3.2 MACRO-ECONOMIC DETERMINANTS
3.2.1 Factors in the Host Country
Despite this fact, all the above-mentioned theories explain something about the relationships between remittances and the behaviour of the remitter. Hence, this paper considers all of them as theories of remittances which can help us explain the cause and effect of remittances in the Eritrean economy. However, these are not the only theories that attempt to explain the determinants of remittances; we have additional theories that associate the act with the general situation that prevails in an economy, the macro- economic determinants.
- Transfer Costs: - Remittance channels to and within Africa are similar to those in other parts of the developing world. The industry continues to be dominated by a small number of money transmitters that generally tend to charge higher fees than banks or credit unions. These money transmitters are not fully developed and have little competition among them and thus they are expensive. Bair (2002:2) found that
"although charges have declined significantly over the past two years, transfer costs for remittances are still high. The average transfer fee and exchange rate commission to send $200 varies from approximately $15 to $26. The cost varies as a result of the type of institution used and which country the money is being sent. When transmission fees and losses on the exchange rate are both factored in, the cost can often reach up to 20 percent of the amount being sent." Ratha (2003: 158) estimated that "if transaction costs were lowered by 5 percent, overall remittances to developing countries would have increased by US $3.5 billion." Hence, high transfer costs either reduced the flow of remittances or diverted them into informal channels that obscure their correct figures.
- Inflexibility of service: - Besides the costs of transfer, each of these transfer channels has its own advantages and disadvantages with regard to its service that makes it different from others. Lack of flexibility in their service is one factor that limits the usage of the official transfer channels. For example, migrants have few opportunities to manage their finances, including remittances, in their home countries. They want to support their families in different forms. Services such as air tickets, vouchers for goods reflect the desire of migrants to support recipients in a particular way, rather than to send cash. Currently it is not possible to send money home with instructions that some of the money be credited to a savings account and the rest paid out to a specific individual Sander and Maimbo (2003: 19). Thus, inflexibility of service has reduced the flow of remittances.
- Accessibility or Legal documentation: - Formal transfer channels demand a legal document to process a transfer. Legal documentation, though necessary to prevent money laundering, however denies access to many of the illegal immigrants, who want to support their relatives back at home. These illegal migrants could constitute a large percentage of the total migrants. As a consequence, large portions of remittances find their way through other alternatives, the informal transfer channels. Bair (2002:3), "The Patriot Act, which was declared after September 11, 2001 requires financial institutions,
including money transfer businesses such as the above-mentioned to establish anti- money laundering programs and verify the identification of their clients. These requirements are in addition to the suspicious activity reporting requirements of Financial Action Task Force on money laundering (hereinafter - FATF) of 1989 that already apply to money services businesses."
Though no one has to take the risk of terrorist act, preventing access to large numbers of undocumented immigrant workers diverts the flow of remittances to informal channels that charge large money and/or other means of transfer channels - like hand carry with people who travel back home. However, a study from Pakistan reveals quite a different result. Despite strict control of these transfer channels, the flow of remittances to Pakistan has indeed increased after September 11, 2001. But the study did not explain the cause of the increase nor did it depict which formal or informal channels they used.
Therefore, one could not argue in favour or against the Act.
- Other factors: - (i) Lack of awareness. Many remitters are first time users of banks if they use the formal financial channels, (ii) Inconvenience. Most of them work long hours or in remote areas so time and location are factors that create some inconvenience.
Thus, due to the above-mentioned reasons the flow of remittances to the developing world could be underestimated.
3.2.1.2 Indirect Factors
There are a number of indirect factors in the host country that could influence the flow of remittances.
- Economic activities: - First the level of economic activity has a direct impact on the demand for migrant labour. Labour-importing countries often set quotas, which limit the number of immigrants who can enter these countries and how long they should stay within their borders. These quotas fluctuate over time, usually according to what is happening to the state of the economy. However, the figures do not usually reflect the true numbers of emigrants as large numbers of illegal (undocumented) migrants do operate in their economies. Although the level of economic activities varies with business cycles and seasonality, emigrants usually do not remain unemployed for long except for an initial period spent job hunting. Besides, they have strong social networks that deliver timely information.
- Levels of wages: - Second, the levels of wages migrants face have an impact on the amount of remittance that migrant workers can send home. The level of migrants' earnings will determine their own consumption and saving behaviour and thus the potential amount that can be remitted. The partially answered questionnaire from Eritreans living in Seattle, Washington, DC - USA, confirmed this notion. The amount remitted depends solely on the level saved and the wages earned.
- Differential interest rates: - Thirdly, the differential interest rates between the host and home countries and comparison of other opportunity costs among several potential portfolio investments have some impact on the flow of remittances. If this difference favours either country, then the flow of remittances fluctuates depending on which one dominates over other. If the difference is higher in the host country, people tend to delay remittances or decrease the amount and frequency they send. For example, in the host countries, many migrants have established small and medium enterprises as well as having house mortgages that extend for twenty years.This act is definitely is going to reduce the flow of remittances in volume as well as in frequency.
- Ratio of females to population: - Finally, the ratio of females to population in the host country will also have an impact on the number of female migrants. Females not only dominate in domestic work but many of the outdoor service jobs also demand female migrants over males and this has an impact on the flow of remittances.