The Impact of Global economic crisis on Jordanian

Workers’ Remittances

Dr. Ahmad ArefAssaf

(PhD in Economics)

Dean/ Faculty of Economics and Administrative Sciences

ZarqaUniversity ,Zarqa , Jordan

Office: +962 5 3821100 Ext. 1500

Mobile: +962 79 5330651

assafphd@yahoo.com

A paper presented to the 1st International Conference of Development and Economy- The

advantages and disadvantages of Economic Crises. Kalamata, Greece, 2 - 4 October 2015

This paper is funded by the Deanship of Scientific Research/ Zarqa University

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Abstract

The main goal of the present study is to highlight the effectof global financial crisis occurred

in 2008–09 on Jordanian Workers’ Remittances. Using different methodology to measure the

economic impact of the decline in remittances inflows during the crisis in Jordan and other

Middle East countries, the author calculate the impact as the proportion of remittances to

GFP in 2008 times the growth rate of remittances inflows in 2009. The result shows that the

drop in remittances for Jordan resulted in a negative shock of (-0.93%) of GDP, (-1.36%) for

Lebanon, (-2.83%) for Egypt, and (-0.93%) for West Bank and Gaza. Thus, even there is

impact of economic crisis on remittances inflows, but such impact was modest in Jordan.

Key words: remittances, global finical crises, economic growth (GDP), Jordan

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Background

The global financial crisis in 2008–09 served a harsh blow to 215 million migrants and their

families around the world. Migrants faced worsening employment prospects in destination

countries, often coupled with tightening entry regulations and vicious anti-immigration

rhetoric. Meanwhile, migrants’ support to families back home in the form of remittances was

ever more important in the face of the rising cost of living.

Remittances are the most tangible link between migration and development. At more than

$325 billion per year, remittances sent by migrants to developing countries are larger than

official development assistance as well as private debt and portfolio equity flows.

Remittances help families all over the world to pay for food, housing, education, and health

expenses and even invest in small businesses. At the national level, remittances help offset

current account deficits and shore up international reserves.

Jordan is classified as a lower middle income country (World Bank 2011) and it has shown

strong economic performance since 2000 with an annual GDP growth averaging 7.5 percent

and per capita GDP more than doubling. Due to the economic slowdown in 2008, and the

unstable situation in the region, Jordan is now meeting several challenges, including

vulnerability to fluctuations in the international oil market, high unemployment and

dependency on remittances from the Gulf States (World Bank 2011).

Jordan's economy is mainly dependent on exports, tourism, and overseas Jordanian

employees' remittances. Any imbalances in these economic resources will affect the rate of

employment and unemployment in the kingdom. Like some underdeveloped countries,

Jordan has been suffering greatly from "brain drain"; there are approximately 600,000

Jordanians working abroad, nearly 50 % of them have workplaces in the Gulf region, and

their remittances are up to 20% of the Jordanian GDP, (European Commission, 2009).In

other words, remittances are recognized as an important national income to the country. It is

agreed that, among the huge number of Jordanians working overseas, there are a big number

of academic, skilled and professional people. This undoubtedly, despite the advantageous

benefits, negatively affects the country since Jordan needs to make up the shortage by depend

on alterative foreign manpower from Egypt and Syria. Consequently, this leads to transfer

huge amounts of foreign currency outside the country; cash outflow. The point is that the

foreign laborers from the Arab neighboring countries are not as professional as the

Jordanians; the vast majority of them work in the field of construction.

The Jordanian economy has one of the world’s highest levels of remittances as a proportion

of GDP (23 percent in 2009) and remittances are a key source of income and foreign

exchange for Jordan. Table 1 shows the significance of remittances for Jordan. According to

the World Bank, for comparison, net FDI inflows were US$2.0 billion, net, ODA received

were US$0.7 billion, the total international reserves were US$8.9 billion, exports of goods

and services were US$12.4 billion in 2008. It is also worth noting that outward remittance

flows are very small in comparison to inward remittance flows despite Jordan appearing to be

a net immigration country.

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Strong economic growth in the 1970s and 1980s was based almost entirely upon emigrants’

remittances. During 1999-2009, average annual GDP growth rate was 6.7% (The World Bank

(2011) and remittances averaged 23 percent of GDP. On the other hand, this economic

growth did not translate into job creation and vibrant labor market. Jordan has low rates of

labor market participation. In particular, female labor force participation has always been

pretty low at 16 percent in 2009 and 12 percent in 2008, whilst male labor force participation

was 84 percent in 2009 (Ministry of Labour 2009). Furthermore, Jordan suffers from

consistently high unemployment rates, 12.9 percent in 2009 according to the Ministry of

Labour (2009). Jordanian unemployment is a youth phenomenon both in terms of absolute

numbers and in terms of unemployment rates. Female unemployment rates are pretty high at

24.1 percent despite their low level of economic activity. It is also worth noting that

unemployment rates are the highest amongst the most educated at around 16 percent.

Objectives of the study

The study aimed to highlighted the global financial crisis in occurred in 2008–09 and its

impact on Jordanian Workers’ Remittances as the Jordanian economy has one of the world’s

highest levels of remittances as a proportion of GDP (23 percent in 2009) and remittances are

a key source of income and foreign exchange for Jordan.

Literature Review

Previous literature on remittances has to a large extent focused on the motives as

determinants of remittances and on the effects of remittances on poverty, inequality and

economic development (Docquier and Rapoport 2005, Russel 1986). Other studies have

investigated the impacts of saving in Pakistan (Burney 1987), or on consumption, investment

and imports (El-Sakka 2007, p 8). Some empirical evidence shows that remittances can

increase economic growth by functioning as a multiplier in gross national output. It also

shows that high proportions of employment can be supported by remittances (OECD 2006, p

155). Jadotte (2009, p 2) mentions a study by Lamaute-Brisson (2002) that shows that if

remittances are targeted to financing economic activities, they are likely to be distributed to

informal activities in the service sector with low productivity. Lamaute-Brisson (2003) has

also done a study about remittances in Haiti where she finds that even though remittances

allow some households to get away from poverty, they do not necessarily reduce inequality

as these transfers often are provided to the wealthier households. Acosta (2006) shows that

remittances decrease the liquidity restraints in El Salvador and therefore increase both

consumption and investments. But after controlling for household wealth and using selection

correction techniques, remittances are negatively correlated to child labor and adult female

labor supply. Average male labor participation is unaffected and an increase in girls‟

education level is increasing with remittances. Rodriguez and Tiongson (2001) find that the

migrant and non-migrant labor participation is not separable and that remittance has a

negative impact on labor supply but remittances are affecting men‟s, rather than women‟s

supply of labor. Kim 2006, Bussolo and Medvedev (2008) have shown that remittances

reduce the labor supply of mainly female, but sometimes also male workers. A study of the

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effect of remittances on the Mexican household labor supply has been conducted by

Airola(2008), who finds that remittance is affecting the hours of work negatively, particularly

for women.

There are researchers who present different results. Funkhouser (1992) observes that, in

Nicaragua, remittances improve the entrepreneurial activities for men (even if reducing labor

supply for women). The result that Kim (2007, p 12-14) finds from a simple cross sectional

study is that remittance is negatively affecting labor market participation at the individual

level. The weekly hours worked by employed people, however, are not affected. The panel

data at the cluster level shows a negative impact of remittances on the labor force mainly

because people receiving remittances have higher reservation wages., A survey by Cox-

Edwards and Rodríguez-Oreggia (2008) on households in Mexico finds no differences in

labor participation between receiving and non-receiving households. For women in the urban

areas remittances increase labor participation and the possible explanation is that remittance

contributes to the establishment of family owned enterprises which could improve the labor

market opportunities for women.

Earlier research of remittances in Jordan shows that they are positively related to economic

growth (Chatelard 2010). Another study investigates how the macroeconomic policy in

Jordan affects the inflows of remittances (El-Sakka 2007). Other research regarding the

impacts of migration and the inflows of remittances on the Jordanian economy during the 70s

is done by Kirwan (1981) and he finds that the unemployment rate decreased because of the

emigration and through the increase of domestic demand for labor. He also finds that a period

of rapid growth was partly due to the high level of remittances. A study conducted by Ilahi

and Shendy shows that there exist spillover effects from the oil-rich countries to the regional

countries (among these Jordan). In other words, the growth in GDP in the Gulf States is

correlated with the neighboring countries which supply the additional labor’s received

remittances (Ilahi and Shendy 2008, p 5, 13). According to a study conducted by Sondos and

Kharmeh (2010) the impact of Jordanian workers‟ remittances on macroeconomic variables

was significant. The household’s final consumption expenditure increased by 33.6 percent

per year, the government final consumption increased by 35.1 percent yearly, the total

exports decreased by 39.5 percent per year and the gross capital formation increased by 31.4

percent, all due to remittances. Remittances contributed to increase in GDP by 7.1 percent.

The impact of the high rate of Jordanian workers‟ remittances on the households‟ final

consumption expenditure was due to a high ratio of marginal propensity to consume in

Jordan, which is estimated to be more than 90 percent (Sondos and Kharmeh 2010).

Emigration and the Labor Market in Jordan

The first wave of Jordan Labor Market Panel Survey (JLMPS 10), which collected micro-

level information in the period from December2009 to June 2010 shows that in 2010,2.1

percent of households had at least one member working overseas. However, it is important to

remember that this figure is an underestimate since it does not include migrant households

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who are wholly currently overseas; i.e. does not include migrants with theirwhole families

currently overseas.

A substantial proportion, almost 38 percent of current migrants, has left in the last two years,

which is expected given the temporary nature of migration in particular to the Gulf States

which amounts for the majority of emigration from Jordan. Around 80 percent of migrants

have visited in the last two years. Jordanian emigrants are highly educated: 62 percent have

university degree highlighting the high skill nature of outward migration in Jordan. Currente

migrants are predominately urban— 95 percent of their households are located in urbanareas.

Interestingly, current migrants were mostly employed (94 percent) before migratingand 79

percent were working in the private sector.

Figure (1) shows the overseas destinations of current emigrants. More than half the current

Jordanian emigrants are in Saudi Arabia (32%) and the UAE (24%). Almost a quarter is in

Western Countries, with the U.S. being the main destination (9%).

By examining the jobs of current overseas emigrants, 91.8 percent were found to be waged

workers, 7.8 percent employers and the majority, 89 percent, was employed in the private

sector. In addition, Figure 2.1 presents the distribution of overseas occupations of current

migrants and indicates that over half of the current emigrants were engaged in skilled

occupations. In terms of economic activity, Jordanian emigrants tend to be engaged in

construction, wholesale and retail trade, professional and technical, and accommodation and

food sectors (Figure 2.2).

Figure (1) the overseas destinations of current Jordanian emigrants

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Figure (2) Overseas Occupation and Economic Activity of Current Jordanian

Emigrants (%)

Remittances

In 1984 remittances accounted for one-fourth of Jordan’s GDP. In the end of 1980 the return

migration from the Gulf started and accelerated during the Gulf War. This return of migrants

increased the population of Jordan by ten percent and the fall in remittances accounted for ten

percent of GDP. In the mid-1990s the stability of the region increased and again, the

Jordanian skilled labor started to migrate to the Gulf States. As we can see in figure (3), the

flow of remittances to Jordan has increased the last 20 years and a plausible explanation for

that could be a decrease in the transfer cost for sending money back home, due to

technological improvements and more competition among financial institutions (Acosta

2006, p 11).

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Figure (3)

The flow of remittances to Jordan

Source: Author’s calculation from World Bank Indicators (2015).

According to some estimates, if one takes the unofficial remittances into account, the actual

remittances should be about 60 percent higher (El-Sakka 2007, p 5). Remittances per-capita

in Jordan is also the highest among labor exporters in the Middle East (ibid. p 5). Jordanian

labor remittances are among the most important economic variables that contribute to the

growth of the national economy. It represents an important economic resource in the

Jordanian balance of payments, because of the high ratio of the total value of receipts that

reached 25 percent of the current balance of payments. The remittances contributed to more

than 40 percent of the balance of services, and more than 20 percent to GDP in the beginning

of the 21st century (Central Bank of Jordan, 2010). 250,000 Jordanians are working abroad

and the majority of them have relatively high educational qualifications like a university

degree. A large part of the senders are working in the Arabian Gulf States (Sondos and

Kharmeh 2010, p 122). Recent years have seen an improvement in relations between Jordan

and the Arab Gulf States, which has led to an increased demand for Jordanian labor, thus

increased remittances.

Since remittances received are a potential source of investments and are therefore able to

bring about concrete economic benefits, estimating their macroeconomic effects is an issue of

both economic and politic interest. The macroeconomic effects of remittances and especially

their economic growth potential have been under-researched in Jordan. Consequently, our

research objective is to investigate, through regression analysis using OLS, the contribution

of the remittances received in Jordan to its long-term economic growth.

Around 3.3 percent of Jordanian households or 4.9 percent of the Jordanian population have

received remittances from household members or other relatives overseas in 2010. Almost 69

percent of household receiving remittances were from migrants in Arab countries, and 31

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percent were from Western Countries. Almost all household heads receiving remittances are

females and 92percent live in urban areas. More than half the remittances were sent to either

a spouse (25percent) or an offspring (33 percent). Figure4. Different methods are used to

send overseas remittances (Figure 5). Mail order is the most popular way (44 %) for current

migrants to send remittances to Jordan. Only 27 percent of current migrants send their

transfers through the banking system. Almost a third of households are sent remittances

through informal channels (by hand or through friends and relatives).

The average amount of remittances over the previous 12 months, was JD2, 054.759 (median=

JD1, 200). The mean amount of remittances sent by migrants in Western countries washigher

than that sent by Arab migrants (JD2,254 compared to JD1,663), but the median from

migrants to Arab countries was higher at JD1,200 relative to JD1,000 from migrants in

Western countries). Only 5 percent of household heads receiving overseas transfers we

recurrently employed, but this is mainly because those households are female headed and

more than 55 percent of those females are above 40 years of age. In fact examining labor

force participation, , there is evidence that individuals in households in receipt of remittances

are less likely to participate in the labor market suggesting that remittances might lead to

higher reservation wages. For example, the labor market participation rate of males above 24

years of age is 69 percent in households in receipt of remittances compared to 80 percent in

households not receiving remittances. For females, the participation rate is 14 percent for

those in households receiving remittances compared to 20 percent in non-recipient

households. Interestingly, there is no significant difference in the educational level of

individuals of both groups (Figure 6). Also, figure 6 shows that household receiving overseas

transfers were more likely to belong to the top two wealth quintiles (4 and 5).

Figure 4: Relationship between Remittance Receiver and Donor

0

5

10

15

20

25

30

35

25

33

14 15

9

4

Relationship between Remittance Receiver and Donor(%)

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Figure 5: Method of Sending Overseas Remittances

Remittances inflows to some Middle East Countries during financial crisis

The Middle East region, similar to nearly every region of the developing countries, was not

immune from the global financial crisis. A first look at official data (figure6) on remittances

inflows to Jordan and some Middle East countries suggest that such inflows were severely

affected by the crisis. Inflows decline in Jordan (-5.2%), Egypt (17.8%) for example.

Figure 6: Remittances inflows as (%) of GDP

0

5

10

15

20

25

30

2005 2006 2007 2008 2009 2010 2011 2012 2013

Jordan

Lebanon

Eygept

West Bank & Gaza

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Using different methodology to measure the economic impact of the decline in remittances

inflows during the crisis in Jordan and other Middle East countries, the author calculate the

impact as the proportion of remittances to GFP in 2008 times the growth rate of remittances

inflows in 2009. The result shows that the drop in remittances for Jordan resulted in a

negative shock of (-0.93%) of GDP, (-1.36%) for Lebanon, (-2.83%) for Egypt, and (-0.93%)

for West Bank and Gaza. Thus, even there is impact of economic crisis on remittances

inflows, but such impact was modest in Jordan.

12

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