How globalization stabilizes poor countries

Scott Wallsten, Fellow, AEI-Brookings Joint Center for Regulatory Studies, Project Syndicate

Globalization stands accused of generating economic instability in developing countries and greatly exacerbating poverty, at least in the short run -- which is the longest period the world's poor can afford to care about. Critics point to the string of economic crises in Africa, Asia, and Latin America in recent years, often attributing them to multilateral lenders' demands for full liberalization of foreign trade and capital flows, privatization, and fiscal austerity.

But the raging debate over globalization often overlooks an increasingly important feature that makes life better and more stable for poor people in developing countries right now: The many millions of migrants who send money home. Data on families in developing countries that receive money from relatives working abroad directly demonstrate that at least one element of globalization -- migration -- increases economic stability in poor countries.

Migrants from struggling countries in Latin America, Southeast Asia, and other regions are increasingly securing jobs at wages that, while low by rich country standards, are far higher than they could dream of back home. In 2001, workers from low- and middle-income countries sent home a staggering US$43 billion -- more than double the level of a decade earlier and $5 billion more than that year's total official foreign aid to these countries.

Migrant workers may send money home for a variety of reasons: To maintain good family relations, to ensure an inheritance, or to re-pay a loan from elders. But whatever the reason, these so- called "remittances" -- the cash workers send home to countries like Colombia, Haiti, Jamaica, Mexico, and Bangladesh -- act as a safety net that their governments typically need but cannot afford to provide.

This is particularly true in small, developing economies. Here incomes are often considerably more volatile than in richer countries, owing to heavy reliance on a few commodities or industries and hence higher vulnerability to external shocks, including weather-related and other natural disasters.

Indeed, poor countries also often lack the private insurance needed to offer the type of emergency assistance that citizens of wealthy nations have come to expect. In developing countries, remittances from workers abroad amount to the best insurance around. In addition to providing their families at home with a much-needed source of stable income, expatriate migrant workers send home even more money when catastrophe strikes.

Such remittances enabled thousands of Jamaicans, for example, to recover from the devastation of Hurricane Gilbert in 1988, when storm damage was estimated at more than one-quarter of the country's annual gross domestic product and nearly three households in four reported damage. Insurance was scarce and the government offered only limited help, providing a mere fraction of the aid that was actually needed. Jamaican families got far more help from loved ones living and working in places like Miami, New York, and Los Angeles.

The same was true when Argentina's economy collapsed last year, when violence wracked Haiti and a hurricane ravaged Honduras before that, and whenever floods submerge villages in Bangladesh. In case after case, billions of dollars in remittances from migrants have given families in poor countries what their governments (and foreign donors) could not always provide: Food, safety, the resources to recover, and hope.

The economic importance of such remittances to poor countries in normal times is itself revealing. In Jamaica, remittances from workers abroad make up more than 10 percent of annual GDP on average -- more than double the level of foreign direct investment. After Hurricane Gilbert, remittances increased by 25 cents for each dollar of hurricane damage that households incurred.

To be sure, this implies that the extra money sent home provided only partial insurance. Perhaps migrants worry -- just like actual insurance companies -- that furnishing too much assistance would result in recipients doing less to protect themselves. Or maybe the damage from the hurricane was simply too large for migrants to cover completely. After all, migrant workers may be relatively well off by standards at home, but they struggle to earn a decent living in their host countries.

Either way, even if remittances from abroad act as a form of insurance in the event of natural disasters, this does not mean that they will increase when other types of external shocks occur. Damage due to hurricanes is relatively easy to observe and can't be blamed on human mistakes. In contrast, it might be more difficult for a migrant in a distant country to assess the extent to which family members back home, knowing that they can always rely on the remittances, are responsible for other forms of income loss.

Nonetheless, the importance of remittances to households in poor countries, especially during periods of external shock, holds two lessons. First, it should be easy and inexpensive for migrants to send money home. Today, migrants and their families often pay 10 percent or more of the remittances in fees to financial institutions that transfer funds and exchange currencies. Reducing these fees would, in effect, be a tax cut for the world's poorest.

Second, and perhaps more importantly, we should embrace migration as a proven method of bringing immediate relief and stability to poor nations. Given that family members are the best judge of need, migration and remittances may, in fact, constitute a foreign-aid framework that is better targeted and more effective than any government program can ever be.

The writer is also a resident scholar at the American Enterprise Institute.