The Geography and Economics of Immigration. The Role of Remittances. Bruno S. Sergi

1. 9th PERC Summer School with the financial support of ACTRAV and in cooperation with DGB Frankfurt Frankfurt am Main 26 – 28 September 2016 The Geography and Economics of Immigration. The Role of Remittances. Bruno S. Sergi University of Messina Davis Center for Russian and Eurasian Studies – Harvard University

2. Global migration routes: migration is a feature of social and economic life across many regions and countries. In Europe, migrants accounted for 70% of the increase in the workforce over the past ten years.

3. The Geography of Remittances

4. The Geography of Remittances – Russia & CIS

5. It is not only about money …… however sending money to their families is expensive!! The global average of sending a remittance of $200 came down from 9.81% to 8.95% in the normal average and from 8.58% to 6.62% in the weighted average from 2008. The result of the global efforts led by the World Bank to reduce the cost of sending remittances is so far the savings of approximately $42.48 billion from 2009 to 2013 at the global level. There was little price transparency and no global effort to address this problem until the World Bank helped form a coalition to monitor the process and create a “one-stop shop” information system to help remittance-senders compare services and costs.

6. What does cause migration? Wars, economics and political instability.

7. In 2015, remittance flows to developing countries reached $432 bn (World Bank)

12. Remittances sent home by migrants in 2015 (i.e., $432 bn) were more than three times the size of official development assistance! (World Bank)

13. The Effects of Remittances Sent Home by Migrants

15. Overview: Micro and Macro Impacts …. not a black and white picture • Remittances are stable and can be countercyclical too ; • Remittances sustain consumption and economic stability of recipients countries; • Remittances increase the rate of accumulation of physical and human capital; • Remittances may discourage active labour participation (substitute remittance income for labour income); • Remittances help to maintain stability in the balance of payments, ensure foreign currency reserves, improve credit worthiness for external borrowing and credit ratings by rating agencies • The Dutch disease (real exchange rate appreciation that harms the competitiveness of tradable sector); • Monetary expansion, excessive consumption, inflationary pressures, and reduce the incentives for governments to introduce reforms.

16. Relevant Cases of Remittances • In 2013, remittances to India were larger than its exports of information technology services. • In 2015, remittances to Egypt were four times the size of its reve­nues from the Suez Canal. • In most small island nations and countries such as Tajikistan, Nepal and Haiti, remittances amount to nearly one-third of GDP. • In Moldova, remittances accounted for about 25% of GDP in 2012 • In Bosnia and Herzegovina, Kosovo, and Montenegro, remittances exceeded 8% of GDP.

17. The Role of Remittances – The Plus Side The impact of remittances on the receiving countries’ poverty rates A cross-country study of 71 developing countries found that a 10% increase in per capita international remittances produced a 3.5% decline in the share of people living in poverty (Adams and Page 2005). Were it not for remittances, the share of the poor in the population would have been 4 percentage points higher in Nepal, 5 percentage points higher in Ghana, 10 percentage points higher in Bangladesh, and 11 percentage points higher in Uganda (World Bank 2012 and 2016).

18. The Role of Remittances – The Plus SideStable remittances flows and efficiency Remittances are playing an increasingly large role in the economies of labour-exporting countries: the stability of remittance flows despite financial crises and economic downturns make them a reliable financial resource for developing countries. And unlike private capital flows, which tend to be highly cyclical, remittances are relatively stable and often consumption-smoothing Unlike official aid that go through official agencies, remittances flow directly to the families of migrants and are arguably more efficient in meeting the needs of the recip­ients. The share of remittances spent on consumption (food, clothing, and rent) ranges from more than 56% in Senegal to less than 15% in Nigeria. Conversely, spending on educa­tion, health and investments accounts for 43% of remittances in Senegal and 85% in Nigeria

19. The Role of Remittances – The Plus SideInvestment and financial deepening Remittances appear to have promoted investment and, in some cases, supported consumption and facilitated financial deepening. IMF’s cross-country estimates (2016) suggest that in countries that depend heavily on remittances (where the remittance-to-GDP ratio exceeds 10%), remittances played a crucial role in financial deepening (measured as private credit or deposit in percent of GDP) as well as in supporting private sector activity. Remittances may help boost private investment in physical and human capital by alleviating credit constraints.

20. The Role of Remittances – The Plus SideDiasporas as sources of knowledge Japan, the Republic of Korea, and Taiwan, China are examples of economies that have relied on their diaspo­ras as sources of knowledge. For example, skilled emigrant populations such as India and China have also been able to tap their expatriates and develop mentor-sponsor models in certain sectors or industries. Evidence of transfer of knowledge between ethnic emigrant groups in the US and their home countries and the contribution of the Indian diaspora to the development of some the most important innovations in India as been provided.

21. The Role of Remittances – The Minus Side of Slow income convergence Emigration has lowered growth and slowed income convergence. Empirical analysis suggests that in 2012, cumulative real GDP growth would have been 7 percentage points higher on average in CESEE in the absence of emigration during 1995–2012, with skilled emigration playing a key contributing factor. This fact has slowed per capita income convergence, in particular in SEE countries (Albania, Bulgaria, Croatia, and Romania), which had a high share of young and skilled emigrants in their populations. Significant effects are also observed in the Baltics (Estonia, Lithuania) and in Slovenia. On average, CESEE countries would have reduced their per capita income gap with EU-28 by an additional 5 percentage points by 2014 in the absence of skilled emigration during 1995–2012. Has this phenomenon reduced incentives for governments to carry out structural reforms? Yes, maybe!

22. Emigrants have generally been younger than the populations they left behind. In 2010, about three-quarters of emigrants were of working age (15-64 year old)—above the share of working-age people in the CESEE population at large.

23. Emigrants’ education levels tended to be higher than their home country averages. As of 2010, the share of emigrants with tertiary education was well above the equivalent ratio in the general population.

24. The prevalence of better-educated and working-age people among emigrants has reduced the supply of skilled labor and contributed to fiscal burdens arising from the higher dependency ratio.

25. The Role of Remittances – The Minus SideMissing Return Migration and Labor Inactivity Return migration appears to have been limited. Estimates based on bilateral inflows of foreign citizens suggest that only a modest fraction of emigrants have returned to their home countries, with higher-income countries registering a somewhat larger inflow. Higher remittance receipts are associated with higher probability of a person deciding not to join the labor market, possibly reflecting a relaxation of the budget constraint coupled with an increase in the reservation wage. A 1% of GDP increase in remittance inflows is associated with about 3 percentage points and 2 percentage points increase in the economy-wide inactivity rate in SEE-XEU and CE-5, respectively.

29. The Role of Remittances – The Minus SideFuture cumulative GDP loss Model simulations show that net migration flows during 2015–30 would cause a cumulative output loss may be as large as close to 9%. GDP per capita could decline by about 4% in some countries. Some Baltic countries would be particularly affected, followed by Bulgaria, Romania, and SEE-XEU, despite moderate positive contributions from remittances. In an adverse scenario, based on the historical pattern of migration, the cumulative output loss would exceed 15% in some countries! Note that migration flows result in a net output gain for the EU as a whole, consistent with positive effects on overall GDP and on per capita GDP of recipient countries, e.g. the Czech Republic, Hungary, and Russia.

30. Full Picture of Negative Effects

32. The Experience in Arab countries Despite the huge absolute and relative size of remittance inflows to the Arab countries, it was found a long-term causality: running from remittances only to current account balance and primary education enrolment rate, a short-term impact of remittances on GDP, household expenditures, investment, and saving was found. As remittances are used for supporting families’ expenditures on food, education, and healthcare, the effect of remittances is at a micro level. The macroeconomic effects of remittances have not yet been tapped into by governments and policy makers and efforts are needed to channel remittances into economic development.

33. Policy remarks • The new arrivals in Europe are mostly young and employable with little financial investment; • Remittances: the low banking penetration in some regions, typical of rural and poor areas, leads to larger reliance on informal means of remittance transfer (the high fees incurred for transferring money to the Arab countries are very high), which in turn could lead to further economic and social development; • Developing legislation that supports the promotion of investments to the diaspora community; • Whereas permanent migration may ease integration at the destination and yield higher benefits for individual migrants, temporary migration may lead to larger benefits for the origin country through return of human, physical and social capital. Therefore, giving incentives and guarantees for expats to invest in productive, long-term, developmental projects, whether individually or collectively. Thank you!

36. The Economic Role of Migrants

43. The Impact of Migrants on a Country’s Economic Growth Immigrants can affect the economy’s rate of growth, especially if they are skilled, innovative or entrepreneurial. However, irregular migrants are unlikely to be involved in innovative activity, which is a benefit typically associated with high-skilled immigration in STEM (science, technology, engineering, and math) fields. Irregular migrants may be more likely to be entrepreneurs, but their businesses are often small, lack capital, and are limited to the informal sector.

44. Labour markets Unauthorized immigrants who can access the labour market are often a flexible and relatively cheap source of labour, which benefits employers and consumers but may pose some challenges: - create low-wage competition for some workers; - are fuel for the expansion of the shadow economy, which increases tax evasion; - can impose net fiscal costs, costing more in publicly provided services than they contribute in taxes (in the short run). The European case is complicated by (i) the concentration of irregular migrants in the informal economy and (ii) to what extent output in the informal economy is captured in official estimates of economic activity.

45. Labor market effects • Immigration can affect the labor market in the receiving country in several ways: • - the number of natives who are employed; • - wages; • - the types of jobs. • The theory predicts that an increase in the number of workers due to immigration would reduce wages. • New immigrants will replace some workers who may be native-born or earlier immigrants. The magnitude of the employment and earnings effects depends on how substitutable new immigrants are for existing workers, the more substitutable they are, the larger the adverse effects. • Some groups of existing workers would benefit from immigration, that is, some of the beneficiaries are complements to immigrant workers, such as a native-born supervisor who works with foreign-born laborers.

46. Some natives respond to immigration by moving into different types of jobs. • Some natives move into communications-intensive jobs in response to immigration and this might reduce any adverse effect of immigration on natives in the labour market, and it is larger in countries with fewer labour market regulations. • Many natives have different skills than immigrants. • Communications skills are many natives’ comparative advantage, while less-educated immigrants’ comparative advantage is often manual skills. • In a single labour market, unauthorised immigrants may have a more adverse impact than legal immigrants on competing workers if they are willing to work for lower wages or in worse conditions. • In Europe, the informal sector is large and there is evidence of segmented labour markets, particularly in Spain, Italy, and Greece.

47. Wage-dampening Effect Unskilled workers and existing migrants are most vulnerable, as they are the closest substitutes for the new arrivals: a ten-percentage-point rise in the share of migrants working in unskilled jobs, such as cleaning, depressed wages for such positions by just 2% (S. Nickell and J. Saleheen). This wage-dampening can even have positive side-effects: - refugees arriving in Denmark (1991 – 2008) did push low- educated natives out of lowly jobs. The displaced natives switched to jobs that involved less manual labour, sometimes with higher salaries (Mette Foged and Giovanni Peri).

48. Fiscal impact: Welfare/transfer programmes and taxes This phenomenon has a fiscal impact – the difference between what immigrants pay in taxes and consume in government. Irregular migrants in Europe are much more likely to work in the informal sector where their labour is not taxed, which reduces their contributions.

49. The OECD assessed the effect of immigrants on its members’ finances in 2007-2009 and they made a net fiscal contribution of around 0.35% of GDP on average, with relatively little variation from country to country. However, a recent paper from the IMF uses existing immigrants to Europe from Afghanistan, Eritrea, Iran, Iraq, Somalia, Syria and the former Yugoslavia as proxies for the latest wave of refugees: - people from those countries who have been in Europe for less than six years are 17 percentage points more likely to rely on benefits as their main source of income and 15 percentage points less likely to be employed; - this gap does shrink the longer the migrants have been in Europe, but it is still there for refugees who have been in residence for more than 20 years.

50. These studies suggest that it will be a while before refugees pay more in tax than they receive in state support: • A study of Australian refugees found that they paid less tax than they received in benefits for their first 15-20 years of residency. • Given that most European countries redistribute income from rich to poor, as long as they are poorer than the average native, they will probably receive net transfers.