The Covid pandemic dealt a blow not only to the state of the world economy, but to its most important asset, namely human capital. In particular, one of the most significant implications of the Covid pandemic has been the sizeable shock delivered to migration flows and the related flow of remittances. The drastic reduction in the size of remittances exacerbates the imbalances observed in the global economy associated with the gap between developed and developing economies, writes Valdai Club Programme Director Yaroslav Lissovolik.
This in turn calls for concerted action from the global community, most notably multilateral international organisations as well as regional development institutions to prioritise assistance to those economies that were affected by these adverse implications of the Covid pandemic.
Of all of the segments of the global economy the Covid crisis and the ensuing shutdown exacted a disproportionate effect on the movement of people and the related flows of remittances. Cross border flows of capital as well as international trade and the movement of goods across borders were also affected, but the effects of the shutdown and quarantine measures on migration and human capital were arguably more severe.
According to the estimates of the World Bank in the course of 2020 the world economy will witness a 20% reduction in the size of remittances, with some of the most significant declines observed in Europe and Central Asia (27.5 percent), followed by Sub-Saharan Africa (23.1 percent), South Asia (22.1 percent), the Middle East and North Africa (19.6 percent). Some of the more extreme cases include countries such as Laos, which is expected to register a 50% drop in remittances this year. A decline of such magnitude makes it the most significant drop in remittances across the globe in recent history.
The decline in remittances is not the only blow sustained by developing countries during the current crisis. Another implication of the shutdown and the return of migrants to their home countries was the rise in unemployment and the pent-up pressure in the respective economies for greater social assistance to alleviate poverty. Low labour mobility and a languishing labour market potentially may exacerbate social strife and increase crime rates. With the effects of the shutdown being prolonged in some cases by second waves of the pandemic, the effects on the labour market, income and poverty levels in the developing countries is progressively deteriorating.
In Russia according to the official data the migrant inflow declined by as much as 50% in April, though subsequently starting from May the inflow of migrants started to pick up pace and by the third quarter of this year it continued to recover. The outflow of remittances accordingly declined to some of the lowest levels in the past several years in Q2, but then recovered in July 2020 to the highest level in the past several years. This pattern of the ebb and flow of remittances likely imparted a paradoxical effect on the rouble – during the peak of the crisis in April the pressure on the rouble declined on the back of the drop in remittances, while later on as restrictions were lifted the rouble came under greater pressure from the renewed outflow of remittances. The latter pattern was amplified, of course, by a similar pattern of declines and subsequent recovery in imports and capital outflows.
Remittances are tremendously important for such economies as Kyrgyzstan, Tajikistan, Georgia, Moldova and Uzbekistan. In the case of Kyrgyzstan and Tajikistan remittances in recent periods at times exceeded the 30% of GDP mark. Apart from the sheer size of the flow of remittances, their qualitative features make them even more important as these are the funds that are more targeted in reaching those that are most in need compared to official development assistance (ODA), FDI or other trans-border financial flows. A reduction of 20-30% in remittances for these economies is tantamount to a loss in targeted long-term funding in excess of the FDI inflows or annual budget spending on human capital items such as healthcare and education.
There will also be negative implications for the advanced economies that used to rely on inflows of migrants to compensate for the population decline arising from adverse demographics. The pandemic and quarantine measures also affected the flows of high-skilled migrants, which likely produced negative effects on productivity in labour-intensive and high-tech sectors. Isolationism and reclusiveness on the back of the pandemic could make it more difficult politically to revert back to the status-quo ante of allowing sufficient flows of migrants to compensate for the declines in the labour force.
In the end, the migration factor affects the developing countries during the pandemic in a variety of ways through multiple channels – balance-of-payments, budget, labour market, human capital development. The response from the global community will need to focus on support for countries that are particularly affected by the decline in migration and remittance flows. A comprehensive strategy coming from the global and regional development institutions will need to be devised to assist the developing economies to surmount the effects of the decline in remittances with respect to the financing and budgetary needs.