Notes on "Making Remittances Work" by Gupta et al

 Notes on "Making Remittances Work" by Gupta et al

BONUS LINK:  My entire (so far) grad school notes collection can be found here. 

          Formal remittances in Africa pale in comparison to the rest of the world.  African remittances make up only 4% of the global total.  From 2000-5 they have increased by only 55% while the rest of the developing world’s remittance levels grew 81%.  On average remittances account for only 2.5% of the GDP for African states versus 5% for developing states in other regions (i.e. East Asia and Latin America).  This numbers are somewhat skewed by the informal African remittance market (e.g., hawala system).  The remittance black markets account for 45-65 % of all money transferred back to Africa.

            While these remittances have made a difference in combatting poverty in Africa, it must first be noted that they are no substitute for sound, long-term economic development policies.  Furthermore, governments must be aware of the remittance levels lest they become victims of Dutch disease and RER appreciation.  It is clear, however, the remittances to augment household income and increase the level of sustenance families are able to provide.  Villages see the benefits of these remittances and will pool their resources to send their brightest youths abroad (or to the city) to earn a degree so that they can utilize this income stream.  While the research attempting to show a direct causative relationship between remittances and poverty reduction have opaque, Gupta does note that with a remittances to GDP ratio rise of 10%, one garners a reduction of 1% in people living on less than $1 a day. 

            Other benefits that remittances bestow on African economies include long-term economic growth potential.  Remittances allow many Africans to open savings accounts for the first time.  These actions lead to investment opportunities for entrepreneurs in the African states.  Furthermore, the remittances often serve as a stabilizing factor against international fluctuations in aid as well as global economic meltdowns.  The tendency for villages to send pupils abroad may contribute to a brain drain (at least partially), however, everyone doesn’t leave and there is corresponding evidence (especially in the health care industry) that remittances has increased the number of qualified health care providers in many African states.

            Despite these positive factors there is much that can be improved for remittances in Africa.  First the switch must be made from the informal markets like hawala to formal markets.  Namely this requirement will drive down risk for those transferring money.  An increase in formal markets providers must coincide with less taxes and fees for those remitting money.  These high taxes are the underlying cause the drives individuals to use informal systems.  Regionalization must also be promoted; this will allow regulation across the borders of neighboring countries so that uniform policies can be understood and use.  All of this must drive innovation—remittances are an ideal avenue by which to reach the unbanked.  In a novel effort, US banks set up a deal for remittances with people in Cape Verde that was very successful.  Some remittance credit union networks have been set up in southern African—these networks don’t require those receiving the money to have an account at the bank—making remittance reception easy and attractive.  Banks and MTOs must create ways to bundle services—this means that one could transfer money back to their home state but also investment and get loans.  On the subject of loans, in other developing regions, remittances have successfully been used as collateral for larger loans.  This has led to huge growth in the housing market in Mexico for instance.  For such growth to occur in Africa, however, remittances will have to grow well beyond their paltry 4% market share.  Finally, cell phone technology is already been used to allow people to bank via their phone.  The incorporation of this technology will prove crucial to the future of remittance. 

Rough Notes:

Remittances Compared:

- 2000-5 increased 55% to $7 billion (compared to 81% globally)

- only 4% of total remittances

- Nigeria the only country in the top 25 globally

- smaller relative to GDP as well (2.5% versus the 5% in other developing countries) EXCEPT: Lesotho, Cape Verde, Guinea-Bissau and Senegal

- Higher percentage  in Africa flow through informal channel though (45-65%) and exclude intraregional remittances (strong in southern Africa)

Remittances' Impact:

- FIRST: no substitute for sustained domestically engineered development effort/strategy

- SECOND: stay alert to Dutch disease and RER appreciation

- Augment households resources, smooth consumption, provide working capital, multiplicative effects on household spending

- finance consumption, invest in education, health care, nutrition

- Villages pool resources to send smartest abroad—so higher poverty might mean more remittances

- Remittances to GDP ratio rise (10%) = 1% less people living on less than $1 a day

Remittance benefits:

- Long Term Growth Potential- depends on how they are used.  If they are used in concert with investment channels they stimulate growth

- Financial Development –enable access to financial markets for those previously unable starting with savings products.  Possibility to use them as collateral with microfinance projects.  This is financial deepening.

- they can be a stabilizer against fluctuations in Aid and FDI

- possible increases in health care workers

Remittance Future:

- Less taxation and fees.  Cost of small sums is very high.  This is due to low volume and lack of form institutions capable of carrying out the transfer

- right now many depend on the hawala system (east Africa)—but these carry significant risk

- no major MTO like wester union in south Africa.  9/11 has made it even harder to own or start an MTO

- financial sector reform—permitting citizens to open foreign currency accounts

- cross border fee regulation and uniformity

- connect the unbanked population (US Banks doing this with Cape Verde)

- adapt to migrant need—International Remittance Network (200 credit unions) doesn’t require recipients to have a bank account.

- Cell phone technology allows money sent as text message—cell phone banking—linked to debit cards

- Channel savings to productivity (beyond savings) like human capital development through housing construction and financing—these require greater financial infrastructure though than many African states have

- SSA banks need to bundle services (savings products and entrepreneurial loans) to remittance families –something not done by Western Union

Notes on Inequality in Africa Article

Have and Have Nots-African Style by Pascal Zachary

BONUS LINK:  My entire (so far) grad school notes collection can be found here. 

NOTES:

Typical inequality measurement:

- The traditional measure of inequality is done through the Gini Coefficient.  Measured on a scale from 0 to 1.  The closer to 1 the less equal the distribution of income.  Conversely the closer to 0 the more equal the income distribution with 0 being a state where the whole population had the same income. 

- There are also less tangible measurements such as resentment, violence and political instability. 

The article gives the example of the Uganda entrepreneur who receives “juju” sticks from resentful fellow villagers outside of his home. 

Gini problems. 

1. One must be careful not to hold the Gini coefficient as the assumed standard for which all nations should strive.    It is only one measure.  The U.S. after all shares a Gini coefficient very similar to many African nations—but vastly different amounts of wealth per capita   

2. Furthermore, the Gini Coeff could rise in a poor developing country at the same time as less people are living in poverty (because the baseline could be raising). 

3.  For many African nations there isn’t even a Gini coefficient!  12/55—there are not even coefficient’s available for over 20% of the nations in Africa! 

Influences on inequality:

- Government graft and corruption, patrimonialism, neopatrimonialism, clientilism

            This cronyism can amplify problems by putting people in power without the knowledge of education to do their job. 

- inefficient economic policies (ex. Fuel subsidies in Nigeria)

- Lack of transparency.

- lack of income tax

- Lack of global attention—much more focus on gap between Africa as a whole and other nations or between different African nations—both ignore the inequality within a nation’s borders. 

- Kuznets Hypothesis: in poor localized agricultural economies, incomes are relatively equal but an relative income gap widens as the economies grow and urbanize

Solutions for to bridge the gap?

- This question assumes something should be done or must be done!  This should not be assumed nor should it necessarily be the focus of economic reform in a nation. 

- While wide income gaps may be morally repugnant, the evidence that they promote political instability and violence is inconclusive.  There is equally persuasive arguments (Walker Connor for instance)  to be made that relative political inequality contribute to instability and violence more so than economic.  There is a big difference between resentment (a mental state) and violence (a physical state). 

- That said, to answer the question, there needs to be an increase in government capacity and accountability and transparency.  Instead of regressive sales taxes and import duties, fairly delineated income taxes could be instituted.  In many nations this isn’t done because of infrastructure limitations (both physical—roads etc…)  and banking limitations.  However, with the dominance of the mobile industry (and mobile banking) this offers methods for governments to implement and collect taxes efficiently and with accountability (fairly). 

- reduction in general subsidies (these unnecessarily benefit the affluent)

- refocus revenues to baseline raising services like clean water, better roads, primary education, prenatal vitamins and immunization—this is an interesting assertion by the author since it runs counter to addressing the inequality itself and is more focused on raising the baseline. 

- the poor must be given a greater stake.

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SUMMARY:  

               A non-traditional measure of income inequality is given at the outset of the article.  For one Ugandan entrepreneur that started a business that expanded far beyond his small village, the inequality was measured through resentment and “juju”sticks.  Despite employing many villagers and bringing development to his region, his neighbors begrudged him for owning a nicer house (and the only one with a generator). 

Traditionally income inequality is measured, however, by using the Gini Coefficient (GC).  The GC measures the distribution of income across the population of a country.  The GC is on a scale from 0 to 1—0 being a nation where everyone had the same amount of income and 1 being a nation where one person had all the income.  Most African nations score poorly (values in the .45 to .65 range).  There are three considerations, though, with the GC.  First, one must acknowledge that it’s only one economic measure.  This limits its utility—especially when one considers that the U. S. is routinely grade with a GC in the .5 range.  A secondary consideration builds on the first limitation—a nation’s GC can rise (typically considered a bad thing) while the number of people in poverty can lessen.  This means that a developing country can have a small group of people receiving more income (thereby raising the GC) but also at the same time increasing the amount of wealth within a country.  Finally, is the problem that 12/55 nations in Africa don’t even have a GC!  In 20% of African nations there’s not even enough data (or access) available to determine the income distrubtion. 

            The author delves into the myriad factors that promote this inequality.  Most of these happen to be the usual culprits: government corruption, graft, cronyism, clientilism, patrimonialism and neopatrimonialism.  All of these factors combine with a lack of transparency and physical infrastructure that strands the poor in a permanent economic stratum. 

            The question of what can be done to close this income gap is a valid one but it must be considered as to whether this is the right question.  Should a gap reduction be the economic focus?  This question brings to the forefront a valid argument made by Walker Connor who points out that perhaps political inequality is a more significant driver of political instability and violence that economic inequality.  Connor makes a persuasive argument worth considering—perhaps its better to work to bridge political equity and avoid violence than it is to focus on economic equality which may only serve to avoid resentment.  That said, to bridge the gap Zachary advocates striking regressive sales taxes and import duties in favor of a more fairly delineated income tax.  This serves to give the poor in a better a greater stake in its future.  There is little government expectation by a nation where no one pays income taxes.  Practically such a move requires significant physical infrastructure so that the government can reach its population in the hinterlands.  Most significantly, on a continent where most people are unbanked it requires harnessing existing technology.  This means embracing mobile banking (a move already being done in many nations) to collect and levy taxes.  On a larger scale bridging the gap requires a global shift in focus.  Too often Africa is treated as a country—monolithic nations that all require the same solutions to their problems.  The reality is that each nation needs a tailored and separate approach.  The focus needs to shift to the gaps inside each nation’s borders and not on comparing them to other nations.  

LINK:
http://www.milkeninstitute.org/publications/review/2010_7/16-23MR47.pdf 

Notes on Economic Geography of Regional Integration (Gill & Deichmann)

Notes on Economic Geography of Regional Integration (Gill & Deichmann)

BONUS LINK:  My entire (so far) grad school notes collection can be found here. 

"To Regionally integrate or not to regionally integrate"

Overall Summary

The authors argue that traditional assessment is debating the wrong issue.  They are typically arguing which is better—global trade agreements or more focused regional approaches. 

2 False assumptions:

- Debate also assumes regional integration is just about preferential trade access

- It’s not an “either or” choice—regional integration can act as a stepping stone allowing small states to scale up their supply capacity—eventually giving them access to world markets. 

- Developing countries must not only encourage transformation across its industries and services but also spatially within its borders—this means balanced growth in density, distance and division.  This spatial distribution can help alleviate the fates of the “bottom billion” that are still accumulating to urban centers that don’t have access to the global markets—exacerbating their situation in ever growing slums.  This requires thoughtful and intentional government planning at the 3 spatial levels:

            Connective Infrastructure

            Blind Institutions

            Targeted Incentives

What countries benefit most?

They are quick to point out that ALL countries can benefit from this type of integration—however—small countries located far from world markets can certainly benefit most.    This usually means countries in Africa and Central Asia. 

Why?

Regional integration allows: boosted supply capacity by providing regional public goods and maximizing specialization

3 key principles:  Start Small, Think Global, Compensate the least fortunate

Start Small—clearly defined narrow areas of cooperation—EU started out as agreement by six countries on coal and stell

Think Global—No Islands!  Access to global markets is the key!  Small poor landlocked countries MUST have regional integration to LEAPFROG them into the global scene

Compensate the Least Fortunate—development means specialization and drives population to those centers.  This must be balanced with remittances as well as explicit compensation for infrastructure and social services (to promote even spatial growth).  Also requires local effort and government policies like revenue sharing to compensate the landlocked countries.

This requires a tailored approach (all to overcome thick economic borders):

1. Regions close to major world markets

            Common institutions key (thin economic borders)

2. Regions with big economies far from world markets

Regional infrastructure to increase home market which also increases access for small countries (connect)

3. Regions with small economies far from world markets

            Bottom billion countries.  Need ALL THREE I’s:  Institutions, Infrastructure and Incentives (increased support for infrastructure development for instance).  

SUMMARY: 

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The authors basic argument is that most economists have been asking the wrong questions and making the wrong assumptions.  This boils down to two common false assumptions:

1. Regional integration is just about preferential trade access

2.  Regional integration and global trade agreements are an “either” “or” proposition. 

They argue that these assumptions ignore the relationship between the two methods and that the approach needs to be tailored to each nations geography (both physical and economic).  To that end they argue for three combined approaches:

1.  Institutions blind to the physical borders

2. Connective regional infrastructure to enable trade

3.  Incentives for the more isolated power countries. 

Using these approaches can boost a small nation’s supply capacity and allow for the maximization of specialization. 

            The authors are quick to point out that while small geographically isolated underdeveloped countries are the ones most likely to benefit from this approach (most African and central Asian nations), ALL nations can benefit.  The key for the small nations disconnected from the global market is spatially purposeful development—meaning spatial balance for density, distance and division.  The common propensity is for the population of developing countries to migrate to the urban centers.  But when these urban centers are isolated without access to the global markets this just creates slums.  This is one of the central problems described by Collier in Bottom Billion.  This phenomenon follows Kuznet’s widely accepted hypothesis that describes how poor localized agricultural economies experience a rapidly widening income gap when urbanization occurs.   

Regional integration then offers these nations a springboard by which they can develop evenly and gain access to global markets eventually. 

            The authors advocate three central principles.  The first is to start small. They give the example of the European Union which originally began as a trade agreement between three nations regarding coal and mining.  A narrow focus allows countries to develop evenly and to focus on full economic integration.    The next principle to think globally.  The end result is never solely regional integration but is instead using that connective infrastructure to leapfrog a small cutoff country into the global economy.  The last principle is to compensate the poor or disadvantaged.  This means that a government must be purposeful in balancing urban development by raising the baseline of the physical infrastructure in the nation.  Practically this means paving roads and ensuring an expansion of baseline social services.  This can also take place in the form of remittances sent back home to the countryside which when used well can spur development there.

            Overall, the authors stress the need to overcome the thick economic borders of many states.  They describe how large nations with access to the global economy benefit from integrated institutions.  They add that large nations far from the global market can expand their reach through a connective regional infrastructure.  Lastly they add that the small nations far from the global market can benefit a combination of institutions, infrastructure and incentives. 

LINK:
http://www.imf.org/external/pubs/ft/fandd/2008/12/deichmann.htm