Saturday, April 5, 2014

Migrant Remittances back home as a source of income inequality

and one that is rising in Sri Lanka and therefore regretful!

In regards to a comment in my last blog post, where it was stated that migrant remittances were a source of inequality, and therefore bad for those who have no chance to immigrate, whilst having a ring of truth, has NO basis in trying to prevent it as a policy directive and an inevitability of the freedom to travel.

All civilizations have benefited from remittances. Half the large estates and country houses in the UK came about as a result of the British going overseas to make their fortunes. Even in Roman times, the money sent from say, Roman Britain by the Romans sustained and gave wealth to their families back home.

The economic policies, laws as well as taxation policies that countries enact to reduce inequality should be directed more at equitable distribution of wealth, once earned rather than the prevention of people from legitimately earning as much as they can if they wish.

This is a big topic, so I will restrict it to remittances of Sri Lankan workers, and the pros and cons to the local economy. We must remember that the US$50B of remittances Sri Lanka has received in the past 11 years has had a huge impact on the Sri Lankan economy in that period, and the Governments of the day have taken all the credit. I have consistently maintained, that but for the Government interference in the economy in this period, the growth would have been that much greater had the private sector been allowed to determine the best mode of investment for the funds these remittances have created.

It is purely laws properly enforced and economic policy that can make use of this source of revenue in the best interests of the citizens of Sri Lanka, the main theme of this blog. Much of the remittances have been wasted by the state and misspent, when it could have been directed at productive investment by the private sector. Only people who directly remit to a productive business will benefit, much like the foreign investment in Sri Lanka, but better as the profits here will remain in SL.

Let us walk through a theoretical example to illustrate my point. I remit US$100,000 of my earnings to my NSB account in 2013 to be used by me when I return in 3 years. The exchange rate I receive is at Rs130, so there is Rs13M which after a year I get an interest of 5%. With inflation at 10%, the rupee purchasing power has reduced by 5% after a year. If I sent it to a NRFC account in $, I would be worse off because the interest received will be 2%, and US $ has appreciated in the meantime by Rs2. Leaving me even worse off.

The GOSL (Govt) borrows this money from NSB at 6% and invests it on a road project, which due to the commission payments and lack of transparency in awarding the tender is 25% more expensive. The graft engaged in by the contractor, getting quality control engineers to sign off on shoddy work, results in a badly constructed road, with pot holes affecting fuel consumption on vehicles, higher maintenance costs on vehicles etc. The contractor funds his new Porsche with the excessive profits made from shoddy workmanship and the fixer engaged in the graft does likewise because their opportunity cost of money easily earned is low so no return is necessary.

The point is that it is more important to utilize remittances more productively, by first giving a better rate of interest to the saver, and directing the lending of that money, with a lower spread to a private project with a higher rate of return, which would increase the multiplier effect of the benefit.

If I have little faith in lending to the bank believing I will lose value, and instead I buy a house, in the belief that it will appreciate in value, then I am adding to house price inflation, making homes less affordable to local income earners, pushing them out of the chance to buy property even to live!

The latter has NO DOUBT contributed to the increase in property values and by the same token also pumped money into the construction industry, that has helped grow the economy and give more opportunities to Electricians, Plumbers and Masons adding to the Growth rate of the economy.

I don’t think there is ANY doubt of the net benefit of remittances to the economy, and the social cost of family consternation and creation of lazy sons sitting in their three wheelers in every corner of Sri Lanka is a problem that can be addressed by proper social engineering within Sri Lanka to take steps to reduce the incidence of these social ills. The richer the country gets the more problems caused by drugs, and spending and that is a cost of wealth and rich kids all over with less onerous tasks to occupy their time!

It is for the earner overseas to understand these pitfalls of how his or her benefaction is used. It is called psychological counseling, where the guilt of an absent relative is extinguished by money, that holds true even within the economy when parents are busy earning money, and substitute money for love. I know I have covered a lot of ground, and created more discussion points, but hey it is an important fact of Sri Lanka, and it is time we addressed all the pros and cons and come up with a balanced approach to this subject to benefit all.   


Anonymous said...

At least can the grafting contractors be named so we will know who our next generation of rulers will consist of and get started early with the sycophancy. At least do this service to your readers.

The mahaweli public works and other earlier mega projects set into motion some of our acclaimed business heroes of the present .

Ratmale,Minneriya,Sri Lanka said...

I actually know many of them and currently don't enjoy protection of the law (there is none as I am also a victim of injustice)so I will chose the moment to expose them when they can be brought to book.

BTW the previous regime graft, which actually started in earnest from the 1977 UNP administration pale in comparison to todays. So it has increased by a factor of about 10 the percentages I mean.

There are many projects I know which have not even taken off, as the up front payment was too much to make the project viable.

Now that was never the case then and so we have missed out on great projects like the Hungarian EU sponsored project to reclaim sea sand, that would have avoided land based sand mining and resulting wholesale irreversible environmental destruction.

Nice try for asking a stupid question though.