Remittances are characterized as a more stable and less cyclical form of capital flows, making them a good candidate to lower the risk of macroeconomic instability in the receiving country.[1]
Remittances have been categorized as ‘free launch’ in financial terms because, unlike debt financing or foreign direct investment, they do not generate any future financial obligations for the receiving countries. For instance, the report of the Inter-American Dialogue Task Force on Remittances emphasized how remittances promoted a steadily increasing stream of capital to Latin America and the Caribbean since 1998. The report writes:
This contrasts with the extreme volatility of most other capital flows to the region. That volatility, incidentally, has been a prominent cause of Latin America’s erratic economic performance in the past decade and the origin of several devastating financial crises in the region…In the past decade of great financial volatility in Latin America, remittances have become a vital safety net, particularly for the region’s poor citizens.[2]
Indeed remittances have been found to rise when the recipient economy suffers a downturn in activity or macroeconomic shocks due to financial crisis, natural disaster, or political conflict. By making up for foreign exchange losses due to these shocks, remittances may smooth consumption and thus play a part in maintaining the economic stability of recipient countries.
[1] Rannveig,Dovelyn(2006). Remittances and Development:Trends, Impacts and Policy Options-A review of the Literature.(www.migrationpolicy.org/research/migration_development)
[2] Ibid
Remittances have been categorized as ‘free launch’ in financial terms because, unlike debt financing or foreign direct investment, they do not generate any future financial obligations for the receiving countries. For instance, the report of the Inter-American Dialogue Task Force on Remittances emphasized how remittances promoted a steadily increasing stream of capital to Latin America and the Caribbean since 1998. The report writes:
This contrasts with the extreme volatility of most other capital flows to the region. That volatility, incidentally, has been a prominent cause of Latin America’s erratic economic performance in the past decade and the origin of several devastating financial crises in the region…In the past decade of great financial volatility in Latin America, remittances have become a vital safety net, particularly for the region’s poor citizens.[2]
Indeed remittances have been found to rise when the recipient economy suffers a downturn in activity or macroeconomic shocks due to financial crisis, natural disaster, or political conflict. By making up for foreign exchange losses due to these shocks, remittances may smooth consumption and thus play a part in maintaining the economic stability of recipient countries.
[1] Rannveig,Dovelyn(2006). Remittances and Development:Trends, Impacts and Policy Options-A review of the Literature.(www.migrationpolicy.org/research/migration_development)
[2] Ibid