Remittances as development tools in the Eritrean economy.

Abstract

Migrant workers in the developed countries remit part of their earnings to their families,

relatives, and friends left behind in their old communities in the less developed countries.

Remittances, as financial resources whether delivered in cash or in kind, have been

playing great roles in the development of the economies of many developing countries.

Remittances are now taking the lead after foreign direct investment in most aid recipient

countries. Remittances are believed to remain a stable source of foreign exchange (Ratha

2003:163). They have great impact on the society at large and on the living standards of

most remittance recipient households. Remittances can be classified as private

development assistance because they are sent from individual migrants. At the same

time, they are family welfare systems or safety nets that are delivered directly to the

beneficiaries.

Why do migrants remit? There are different theories of remittances that attempt to

explain the act of remitting. Such theories range from an altruistic behaviour, which

according to some studies about 75 percent of remitters claim to be motivated by

enlightened-self interest, implicit family loan agreement and implicit co-insurance. The

macro-economic determinants and the social networks also play a part in influencing the

flow in volumes and frequencies of these moneys.

Eritrea, as a country that has come out of protracted and devastating thirty years of war,

started its development from meagre resources. In fact according to Randall (1995), in

1991 - the year Eritrea got its independence - 85 percent of its people were living on

foreign aid whether in the form of remittances or food aid. During the armed struggle, the

role of the Diaspora Eritreans was significant not only as financial support but also

because they acted as spokespersons for the little-known struggle for independence. It

was therefore imperative for Eritrea to rely heavily on its Diaspora population for their

financial, technical and other material resources to rehabilitate its devastated economy.

To regain sovereignty means a lot to Eritreans as a whole and to the Diaspora Eritreans in

particular. After independence, hundreds of thousands of the Eritrean Diaspora flew to

their country, met their families and visited different historical places. According to the

ministry of Tourism of the State of Eritrea, more than 70,000 Diaspora Eritreans visit the

country annually, which means a sustainable level of tourism development can be

achieved. The Diaspora also initiated different projects. The study has come to realise

that indeed there are different projects that are sponsored by the Eritrean Diaspora in

concern of their immediate families, communities and investments for their potential

profits.

Although it is difficult to put it in terms of figures or percentiles, some estimates put the

annual remittances received by Eritreans to be between 200 - 300 million US dollars.

Remittances, whether consumed or invested, are estimated to contribute enormously to

the Eritrean economy, which roughly estimated is 19-37 percent of GDP. As in the case

of Mexico, remittances' trickling down effect is 3:1 (Adelman and Taylor 1990 as cited

in Ratha, 2003). Likewise, the developmental effect of remittances in the Eritrean

economy is also estimated no less, if not more.

Furthermore, the Government of the State of Eritrea implemented different policy

measures to ease the flow of remittances and to guide the individual remitter in the use of

these financial resources in the domestic economy. Different investment opportunities

such as housing projects, sale of shares and stocks of government owned enterprises and

treasury bonds are to mention but a few. Similarly, the government, to augment the

Martyrs' Trust Fund and to increase the tax base of the economy, introduced directives

plus nominal tax rates to the Diaspora Eritreans. Institutionalising Diaspora Eritreans and

securitization of the future-flow of remittances also helped the government to get access

to international markets, to avoid credit rationing in the face of deteriorating sovereign

risks.

The dissertation attempts to capture the role of remittances as development tools in the

Eritrean economy. After introducing the geopolitical and economic background history

of the country in chapter one, in chapter two attempts are made to cover extensively the

definitions, uses and drawbacks of remittances. In chapter the different theories or

determinants of remittances and the transfer channels and their associated problems are

described. In chapter four endeavours are made to assess the different policy measures

applied by labour exporting countries to influence the flow of remittances and their uses.

For comparison of these policies, three countries experiences are presented. Finally in

chapter five the paper tries to draw conclusions and advance some recommendations.