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Beyond Remittances in Beyond Remittances in The Mediterranean: The Mediterranean: the financing of local the financing of local developmentdevelopment

Alessandro Romagnoli Luisa Alessandro Romagnoli Luisa MengoniMengoni

University of Bologna University of University of Bologna University of Bologna Bologna

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Aim of the paperAim of the paper

• The aim of the paper is to highlight the The aim of the paper is to highlight the relationship between remittances and relationship between remittances and local development in the Mediterranean, local development in the Mediterranean, connecting the migrant flows features to connecting the migrant flows features to the local conditions of original economies.the local conditions of original economies.

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The Economics of Migrant The Economics of Migrant RemittancesRemittances

• Reasons why migrants send their savings to the Reasons why migrants send their savings to the original familyoriginal family

- altruism, strategic motives, social security, - altruism, strategic motives, social security, intergenerational exchangeintergenerational exchange

• IImpact of remittances on the development process mpact of remittances on the development process of the native countryof the native country

- inequality and threshold income in the migrant - inequality and threshold income in the migrant original community affect the amount of remittance original community affect the amount of remittance (more is the income inequality, less is the amount of (more is the income inequality, less is the amount of remittances)remittances)

- remittances can stimulate new investments in - remittances can stimulate new investments in village production processes or allow the adoption of village production processes or allow the adoption of new technologiesnew technologies and and skills acquired in self-skills acquired in self-employment by return migrants employment by return migrants

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The Local Economic The Local Economic DevelopmentDevelopment

LED is a process taking into account the LED is a process taking into account the conditions and the potentialities of a conditions and the potentialities of a territorial community. So it aims to:territorial community. So it aims to:

• Improve quality of lives through jobsImprove quality of lives through jobs

• Push local institution towards transparency Push local institution towards transparency and actual support of economic activitiesand actual support of economic activities

• Empower local societies through active Empower local societies through active participation to economic processes participation to economic processes

• Connect the economic activities to the Connect the economic activities to the resources and to the comparative resources and to the comparative advantages of the territoryadvantages of the territory

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Local conditions in the Local conditions in the Mediterranean areaMediterranean area

The local economic conditions that The local economic conditions that determined migration flows are slightly determined migration flows are slightly different from those that should stimulate different from those that should stimulate the productive use of remittancesthe productive use of remittances

• Official financial channels are generally Official financial channels are generally not interested in LED initiativesnot interested in LED initiatives

• Low profile of educational backgroundLow profile of educational background

• The economic business is considered as The economic business is considered as an individual or familial matter an individual or familial matter

• Experience is the main source of Experience is the main source of knowledgeknowledge

• Innovation and management are unknownInnovation and management are unknown

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Why remittances to promote Why remittances to promote LED?LED?They are less dependent on economic They are less dependent on economic

fluctuations and less volatile to external fluctuations and less volatile to external shocks than other foreign capital, so many shocks than other foreign capital, so many LDCs nowadays rely more on them, than LDCs nowadays rely more on them, than on official external flows (IMF 2005, on official external flows (IMF 2005, Gammeltofl 2002)Gammeltofl 2002)

In the institutional vacuum, remittances In the institutional vacuum, remittances emerge as the main form of private emerge as the main form of private financing of LEDfinancing of LED

They constitute a less polarized and a They constitute a less polarized and a more flexible form of financing (with more flexible form of financing (with respect to FDI, AID)respect to FDI, AID)

They are more suitable to finance small They are more suitable to finance small scale ongoing activitiesscale ongoing activities

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As there is an inverse relation (U shaped) between migration flows and economic growth ….

income

Migration flow

migrants

there is an economic threshold, in terms of there is an economic threshold, in terms of GDP, GDP, after which migrant remittances are a after which migrant remittances are a feasible source to finance developmentfeasible source to finance development

y0

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1. Remittances as additional income1. Remittances as additional incomea) Speed up the process of changing the a) Speed up the process of changing the

structure of jobs for those that remain behindstructure of jobs for those that remain behind

If the agriculture is dumped, no income effect is If the agriculture is dumped, no income effect is created and a dependency condition is created and a dependency condition is originated originated

If there is a substitution of the family labor with If there is a substitution of the family labor with hired labor in agriculture new jobs are createdhired labor in agriculture new jobs are created

The overall effect is positive as remittances can The overall effect is positive as remittances can result in the result in the creation of new jobscreation of new jobs (Funkhouser (Funkhouser 1992; de-Haas 2005) 1992; de-Haas 2005)

The impact of remittances on The impact of remittances on developmentdevelopment

((beyond the common view on private consumption)beyond the common view on private consumption)

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b) break financial constraint of recipient b) break financial constraint of recipient and increase the probability of and increase the probability of investments in key areas for investments in key areas for development enabling:development enabling:

-The-The change in the structure of the change in the structure of the capital and/or capital and/or the adoption of new the adoption of new technologiestechnologies

-The -The increaseincrease of the of the starting up of a new starting up of a new businessbusiness after return (private enterprises after return (private enterprises and commercial activities)and commercial activities)

There is a relation between migration There is a relation between migration structure and remittances use:structure and remittances use: temporary migration is a strategy for temporary migration is a strategy for accumulating savings for productive usesaccumulating savings for productive uses

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- - Remittances relax Remittances relax household credit constrainthousehold credit constraint increasing the probability of investments as more asincreasing the probability of investments as more as::

• Household perceive remittances as Household perceive remittances as transitorytransitory rather rather than permanentthan permanent

• The migration is The migration is temporarytemporary rather than permanent rather than permanent• The migrants have The migrants have particular purposesparticular purposes

There is a relation between migration reasons There is a relation between migration reasons and remittances use:and remittances use: in addition to the altruistic in addition to the altruistic motive migrants can be pushed to send their savings motive migrants can be pushed to send their savings for personal motivation, that is for future investments for personal motivation, that is for future investments upon return upon return

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2. Remittances, achievement of skills and 2. Remittances, achievement of skills and economic initiatives upon return (evidence)economic initiatives upon return (evidence)

Remittances and Human capital (Skills, overseas Remittances and Human capital (Skills, overseas work experiences) acquired can promote LED:work experiences) acquired can promote LED:

• Level of schooling increasing the probability of Level of schooling increasing the probability of self-employment self-employment

• Migrants that acquired medium and high-skills Migrants that acquired medium and high-skills abroad have higher probability of choosing abroad have higher probability of choosing entrepreneurial activitiesentrepreneurial activities upon return upon return

• Overseas work experience in high wage Overseas work experience in high wage countries encourage countries encourage economic initiativeseconomic initiatives upon upon returnreturn

• Return migrants exhibit a higher tendency for Return migrants exhibit a higher tendency for self-employment over wage employmentself-employment over wage employment

ButBut Labor market condition and regional Labor market condition and regional contest are crucial in determining occupational contest are crucial in determining occupational choice of return migrantschoice of return migrants

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““Horizontal” vs “Vertical” migration flows to Horizontal” vs “Vertical” migration flows to finance LED ? finance LED ? Migration flows in the Mediterranean Migration flows in the Mediterranean

SystemSystem

South-North (MENA-UE)South-North (MENA-UE)

Permanent UnskilledPermanent Unskilled

(Coppel,Dumond (Coppel, Dumond,(Coppel,Dumond (Coppel, Dumond,Visco 2001) Visco 2001)Visco 2001) Visco 2001)

Networks, Starting from the Networks, Starting from the Family reunification 60’migrants Family reunification 60’migrants

respond respond Mechanism to demand for Mechanism to demand for

Unskilled labourUnskilled labour

South-South (MENA-GCC)South-South (MENA-GCC)

Temporary SkilledTemporary Skilled(Martin Baldwin (Martin Baldwin(Martin Baldwin (Martin BaldwinEdwards 2005) Edwards 2005)Edwards 2005) Edwards 2005)

Policies:Prevent Labour market Policies:Prevent Labour market

Naturalization segmentationNaturalization segmentationFoster employment of of GCCFoster employment of of GCCnativesnatives

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Country of Origin

Pre-primary education and Primary education or first stage of basic education

Lower secondary or second stage of basic education, (Upper) secondary education and Post-secondary non-tertiary education

First stage of tertiary education and Second stage of tertiary education

Total

Percentages

Algeria 44.14 36.17 19.68 100,00

Egypt 38.22 20.27 41.35 100,00

Palestinian T. 20.63 31.41 49.77 100,00

Israel 15.76 23.34 60.90 100,00

Jordan 19.33 28.06 52.59 100,00

Lebanon 24.04 24.16 51.81 100,00

Morocco 38.65 45.99 15.27 100,00

Syria 28.82 19.88 50.88 100,00

Tunisia 40.60 34.82 24.58 100,00

Turkey 27.80 59.11 5.84 100,00

Migrant population aged 15 and over originating from Med-MENA, Migrant population aged 15 and over originating from Med-MENA, according to country of origin and level of education, all countries according to country of origin and level of education, all countries of residence together countries of residence together*of residence together countries of residence together*

*Only countries of residence providing the distribution by occupation of Med-MENA are included. *Only countries of residence providing the distribution by occupation of Med-MENA are included. Sources: Sources: Statistical Institute of Germany (2001), Canada (2001), Spain (2001), USA (2000), France (1999), UK (2002), Jordan Statistical Institute of Germany (2001), Canada (2001), Spain (2001), USA (2000), France (1999), UK (2002), Jordan (2003) and Tunisia (2004).(2003) and Tunisia (2004).

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Implication for LED in MENAImplication for LED in MENAMain achievementMain achievement::

Horizontal migrationHorizontal migration is both is both temporarytemporary and and high high skilledskilled

a) The use of remittances for productive investments a) The use of remittances for productive investments is higher if migration is temporary (World Bank is higher if migration is temporary (World Bank 2006)2006)

b) In the case of return migrants remittances and b) In the case of return migrants remittances and human capital acquired promote economic human capital acquired promote economic initiatives and entrepreneurship (Ilahi 1999, initiatives and entrepreneurship (Ilahi 1999, McCormick Wahba 2001, Dustmann Kirchkamp McCormick Wahba 2001, Dustmann Kirchkamp 2002)2002)

South-south migration has specific implication for South-south migration has specific implication for the LED of MENA!the LED of MENA!

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Future applied Future applied research…research…

To put in relation skill endowment of To put in relation skill endowment of return migrants along different return migrants along different patterns of migration in the MENA patterns of migration in the MENA regionregion

To test the specific implication of To test the specific implication of Horizontal flows for labour exporting Horizontal flows for labour exporting countries in MENAcountries in MENA