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From remittances to microcredit

Valentino, Piana and Paulos, Kesete (2007) From remittances to microcredit. In: International Economic Conference on Trade and Industry (IECTI) 2007, 3 - 5 December 2007, Bayview Hotel Georgetown, Penang. (Unpublished)

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In many peripheral countries, remittances are becoming an extremely important source of external financial flows. In spite of their several desirable effects (e.g. structural growth, stability over time, direct positive impact on poor and middle-income families, etc.), remittances are hardly used for investment and productive purposes; rather they tend to prompt temporary consumption and even imports, exacerbating the trade deficit. In this paper, it is investigated how Microcredit Financial Institutions (MFIs) could connect to remittances flows, so as to boost self-reliance and entrepreneurship, thereby contributing to poverty reduction and widely shared economic growth. A policy trying to channel remittances to microcredit is evaluated in terms of its differentiated appeal for different kinds of migrants. A world-wide analysis of remittances and microcredit diffusion is mapped into a graph of the hierarchical structure of the world, based on previous original works on core, peripheral, semi-peripheral, and independent countries. The results show that remittances significantly deviate from the pattern of both trade revenues and foreign direct investments. Remittances are shaking the world structure by arriving where the others do not. Quite similarly, the number of MFIs is higher the lower the ranking in the world hierarchy. In particular, the exceptional position of Bangladesh in both remittances and microcredit is paralleled by its almost unique position in the world hierarchy. In microeconomic terms, remittances are characterized by asymmetric information and moral hazard, which reduces their amount and the share sent through official channels. MFIs could boost overall remittances and take a share in them by offering innovative quadrilateral relations to remittance sender, remittance receiver, micro-loan borrower. Indeed, there is a high level of compatibility between microcredit and remittances mechanisms in terms of the people involved, the centrality of private initiative, the dimension of the transaction, the time horizon. In particular, there exists a small but growing sub-group of emigrants that could devote significant sums to fund MFIs in the perspective of receiving back the capital with interests when they come back (or go) to the developing country. The legal, risk-bound, competitor-driven problems of the proposed mechanism of connection are given remedies and an outline of time-path for implementation. In macroeconomic terms, the wider and more flexible aggregate supply due to the private entrepreneurial activities funded by MFIs would increase the potential GDP and would improve the working of the Keynesian multiplier triggered by remittances, thus reducing inflationary tensions and trade unbalances. A more equilibrated and fairer growth path can then be attained. The countries where this proposed policy has the largest potential for success might include not only India, Bangladesh, Viet Nam, Indonesia, Thailand and Sri Lanka but also Ethiopia, Nigeria and the Philippines. Among the countries dominated by Germany, Egypt, Morocco, Viet Nam, Colombia and Mexico are particularly well placed to grasp this opportunity, especially if an adequate assistance is offered to them.

Item Type: Conference or Workshop Item (Paper)
Additional Information: Organized by Faculty of Economics, Universiti Utara Malaysia
Subjects: H Social Sciences > HG Finance
Divisions: College of Arts and Sciences
Depositing User: Mrs. Juwita Johari
Date Deposited: 27 Feb 2011 02:41
Last Modified: 27 Feb 2011 02:41
URI: http://repo.uum.edu.my/id/eprint/2575

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