Remittances, GDP Growth and Aggregate Demand

Monday, 7 February 2011 02:28 -     - {{hitsCtrl.values.hits}}

The total earnings Sri Lanka received via remittances in 2010 is approximately USD 4175 mn and the figure exceeds seven times the gross foreign exchange income from tourism during the same period which saw a surge in tourist arrivals.

Since no production costs are involved in departures foreign employment does not induce an outflow, and hence, the net foreign exchange income of tourism which is below the gross level would further increase the above multiple.

In this connection, growth of remittances stands alone as the only significant non-debt driven inflow relieving Sri Lanka’s expanding trade deficit. Foreign employment ranked as the fifth largest contributor to foreign exchange earnings in 1990 and since then, it has become the premier net foreign exchange earner in Sri Lanka from 2009 onwards.

The fundamental factor which fuels the growth of foreign employment earnings in Sri Lanka is the rapid increase of departures recorded over the past 20 years. According to records available at the Sri Lanka Bureau of Foreign Employment, the present outflow is over 200,000 per annum and the growth of foreign employment has surpassed the rate of labour force increase in the country. The percentage of migrant workers from the total employed population of Sri Lanka has also increased to 24.1% in 2009 which stood at 13.5% in 2000.

Considering foreign employment by the manpower categories involved, housemaids continued to remain the largest category among migrant workers. Out of the total females who left the country in search of employment 89%were house maids. Out of the Sri Lankan labour force which went ahead for employment during the past decade 70% were in the unskilled sector. Nearly 66% of them were female domestic workers who are a poorly paid manpower category and with no bargaining power in labour markets. The number of complaints received by Sri Lanka’s Foreign Employment Bureau in 2009 from migrant workers increased by two thousand four hundred and two and it was 4.9% of total recruitments. The deaths reported during the year were three hundred and thirty three which is an increase of 4.9% year over year.

In spite of these hazards Sri Lankans continue to migrate in search of employment as a measure of last resort. Major factors that influence Sri Lankans to work abroad even under these conditions are stagnant real incomes, unemployment or underemployment, high inflation, indebtedness, and a virtual inability to exist in the home country. An aggravation of these conditions has a tendency to increase the rate of departures and the foreign employment income of the country, demonstrating a direct relationship between the growth of foreign remittances and the inadequate demand for labour in the economy.

Evidence of the low absorption rate of the work force is also shown by the annual average rate of increase in migrant workforce exceeding the annual average growth of labour force in the country. From 2004 to 2009 the annual average rate of increase in migrant workforce was circa 10.7% whereas the annual average growth of the labour force is only circa 0.9%. The expanding export of labour or rather unemployment, has obscured the real unemployment levels as given in official statistics.

More importantly, the escalation of this disguised-unemployment in the economy has been the only major source of relief to the increasing trade deficit; it is boosting domestic aggregate demand and fueling the GDP growth by increasing the inflow of foreign remittances. It would thus seem that the rise in this disguised-unemployment and stagnant real incomes have caused the rate of growth to climb, indicating an ‘unemployment-led growth pattern’ in the economy. These facts further strengthen the eminent need to rearrange the distribution of resources in the economy in favour of technologically progressive industries; and the task lies with the private sector, known as the engine of growth of the economy. (Source: Asia Wealth Management/Asia Research)