The Impact of Global economic crisis on Jordanian Workers Remittances

Transcription

1 The Impact of Global economic crisis on Jordanian Workers Remittances Dr. Ahmad ArefAssaf (PhD in Economics) Dean/ Faculty of Economics and Administrative Sciences ZarqaUniversity,Zarqa, Jordan Office: Ext Mobile: assafphd@yahoo.com A paper presented to the 1st International Conference of Development and Economy- The advantages and disadvantages of Economic Crises. Kalamata, Greece, 2-4 October 2015 This paper is funded by the Deanship of Scientific Research/ Zarqa University

2 Abstract The main goal of the present study is to highlight the effectof global financial crisis occurred in on Jordanian Workers Remittances. Using different methodology to measure the economic impact of the decline in remittances inflows during the crisis in Jordan and other Middle East countries, the author calculate the impact as the proportion of remittances to GFP in 2008 times the growth rate of remittances inflows in The result shows that the drop in remittances for Jordan resulted in a negative shock of (-0.93%) of GDP, (-1.36%) for Lebanon, (-2.83%) for Egypt, and (-0.93%) for West Bank and Gaza. Thus, even there is impact of economic crisis on remittances inflows, but such impact was modest in Jordan. Key words: remittances, global finical crises, economic growth (GDP), Jordan 2

3 Background The global financial crisis in served a harsh blow to 215 million migrants and their families around the world. Migrants faced worsening employment prospects in destination countries, often coupled with tightening entry regulations and vicious anti-immigration rhetoric. Meanwhile, migrants support to families back home in the form of remittances was ever more important in the face of the rising cost of living. Remittances are the most tangible link between migration and development. At more than $325 billion per year, remittances sent by migrants to developing countries are larger than official development assistance as well as private debt and portfolio equity flows. Remittances help families all over the world to pay for food, housing, education, and health expenses and even invest in small businesses. At the national level, remittances help offset current account deficits and shore up international reserves. Jordan is classified as a lower middle income country (World Bank 2011) and it has shown strong economic performance since 2000 with an annual GDP growth averaging 7.5 percent and per capita GDP more than doubling. Due to the economic slowdown in 2008, and the unstable situation in the region, Jordan is now meeting several challenges, including vulnerability to fluctuations in the international oil market, high unemployment and dependency on remittances from the Gulf States (World Bank 2011). Jordan's economy is mainly dependent on exports, tourism, and overseas Jordanian employees' remittances. Any imbalances in these economic resources will affect the rate of employment and unemployment in the kingdom. Like some underdeveloped countries, Jordan has been suffering greatly from "brain drain"; there are approximately 600,000 Jordanians working abroad, nearly 50 % of them have workplaces in the Gulf region, and their remittances are up to 20% of the Jordanian GDP, (European Commission, 2009).In other words, remittances are recognized as an important national income to the country. It is agreed that, among the huge number of Jordanians working overseas, there are a big number of academic, skilled and professional people. This undoubtedly, despite the advantageous benefits, negatively affects the country since Jordan needs to make up the shortage by depend on alterative foreign manpower from Egypt and Syria. Consequently, this leads to transfer huge amounts of foreign currency outside the country; cash outflow. The point is that the foreign laborers from the Arab neighboring countries are not as professional as the Jordanians; the vast majority of them work in the field of construction. The Jordanian economy has one of the world s highest levels of remittances as a proportion of GDP (23 percent in 2009) and remittances are a key source of income and foreign exchange for Jordan. Table 1 shows the significance of remittances for Jordan. According to the World Bank, for comparison, net FDI inflows were US$2.0 billion, net, ODA received were US$0.7 billion, the total international reserves were US$8.9 billion, exports of goods and services were US$12.4 billion in It is also worth noting that outward remittance flows are very small in comparison to inward remittance flows despite Jordan appearing to be a net immigration country. 3

4 Strong economic growth in the 1970s and 1980s was based almost entirely upon emigrants remittances. During , average annual GDP growth rate was 6.7% (The World Bank (2011) and remittances averaged 23 percent of GDP. On the other hand, this economic growth did not translate into job creation and vibrant labor market. Jordan has low rates of labor market participation. In particular, female labor force participation has always been pretty low at 16 percent in 2009 and 12 percent in 2008, whilst male labor force participation was 84 percent in 2009 (Ministry of Labour 2009). Furthermore, Jordan suffers from consistently high unemployment rates, 12.9 percent in 2009 according to the Ministry of Labour (2009). Jordanian unemployment is a youth phenomenon both in terms of absolute numbers and in terms of unemployment rates. Female unemployment rates are pretty high at 24.1 percent despite their low level of economic activity. It is also worth noting that unemployment rates are the highest amongst the most educated at around 16 percent. Objectives of the study The study aimed to highlighted the global financial crisis in occurred in and its impact on Jordanian Workers Remittances as the Jordanian economy has one of the world s highest levels of remittances as a proportion of GDP (23 percent in 2009) and remittances are a key source of income and foreign exchange for Jordan. Literature Review Previous literature on remittances has to a large extent focused on the motives as determinants of remittances and on the effects of remittances on poverty, inequality and economic development (Docquier and Rapoport 2005, Russel 1986). Other studies have investigated the impacts of saving in Pakistan (Burney 1987), or on consumption, investment and imports (El-Sakka 2007, p 8). Some empirical evidence shows that remittances can increase economic growth by functioning as a multiplier in gross national output. It also shows that high proportions of employment can be supported by remittances (OECD 2006, p 155). Jadotte (2009, p 2) mentions a study by Lamaute-Brisson (2002) that shows that if remittances are targeted to financing economic activities, they are likely to be distributed to informal activities in the service sector with low productivity. Lamaute-Brisson (2003) has also done a study about remittances in Haiti where she finds that even though remittances allow some households to get away from poverty, they do not necessarily reduce inequality as these transfers often are provided to the wealthier households. Acosta (2006) shows that remittances decrease the liquidity restraints in El Salvador and therefore increase both consumption and investments. But after controlling for household wealth and using selection correction techniques, remittances are negatively correlated to child labor and adult female labor supply. Average male labor participation is unaffected and an increase in girls education level is increasing with remittances. Rodriguez and Tiongson (2001) find that the migrant and non-migrant labor participation is not separable and that remittance has a negative impact on labor supply but remittances are affecting men s, rather than women s supply of labor. Kim 2006, Bussolo and Medvedev (2008) have shown that remittances reduce the labor supply of mainly female, but sometimes also male workers. A study of the 4

5 effect of remittances on the Mexican household labor supply has been conducted by Airola(2008), who finds that remittance is affecting the hours of work negatively, particularly for women. There are researchers who present different results. Funkhouser (1992) observes that, in Nicaragua, remittances improve the entrepreneurial activities for men (even if reducing labor supply for women). The result that Kim (2007, p 12-14) finds from a simple cross sectional study is that remittance is negatively affecting labor market participation at the individual level. The weekly hours worked by employed people, however, are not affected. The panel data at the cluster level shows a negative impact of remittances on the labor force mainly because people receiving remittances have higher reservation wages., A survey by Cox- Edwards and Rodríguez-Oreggia (2008) on households in Mexico finds no differences in labor participation between receiving and non-receiving households. For women in the urban areas remittances increase labor participation and the possible explanation is that remittance contributes to the establishment of family owned enterprises which could improve the labor market opportunities for women. Earlier research of remittances in Jordan shows that they are positively related to economic growth (Chatelard 2010). Another study investigates how the macroeconomic policy in Jordan affects the inflows of remittances (El-Sakka 2007). Other research regarding the impacts of migration and the inflows of remittances on the Jordanian economy during the 70s is done by Kirwan (1981) and he finds that the unemployment rate decreased because of the emigration and through the increase of domestic demand for labor. He also finds that a period of rapid growth was partly due to the high level of remittances. A study conducted by Ilahi and Shendy shows that there exist spillover effects from the oil-rich countries to the regional countries (among these Jordan). In other words, the growth in GDP in the Gulf States is correlated with the neighboring countries which supply the additional labor s received remittances (Ilahi and Shendy 2008, p 5, 13). According to a study conducted by Sondos and Kharmeh (2010) the impact of Jordanian workers remittances on macroeconomic variables was significant. The household s final consumption expenditure increased by 33.6 percent per year, the government final consumption increased by 35.1 percent yearly, the total exports decreased by 39.5 percent per year and the gross capital formation increased by 31.4 percent, all due to remittances. Remittances contributed to increase in GDP by 7.1 percent. The impact of the high rate of Jordanian workers remittances on the households final consumption expenditure was due to a high ratio of marginal propensity to consume in Jordan, which is estimated to be more than 90 percent (Sondos and Kharmeh 2010). Emigration and the Labor Market in Jordan The first wave of Jordan Labor Market Panel Survey (JLMPS 10), which collected microlevel information in the period from December2009 to June 2010 shows that in 2010,2.1 percent of households had at least one member working overseas. However, it is important to remember that this figure is an underestimate since it does not include migrant households 5

6 who are wholly currently overseas; i.e. does not include migrants with theirwhole families currently overseas. A substantial proportion, almost 38 percent of current migrants, has left in the last two years, which is expected given the temporary nature of migration in particular to the Gulf States which amounts for the majority of emigration from Jordan. Around 80 percent of migrants have visited in the last two years. Jordanian emigrants are highly educated: 62 percent have university degree highlighting the high skill nature of outward migration in Jordan. Currente migrants are predominately urban 95 percent of their households are located in urbanareas. Interestingly, current migrants were mostly employed (94 percent) before migratingand 79 percent were working in the private sector. Figure (1) shows the overseas destinations of current emigrants. More than half the current Jordanian emigrants are in Saudi Arabia (32%) and the UAE (24%). Almost a quarter is in Western Countries, with the U.S. being the main destination (9%). By examining the jobs of current overseas emigrants, 91.8 percent were found to be waged workers, 7.8 percent employers and the majority, 89 percent, was employed in the private sector. In addition, Figure 2.1 presents the distribution of overseas occupations of current migrants and indicates that over half of the current emigrants were engaged in skilled occupations. In terms of economic activity, Jordanian emigrants tend to be engaged in construction, wholesale and retail trade, professional and technical, and accommodation and food sectors (Figure 2.2). Figure (1) the overseas destinations of current Jordanian emigrants 6

7 Figure (2) Overseas Occupation and Economic Activity of Current Jordanian Emigrants (%) Remittances In 1984 remittances accounted for one-fourth of Jordan s GDP. In the end of 1980 the return migration from the Gulf started and accelerated during the Gulf War. This return of migrants increased the population of Jordan by ten percent and the fall in remittances accounted for ten percent of GDP. In the mid-1990s the stability of the region increased and again, the Jordanian skilled labor started to migrate to the Gulf States. As we can see in figure (3), the flow of remittances to Jordan has increased the last 20 years and a plausible explanation for that could be a decrease in the transfer cost for sending money back home, due to technological improvements and more competition among financial institutions (Acosta 2006, p 11). 7

8 Figure (3) The flow of remittances to Jordan Source: Author s calculation from World Bank Indicators (2015). According to some estimates, if one takes the unofficial remittances into account, the actual remittances should be about 60 percent higher (El-Sakka 2007, p 5). Remittances per-capita in Jordan is also the highest among labor exporters in the Middle East (ibid. p 5). Jordanian labor remittances are among the most important economic variables that contribute to the growth of the national economy. It represents an important economic resource in the Jordanian balance of payments, because of the high ratio of the total value of receipts that reached 25 percent of the current balance of payments. The remittances contributed to more than 40 percent of the balance of services, and more than 20 percent to GDP in the beginning of the 21st century (Central Bank of Jordan, 2010). 250,000 Jordanians are working abroad and the majority of them have relatively high educational qualifications like a university degree. A large part of the senders are working in the Arabian Gulf States (Sondos and Kharmeh 2010, p 122). Recent years have seen an improvement in relations between Jordan and the Arab Gulf States, which has led to an increased demand for Jordanian labor, thus increased remittances. Since remittances received are a potential source of investments and are therefore able to bring about concrete economic benefits, estimating their macroeconomic effects is an issue of both economic and politic interest. The macroeconomic effects of remittances and especially their economic growth potential have been under-researched in Jordan. Consequently, our research objective is to investigate, through regression analysis using OLS, the contribution of the remittances received in Jordan to its long-term economic growth. Around 3.3 percent of Jordanian households or 4.9 percent of the Jordanian population have received remittances from household members or other relatives overseas in Almost 69 percent of household receiving remittances were from migrants in Arab countries, and 31 8

9 percent were from Western Countries. Almost all household heads receiving remittances are females and 92percent live in urban areas. More than half the remittances were sent to either a spouse (25percent) or an offspring (33 percent). Figure4. Different methods are used to send overseas remittances (Figure 5). Mail order is the most popular way (44 %) for current migrants to send remittances to Jordan. Only 27 percent of current migrants send their transfers through the banking system. Almost a third of households are sent remittances through informal channels (by hand or through friends and relatives). The average amount of remittances over the previous 12 months, was JD2, (median= JD1, 200). The mean amount of remittances sent by migrants in Western countries washigher than that sent by Arab migrants (JD2,254 compared to JD1,663), but the median from migrants to Arab countries was higher at JD1,200 relative to JD1,000 from migrants in Western countries). Only 5 percent of household heads receiving overseas transfers we recurrently employed, but this is mainly because those households are female headed and more than 55 percent of those females are above 40 years of age. In fact examining labor force participation,, there is evidence that individuals in households in receipt of remittances are less likely to participate in the labor market suggesting that remittances might lead to higher reservation wages. For example, the labor market participation rate of males above 24 years of age is 69 percent in households in receipt of remittances compared to 80 percent in households not receiving remittances. For females, the participation rate is 14 percent for those in households receiving remittances compared to 20 percent in non-recipient households. Interestingly, there is no significant difference in the educational level of individuals of both groups (Figure 6). Also, figure 6 shows that household receiving overseas transfers were more likely to belong to the top two wealth quintiles (4 and 5). Figure 4: Relationship between Remittance Receiver and Donor Relationship between Remittance Receiver and Donor(%)

10 Figure 5: Method of Sending Overseas Remittances Remittances inflows to some Middle East Countries during financial crisis The Middle East region, similar to nearly every region of the developing countries, was not immune from the global financial crisis. A first look at official data (figure6) on remittances inflows to Jordan and some Middle East countries suggest that such inflows were severely affected by the crisis. Inflows decline in Jordan (-5.2%), Egypt (17.8%) for example. 30 Figure 6: Remittances inflows as (%) of GDP Jordan Lebanon Eygept West Bank & Gaza

11 Using different methodology to measure the economic impact of the decline in remittances inflows during the crisis in Jordan and other Middle East countries, the author calculate the impact as the proportion of remittances to GFP in 2008 times the growth rate of remittances inflows in The result shows that the drop in remittances for Jordan resulted in a negative shock of (-0.93%) of GDP, (-1.36%) for Lebanon, (-2.83%) for Egypt, and (-0.93%) for West Bank and Gaza. Thus, even there is impact of economic crisis on remittances inflows, but such impact was modest in Jordan. 11

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