The Remittance Inflows' Impact on Savings in the Serbian Economy

1. IntroductionOver the past decade remittances to developing countries have significantly increased. Officially recorder remittances have reached around USD 401 billion in 2012 and are expected to reach USD 515 billions in 2015. They remain one of the most significant and stabile external financial sources after FDI that is surpassing the level of official foreign aid and private debt and portfolio equity flows to these countries (The World Bank, 2013, p. 1). It is important to notice that unofficially transferred remittances are estimated to represent additional significant unregistered inflows. The problem of underreporting is especially pronounced in developing countries with weaker financial system and economic and political instability.Most of the papers dealing with remittance flows to developing countries confirm their positive influence on local consumption and social position of local population. Recent theoretical and empirical studies suggest remittances' economic potential in circumstances when they are properly channeled into investment opportunities (land, housing, financial assets, microenterprises, education, etc.) that can boost economic growth.The goal of this paper is to investigate the effects remittances may have on both, home country consumption and savings, which opens possibilities for their channeling into profitable investments. The theoretical discussion is followed by empirical evidences based on Serbian economic data. Finally, suggestions are provided for possible improvements of remittance channeling into productive uses.2. Remittances and consumption in receiving countriesIn this part of the paper we examine consumption patterns related to the inflow of remittances. The initial economic position and households' living standard are main determinants of remittances usage in the home country. Better initial economic situation allows migrants and their families to use remittances more for savings and investments. On the other side, for very poor migrants' families, the priority is to increase consumption and meet existing financial obligations rather than to save received funds.The main motive for sending remittances to the country of origin is the concern for individuals and families. According to the so-called Insurance hypothesis (as it is defined in Kapur, 2003), remittances have a role of insurance in lower income countries and a significant impact on poverty and equality. Also, because they provide an additional income to individuals/households, they are critical for personal consumption in poor states. Empirical facts show that the inflow of remittances increases when home country experiences some sort of macroeconomic shock, which is in accordance with the above mentioned hypothesis. The increase of the value of remittance inflows is due to the fact that the remitter experiences a positive income shock due to the devaluation, while the receiver faces a negative income shock because of the recession. According to the results of one empirical research (Kapur, 2003) using balanced and unbalanced panel data, share of remittances in personal consumption is higher during the period of economic downturn than during the "regular" times.Apart from this effect of poverty alleviation - resulting from the fact that remittances increase the average income and provide less vulnerability to shocks, it is especially important to emphasize their potential to increase the long-term consumption. Investing this additional income into savings, production or human capital can provide long-term benefits, by increasing the economic growth, future consumption and therefore reducing the dependence on external sources of financing.Although savings and investments based on remittance inflows can generate various long- term benefits for individuals and the home country (see the next part of this paper), the effects they have on current consumption can also be very positive if remittances are used for consumption financing of domestically produced goods and services. …