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Remittances versus Foreign Direct Investment

Remittances in Georgia are huge. If we only count the level of remittances sent using cash transfer systems like Western Union and Moneygram then remittances have grown from USD 259 million in 2004 to over USD 1 billion in 2008. On top of this transfers into the country from personal bank-accounts is even higher and in 2008 was an additional USD 1.2 billion.

The apparently dramatic increases in cash-transfers over recent years may not reflect that remittances have increased by this much , but may instead reflect the fact that the cost of transferring money electronically has dropped dramatically in recent years so that more and more people are sending money electronically. According to the World Bank transfers between Russia and Georgia now cost on average 2.2% making this 'corridor' one of the cheapest in the world. Below are the prices for many of the most popular cash-transfer systems.

A great deal is written about the impact of these remittances with development professionals often looking to see ways in which these funds can be more effectively utilised to create long-term development. In particular, remittances are usually compared unfavourabley to Foreign Direct Investment because most remittance money is spent on essentials like food, clothing and heating and so little is 'invested'.

However, there are reasons to think that remittances may be far more effective for poor-oriented development than FDI. First, spending remittances on food, clothing and other necessities not only improves the situation of the poor directly, but also creates knock-on effects for local economies. If money is spent on food then it is likely to stimulate agricultural economies. FDI, on the other hand, is often concentrated in areas like banking, telecoms and property which may be essential for an economy in general but do not create a lot of employment for poor rural areas.

Second, remittances are a vastly more reliable foreign input than FDI and so more likely to have a counter-cyclical effect. Foreign Direct Investment tends to drop in times of crisis. FDI into Georgia dropped 24% between 2007 and 2008, largely because of the war, and in the first quarter of 2009 it dropped another 76% compared to the first quarter of 2008.

In comparison remittances have faired far better. Between 2007 and 2008 remittances actually went up by 16% and while the first four months of 2009 saw a decrease, the decrease was 25% (on 2008). As a result, in the first quarter of 2009 remittances were significantly larger than FDI with remittances at USD 164 million and FDI at 125 million.

This blog draws on information gathered by us for the International Organization of Migration, Feasibility Study on the Use of Mobile Phones for sending remittances.

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