

On top of the challenge to capture more remittance at entrance, the government also faces a daunting task of attracting investment from this source of foreign capital. Large amount of remittances are sold to black market at better exchange rate. According to big remittance players, the percentage of money sold to the banks trails at 10-15%. One of the reasons is the restriction imposed by the government on buying foreign currency back from the bank when they need foreign currency for medical treatment, overseas study or travel.

Furthermore, large amount of remittances ends up with more affluent families in developed cities like Ho Chi Minh city. Monies are often used to purchase real estates, invest at higher interest rates or travel. Incentives to encourage recipients to invest in businesses to create jobs and contribute to the economy are not yet present. Though not significant, remittance has contributed to increased inequality in the country.

It is therefore, both an opportunity and challenge for the government to formalize efforts to attract this significant source of foreign capital and channel them more effectively to improve the country economic development.

References:

http://www.worldbank.org/en/news/press-release/2014/04/11/remittances-developing-countries-deportations-migrant-workers-wb

http://english.vietnamnet.vn/fms/business/66682/vietnam-ranks-seventh-in-the-world-for-remittances.html

http://www.remittancesgateway.org/index.php?option=com_content&view=article&id=1089:vietnam-yet-to-best-use-overseas-remittances&catid=97:economic-news&Itemid=107

 

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