In the whole worldwide economy, remittances show one of the leading international flows of financial resources. Worker remittances build up a critical process for transferring resources from many developed to developing countries. Remittances are the most significant source behind foreign direct investment.
Such as the online money transfer to Bangladesh and other countries helps build a road to economic stability for both countries, the receiver and the sender.
Sometimes the flows of remittances may exceed the flows of foreign direct investment. Still, literature on worker remittances has focused mainly on the effect of remittances on income spread in countries on the determinants of remittances on the micro-level.
Emigration is one of the critical issues in the global economy. It is still estimated that over 110 million individuals now live outside of the country of their birth. This mainly has many economic and political implications for both receiving and sending money.
The World Bank has recently forecast that the remittances to developing countries will total far more than US$450 billion this year. Given the sheer size of the money transfers, we must expect them to affect countries that receive them.
In a few respects, remittances do live up to this hype. For example, research has shown that remittances may reduce the volatility of economies that receive them to stabilize the overall demand of goods and services.
They also inject substantial cash into the government coffers. The recipients spend a considerable share of transfers on essential and the rest of taxable products. In such a way, remittances have now created a fiscal cushion for the cash-strapped governments and enabled a few countries to get free of the debt crisis.
The worse things are at home, the more the money remitters will send as these transfers are intended in a considerable part to ensure the family against hardships. This only improves the strengths of recipients’ incentives to reduce the productive efforts then. Hence remittances may lead to far lower growth as recipients have the motivation to work and then invest less.
Dangers Of Dependence
All of this evidence suggests that remittances play an important role in economics as the consumption stabilizer and is also an overall economic stabilizer. But it means that if remittances go falling unexpectedly, this may lead to recession.
The world has seen some evidence of this after the very recent financial crisis that caused global remittances to fall for the first time in many years, even decades.
When people are doing online money transfer to Bangladesh or other countries, they must know this effect. In Africa, some countries lost .2% to .5% of GDP growth only because of the decline in remittances. And a few of the North African counties which were highly dependent on remittances from Europe lost around 1% in 2009.
Analysis of central Asian economies also showed that the consumption fell a lot faster than the remittances, indicating that the latter had a decline perceived to reduce household recourses significantly.
This also puts fiscal stress over governments as the revenues from those consumption taxes slump. It can also limit their ability to plough a lot more money into the economy to counteract the decline in remittances and a resulting drop in consumer spending.
Hence remittance dependent economies may receive a double shock when all of these payments fall.
Misunderstanding Remittances Real Role
Fortunately, however, these occasions have been a lot rare. Remittances have also proven to be a dependable source of income that millions of families use to meet the basic needs. This suggests highly strongly that expecting them to extend over the long term economic growth misunderstands the vital role they play in most remittance-receiving economies.
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