The political economy of remittances in Ethiopia

By Alemayehu G. Mariam

A Thankless Job, But Somebody’s Got to Do It!

It is gratifying to know that Ethiopian Americans are carrying their fair share of the load in helping the economy of their homeland. It was an eye-opening revelation to learn that Ethiopian Americans contributed a cool $1.2 billion to the Ethiopian economy this past year. That is “only second to the amount generated by Ethiopia’s exports.” Last week Elias Loha, Manager of Reserve Management and Foreign Exchange Market of Ethiopian National Bank, fretting over “a cut in vital remittances from Ethiopians in the United States” told Reuters: “We are concerned and worried that as a result of the financial crisis… some of the Ethiopians may loose their jobs and as a result they may stop sending money to help their families back home.” Could that be a backhanded way of giving us teeny-weeny credit for the much vaunted stratospheric “10 percent a year economic growth” Zenawi gasbags about? Regardless, there seems to be manifest alarm in Zenawi’s officialdom that the Ethiopian-American goose may not be laying as many golden eggs as it has been previously because of the sub-prime mortgage debacle.

The $1.2 billion figure came as a pleasant and unexpected surprise for many Ethiopians who regularly send money to their families or make remittances for other purposes. The official figure most likely underestimates the actual figure since the National Bank does not have the data collection mechanisms to accurately gauge the remittance flow in the informal channels or in the underground economy. For instance, a 2006 World Bank study suggested that if remittances sent through informal channels are included, total remittances in recipient countries could be as much as 50 per cent higher than the official record. What surprised most Ethiopian Americans aware of the staggering contribution was the fact that remittances substantially exceed the total amount of U.S. aid given to Ethiopia. Evidently, such massive infusion of money could have significant and decisive implications for Ethiopian society, but there are few systematic studies on the impact of remittances on the Ethiopian economy. We do not know if the $1.2 billion dollars we sent alleviated poverty or deepened the inequality in Ethiopia between remittance recipients and the vast majority of people who do not receive them. Did our remittances help reduce the poverty rate in Ethiopia or place an added burden on the poor by grossly distorting the local economy? Is the $1.2 billion we sent last year or the hundreds of millions in prior years in some part responsible for the current high inflation, high food and fuel costs and stratospheric housing prices? Is there evidence to show that the billion plus dollars we sent contributed to economic development in Ethiopia? Would a significant decline in remittances by Ethiopians in the U.S. have positive effects on the economy by alleviating inflationary and other pressures? What is the relationship between increased levels of remittances and the “brain drain” of highly skilled workers from Ethiopia? Do our remittances provide economic buoyancy to help keep afloat the doomed ship of a ruthless dictatorship? We just don’t have the empirical data to answer these questions.

The Evidence on Remittances, Growth and Poverty

Although there are few studies on the impact of remittances on the Ethiopian economy, there is an emerging body of empirical literature on the subject in the Asian and Latin America contexts. The top recipient countries of recorded remittances include India ($21.7 billion), China ($21.2 billion) and Mexico ($18 billion). Africa receives only 4 percent of total remittances made to developing countries. The International Monetary Fund Yearbook (2006) reports that 5 African countries enjoy the highest remittance flows relative to their size (based on both ratio of remittances to GDP and export earnings); these include Lesotho, Cape Verde, Guinea Bissau, Senegal and Togo.
The available data on the impact of international migration and remittances on economic growth and poverty is not definitive, but there seems to be general consensus that remittances have a positive impact on the reduction of the employment and poverty rates in recipient countries. For instance, a study of 74 low and middle income developing countries done by the United Nations Population Fund in 2006 concluded that there is statistically significant correlation between remittances and decline in poverty. The study suggested that a 1.2 percent reduction in the poverty rate could be achieved by a 10 percent increase in the share of remittance in a country’s gross domestic product (GDP). Other studies in the Asian context suggest that remittance inflows could accelerate entrepreneurial activity in households by obviating credit restrictions. According to the World Bank, the more remittances a country receives, the higher its creditworthiness and the easier access it has to international capital markets. Remittance inflows are also said to have multiplier effects (money used to create more money) making a significant contribution to savings and investments in recipient countries. One study of Tunisian workers, for instance, showed that workers who had limited access to bank credit or the financial market used remittances for investment purposes. Other reported benefits of remittances include improved financing in health care and education and reduction in child labor in recipient countries.

There is also a body of literature that casts doubt on the relationship between remittances and economic growth in recipient societies. There is some evidence to suggest that remittances in Latin America have had only short term positive impact on poverty by increasing the income of recipients, but no appreciable effect on economic growth. A number of other studies have suggested that the primary use of remittances in recipient countries is to raise the recipients’ level of consumption with the balance going into home building, debt repayment and the financing of future migration by other members of recipients’ households. Some scholars have argued that remittances indirectly but negatively affect labor supply in recipient countries by encouraging some recipient households to work less, creating a “moral hazard” in which remittances spawn an informal “welfare” system. Concern has also been expressed by some economists that large and sustained remittance inflows could result in the so-called “Dutch Disease” problem, whereby remittances cause an increase in the real exchange rate (how much one currency is worth relative to another) and make the production of tradable goods sector (e.g. exports) less profitable. For instance, a study of 13 Latin American and Caribbean countries showed that remittance inflows into these countries caused an increase in the exchange rate which reduced the value of exports and the competitiveness of the recipient countries’ export sectors.

Do our Dollars Help or Hurt Our People?

There are few studies that have examined the relationship between remittances and economic consequences in Ethiopia. One of the few systematic and enlightening studies on the subject was done by Dejene Aredo of Addis Ababa University in 20051. Aredo’s study lends some interesting insights on the role of remittances and their impact on the economy, particularly in the urban areas. Aredo examined the effect of remittances (both domestic and foreign) on urban households who are “more vulnerable than rural households to different sorts of urban shocks” (e.g. effect of structural adjustment programs [i.e. to get World Bank or IMF loans, a country must do what it is told] on urban workers, higher rates of HIV/AIDS, withdrawal of government subsidies for targeted programs, higher rate of poverty among female-headed urban households, higher incidence of homelessness and unemployment, disproportionate impact of global financial crises, etc.). Aredo found that a “considerable proportion of sampled households (16.63%) received remittance from abroad.” International remittances (77 percent) exceeded domestic ones (23 percent) “both in terms of volume and per capita flows.” Urban households received remittances at a higher frequency during the month suggesting that remittances were used “largely to cover day to day consumption expenditures.” Only 1.1 percent of remittances in the sample were used for investment purposes, 1.7 for savings and 2.8 percent for asset purchases. Aredo also found that women got more remittances than men from both international and domestic sources, suggesting that “remittances are a means by which poverty among the most vulnerable groups of society, i.e. female-headed households, is partially addressed.” Based on his findings, Aredo suggests that “with increased remittances, it is possible to cover a substantial portion of the resource gap and reduce poverty by half by the year 2015.” He also suggests implementation of a more comprehensive policy to tap into available Diaspora funds beyond the regime’s policies (e.g. removal of import tariffs on certain goods, land grants for home building, bank deposit in foreign exchange, etc.).

The jury is still out on the impact of remittances on the Ethiopian economy. The available data is insufficient to determine whether remittances from Ethiopians in the United States alleviate poverty, accentuate existing inequalities or contribute significantly to economic development, job creation and investments. The preliminary evidence suggests that remittances can cushion the “ever-deepening poverty and vulnerability to recurrent shocks” of urban households, particularly female-headed ones. Aredo’s study appears to suggest that “in the absence of credit and insurance market (even in urban areas), vulnerable households attempt to smooth their consumption by partially relying on both sources of remittances (i.e. domestics and international), while households with stable and high incomes rely heavily on international remittance transfers for investment or other purposes (other than for consumption smoothing purposes).”

What Can We Do As Ethiopian American “Remittance Donors”?

Remittances are essentially private transfers of wealth with potentially significant economic and political consequences in recipient countries. In Ethiopia, $1.2 billion in remittances in one year appear to represent the largest source of foreign exchange earnings, rivaling and/or exceeding export revenues, foreign aid, foreign direct investment or other private capital flows. If we as Ethiopian Americans collectively remit (“donate”) well over a billion dollars a year, that effectively makes us a major stakeholder in the economic well being of our country. Obviously, the regime’s “concern” with declining remittances has to do with the potential evaporation of foreign exchange reserves caused by job losses of Ethiopians in the U.S. World Bank data does not support their concern. In fact, there is evidence to suggest that there tend to be more remittances in an economic downturn, political crisis, natural disaster, famine or war than in normal circumstances. But as “remittance stakeholders” our issues transcend the regime’s insatiable appetite for foreign exchange reserves. Our issues are different: Do we have an obligation to carefully analyze the economic impact of our financial transfers on economic growth and poverty in Ethiopia? Do we have any political or moral responsibility in the way our remittances are used in the country? Could we be spreading the “Dutch Disease” to Ethiopia by massive remittance infusions? Do our remittances provide a mechanism to those in power to substitute remittances as anti-poverty programs and avoid long-term development efforts? If our remittances tend to increase income inequality between recipients and others, do we have an obligation to rectify that imbalance through remittances to charitable organizations? How can we help build institutional capacity without building and fortifying the current repressive dictatorship? Do our remittances indirectly support, prolong and entrench the one-party, one-man dictatorship in Ethiopia? These are questions properly put to Ethiopian economists.

In terms of prescriptive remittance policies, various scholars have proposed initiatives in three categories: 1) policies that maximize remittance savings in national financial institutions in recipient countries, 2) policies that promote investment among recipient households while minimizing consumption, and 3) policies that are aimed at promoting infrastructure development funded totally or partially by “collective” remittances. One area of exploration for Ethiopian Americans should be “community development” totally or partially funded by “collective” remittances. For instance, some Mexican migrants in the U.S. have formed hometown associations that raise funds for their communities of origin and spend those funds on community development projects such as improving water supply and quality, health and educational services, etc. In some cases, their contributions have been matched by the Mexican federal and state governments. The Overseas Pakistanis Foundation, a non-profit organization with headquarters in Islamabad provides investment advisory and facilitative services to returning Pakistanis who seek to establish businesses. At the institutional level, India and Pakistan have offered specialized incentives for their “Diasporic” citizens to set up or expand businesses, particularly in economically backward or depressed areas. Commercial banks in El Salvador, Nicaragua, Honduras, and Guatemala have remittance policies that offer higher interest rates on term deposits and foreign currency denominated banking accounts. Undoubtedly, Ethiopian economists could develop a whole list of creative uses of remittances for maximum local benefits. Beyond the need for substantive policies, better data collection and analysis on the multifaceted aspects of remittances is needed. Without such data, much of the analysis and policy prescriptions are likely to be speculative and not particularly useful in maximizing the positive impact of remittances on the Ethiopian political economy. Needless to say, it is awfully nice to know that there are some in Ethiopia who are concerned about the economic health of the Ethiopian American goose that lays the golden eggs. But does the golden goose have to be a cash cow too?
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1 http://www.gdnet.org/pdf2/gdn_library/global_research_projects/macro_low_income/Aredo.pdf