Just in January 2022, the country celebrated an increment in diaspora remittances to Zimbabwe as they reached a whopping US$1 billion in 2021. Many factors contributed to the situation. You can read this article for some background on that. Many Zimbabweans can understand the importance of diaspora remittances from an individual or household perspective but do not understand how pivotal diaspora remittances are to the economy of Zimbabwe as a whole. To do this we will have to put on macroeconomic lenses and abandon some assumptions we make when it comes to the economy. So, why are diaspora remittances important to Zimbabwe?
Let’s start with some clarity on remittances. As you should understand these are endowments in cash or kind that are remitted (sent) by Zimbabweans or people linked to Zimbabweans from outside the country. Of course, our concern is the cash remittances but it’s important to note that in reality, non-cash remittances count and I will explain why later. So that US$1 billion figure looks at money remitted through official channels and on the books so to speak. However one of the assumptions we will have to drop is that remittances only count when moved through official channels. We will see shortly that it doesn’t matter how the money is remitted, the result is the same.
Let’s take a look at the macroeconomics of economies to set the stage for our discussion on the importance of diaspora remittances to Zimbabwe. We will endeavour to keep the discussion as simple as possible so you can understand as much as possible. Economies, for our purposes, have two important players customers and businesses. Regular readers will recall at least one occasion where I have used the words “a business is a customer, there is no business without a customer”. So in our two groups, businesses are people providing goods and services. This includes businesses in any form whether micro, small, sole traders or corporations. Customers are simply those who pay for these goods and services. No individual customer affects the market by themself but many customers can affect the economy. What I mean by this is, if one customer stops buying it doesn’t matter but if all or a big enough majority of customers stop buying we have a problem, more on this later.
Aggregate demand is a term used to describe the combined demand for goods and services in an economy. This combines demand from organisations such as the government and entities such as businesses and individuals. When we talk of aggregate demand we are talking about how much money is available in an economy for those who step up to produce what is required. To demand, those aforementioned economic participants must have money and this is where things start linking up with remittances. We just have to look at the employment situation in Zimbabwe to grasp this fully.
Employment, Unemployment and Underemployment
Often discussions on employment will make the matter black and white, one is employed or unemployed. The definition of employment here is where a person spends at least an hour in a week engaged in income-producing activities. So clearly people employed full time, part-time, and casually are all employed. Here too the self-employed and piece workers are also employed. The problem with this definition is it doesn’t look at the quality of the employment. Quality? Let us assume that the global average (monthly) wage for a bricklayer is US$1000 then a bricklayer in country X who spends as many hours working as a bricklayer in any other country but earning US$100 is considered underemployed. This looks at the output of the work rather than the input. I’m sure you see where I’m going with this. Zimbabweans are severely underemployed. Not all Zimbabweans but an overwhelming majority of employed Zimbabweans are underemployed. The result is very little money in the pockets of people (and businesses). Which means low aggregate demand.
It is very difficult to say to exactly what extent this happens as it differs from situation to situation. Members of the Zimbabwean populace who would otherwise be unemployed or underemployed are earning decent (but not perfect) wages in the diaspora. Remitting some of this money to take care of family or engage in business they are adding to the aggregate demand. Again it’s not the same for every situation. Some receive occasional support, some receive total support and others a mix. However, we can all agree that remittances are putting money in the hands of customers, the customers that businesses need.
What would happen without remittances?
I guess to understand the importance of these remittances we have to look at a world, or Zimbabwe, without them. We have outlined how diaspora remittances are propping up aggregate demand by putting money in the hands of customers. So without remittances, we would have little to no money in customers’ hands as they would have to live on their domestic wages. I stress again that it is not everyone who is underemployed or unemployed but everyone will feel the effects of lacking diaspora remittances as you will understand shortly. With little money in their hands, some members of the economy would not be able to afford some goods and services and would stop buying altogether.
Economies of scale
Economies of scale refer to the advantages that businesses gain from operating at their size. To paint a simple example we will use a factory and a tomato vendor. A factory pays a fixed amount for rent, this does not change and indirectly influences the cost of producing whatever they produce. Let’s assume this factory has a rental of US$1000 per month and they produce fridges. In a normal production month, they produce 1000 fridges meaning the rental cost is absorbed at $1 per fridge. If for some reason like customers stopped demanding fridges they only produced 1 unit, that one fridge would have the full $1000 rental added to its cost. That makes firstly the fridge unaffordable by any measure and secondly means the equipment and workers are not required and will be sold and laid off respectively to keep the factory alive. Now let’s think about our tomato vendor. Assuming they grow their tomatoes and spend their entire day (7 am to 7 pm) selling tomatoes at a small stall. Let’s assume each tomato sells for $1 and they normally sell 100 tomatoes a day. So their earnings are roughly $8.25 per hour. That’s a good value for an hour. Now if customers were scarce and stopped buying to the extent that the vendor only managed to sell 10 tomatoes in a day that brings their earnings down to $0.83 per hour. At some point sitting there for 12 hours becomes unsustainable and they may leave this activity altogether and pursue another.
To tie it all together we can see that diaspora remittances are propping up aggregate demand in the economy, without which, even those who can afford things would soon not be able to afford them or those producing them would stop producing them entirely. Businesses closing down would render more people unemployed and shrink aggregate demand further and there is only one possibility of economic implosion.
Footnote: To explain some of the concepts in this article we have also had to assume a closed economy, so no ability to import or export goods and services. Introducing this would slow down or prevent some effects mentioned here but the point of this article was to explain the importance of remittances in a way they could be understood.