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No evidence of slowdown in Moroccan workers’ remittances

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
July 2004
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workers’ remittances to Morocco

Workers’ remittances are playing an increasingly vital role in developing countries. The volume of these flows can, for example, significantly affect the liquidity of banking systems, influence monetary and exchange rate policies, and bolster external positions. To better understand their impact on developing country economies, the IMF is taking a closer look at remittances. One such study, by Jacques Bougha-Hagbe of the IMF’s Middle East and Central Asia Department, examined the determinants and long-term prospects of remittances to Morocco.

Morocco receives sizable remittances. With $3 billion to $4 billion in annual receipts. Its remittances are now equivalent to about 9 percent of GDP—up from an annual average of 5 percent between the mid-1990s and 2000—and about 25 percent of exports (see chart). Transfers from Moroccans living abroad—mainly in France, Italy, and Spain—play an important role in Morocco’s balance of payments. They almost offset the trade deficit and have helped boost its balance of payments surpluses. Accumulated surpluses have allowed Morocco to build up external reserves, which now cover the country’s external public debt.

Moroccan workers’ remittances are up from the mid-1990s

(percent)

Data: IMF

What could determine remittances?

To help analyze the motivation for workers’ remittances, Bougha-Hagbe develops a theoretical model that considers several possible explanatory factors. One of these, highlighted in the economic literature, is altruism or solidarity—that is, a union of interests or sympathies among members of a group. Other motivating factors include attachment to homeland, which could be viewed as a willingness to have a nonfinancial asset, such as real estate, in a given country; prosperity of the workers, indicated, for example, by economic growth in countries where remittances originate; and portfolio diversification or other investment goals.

Additional factors may also influence the level of remittances. The exchange rate, for example, could do so through substitution and wealth effects. The idea behind the substitution effect is that because goods in the home country become less expensive in foreign currency terms when the home country’s currency depreciates, workers abroad will tend to substitute some goods in the home country for the relatively more expensive ones in the foreign country of residence. The effect on the amount of foreign currency remitted, however, will depend on the sensitivity of demand to such a change in relative prices. Remittances may even be reduced by the substitution effect of a depreciation because workers wishing to buy the same volume of goods will be able to do so with less foreign exchange.

A decline in value of the home country’s currency can also make its citizens living abroad and possessing foreign assets wealthier. This may encourage them to transfer more money to buy even more goods and assets in the home country, including residential real estate. This is the wealth effect. However, Bougha-Hagbe does not emphasize the potential role of exchange rates in his analysis because, as he notes, “even if the actual effect of exchange rate movements were known, interpreting their long-term effect on the sustainability of the external position would not be certain.”

A qualitative influence on transfers may be national policies toward workers living abroad. In Morocco, the authorities recognize the value of keeping Moroccans who live abroad in close contact with their home country. To this end, they have created a ministry that, among other things, helps streamline the administrative procedures that Moroccans overseas must deal with in transactions with their country of origin. While Bougha-Hagbe’s model does not take such qualitative items explicitly into account, he suggests ways in which they might be incorporated.

What does the evidence suggest?

Looking at data for 1993-2003, Bougha-Hagbe finds that, over the long run, two factors—altruism and attachment to homeland—seem to provide the major motivation for remittances to Morocco. The data suggest that (everything else held constant) as Morocco’s real GDP (a proxy for real income in the home country) decreases, remittances increase. At the same time, remittances also increase as wages in the countries where migrants live (used as a proxy for migrants’ income) increase. Both findings suggest a willingness to help and to share—that is, an altruistic motive.

The evidence also suggests that as remittances increase, so does construction activity in Morocco. This result is in line with the fact that there is a great deal of housing construction in Morocco by Moroccans living abroad, a sign of attachment to their homeland. For reasons yet unknown, remittances surged in 2001; various events in the post-September 11 environment could support an explanation based on increased attachment to the home country.

Portfolio diversification, in contrast, does not seem to be a significant motive. This finding suggests that there are relatively low risks of a sudden end to, or reversal of, transfers from Moroccans living abroad.

Will remittances remain stable?

The influence of altruism or solidarity as a determinant of workers’ remittances could contribute to their long-run stability, Bougha-Hagbe notes, “mainly because it seems reasonable to expect such motives to remain stable.” However, he adds, “the stability of this motive should be seen in the context of changing migration patterns.” If family members also move overseas, for instance, the importance of altruistic motives might be reduced. Nonetheless, in the case of Morocco, he explains, “this effect would be counterbalanced by waves of new emigrants who are attracted by the increasing labor demand in industrial countries. Moreover, altruistic motives may, in fact, partly reflect self-interested reasons for transfers from Moroccans who want their residential investments to be looked after while they are away.”

Attachment to homeland could also contribute to stable remittances, since such motives would likely remain constant. However, improved settlement opportunities for Moroccans in their countries of residence may reduce their attachment to their home country. But these improvements in settlement opportunities, Bougha-Hagbe observes, “could be expected to occur at a slow pace and, thus, in the foreseeable future, to have only a limited offsetting impact on Moroccans’ attachment to their homeland.”

Other considerations

Remittances as portfolio investment flows, which would likely be sensitive to their rate of return and therefore subject to sudden reversals, could be expected to add to a country’s vulnerability. A small part of remittances are direct investment flows by Moroccans willing to create small and medium-sized enterprises in their home country. This could also be interpreted as a sign of their attachment to their home country and, thus, is not likely to add to the country’s vulnerability.

Still, such transactions, given their investment nature, could be sensitive to rates of return. If this were true, remittances in the form of portfolio investment flows should be positively correlated with interest rates in Morocco and negatively correlated with interest rates abroad. “This possibility does not seem to be confirmed by the evidence,” Bouhga-Hagbe says, adding that stock market returns could also be tried in future research.”

No evidence of sharp slowdown soon

What is the prognosis, then, for remittances to Morocco? Bougha-Hagbe sees “no evidence of significant risks of a sharp slowdown or reversal of workers’ remittances in the foreseeable future.” Remittances are, thus, likely to continue to be an important source of foreign exchange inflows to Morocco.

The evidence of Moroccans’ attachment to their home country, he adds, also supports the view that Morocco should maintain its economic and political reform efforts, which could further help diversify the investment allocation of remittance inflows, limit the negative impact that remittances could have on labor force participation, and therefore help create sustained and broad-based economic growth.

There is no evidence of significant risks of a sharp slowdown or reversal of workers’ remittances in the foreseeable future.

—Jacques Bougha-Hagbe

With workers’ remittances largely flowing into construction activity and only a small portion going to the creation of small and medium-sized enterprises, it is clear, Bougha-Hagbe says, that Morocco is not yet taking full advantage of the skills of the younger generations, who are not only highly qualified but also more likely to be entrepreneurs.

To increase investment inflows and the entrepreneurial skills of its citizens living abroad, Morocco could, for example, set up a special entity specifically devoted to assisting emigrants who want to create small and medium-sized enterprises and who may even wish to manage them from abroad. Such an entity would not only provide needed information and administrative documents, but could also help establish the legal environment that would be required for such investors. In a broader context, faster implementation of the country’s structural reform agenda is also essential, concludes Bougha-Hagbe.

Photo credits: Simon Willson for the IMF, page 213; Eugene Salazar and Michael Spilotro for the IMF, pages 213, 216-218,224, and 227-228; World Bank, page 214; and Klaus Brodhage/BIS, pages 219-221.

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