Why you should care
Because in an interconnected world, distant events can still impact us.
Charu Sudan Kasturi
OZY Senior Editor Charu Sudan Kasturi's column, "Butterfly Effect," connects the dots on seemingly unrelated global headlines, highlighting what could happen next and who is likely to be impacted.
Mail wedding invitations: check. Book hall in Kottayam, Kerala, for the ceremony: check. Plan menu of local delicacies for the celebratory luncheon: check. After months of planning, it was all coming together. Then, a week before the big day, the bride’s parents demanded that the wedding be postponed. It wasn’t that they didn’t like their prospective son-in-law, Shankar Thoppil, but they didn’t know how the 31-year-old would be able to support his new wife after taking a 30 percent pay cut as a condition of keeping his managerial job with a Kuwait construction firm. “My dreams, my life — everything is on hold,” Thoppil says.
Four years ago, when oil prices plunged from around $110 a barrel to less than half that amount, there were lots of cheering from energy guzzlers like India, which imports 75 percent of its oil. The celebration, however, was not universal. Way down south in Kerala, a coastal sliver state along the Arabian Sea, more than 2 million families are mourning a parallel phenomenon: the loss of remittance payments sent home by dutiful sons and daughters working in the Middle East, even though oil prices have now gone up again.
The Kerala immigrant worker would send almost everything he earned back home.
K.V. Shamsudeen, Indian-born Dubai entrepreneur
The umbilical cord that stretches across the Arabian Sea extends back to the seventh century, when Arab traders introduced Islam to India via Kerala. The 1970s construction boom in the Middle East, fueled by an oil price surge, drew the first wave of Kerala workers. By 1998, 1.4 million Keralites were toiling in the region, a number that exploded to 2.4 million by 2014. Remittance money kept pace, soaring from $2.2 billion in 1998 to $9.2 billion in 2014. “The Kerala immigrant worker would send almost everything he earned back home,” says K.V. Shamsudeen, an Indian-born entrepreneur in Dubai who runs financial management classes for Indian workers.
The folks back home should have taken one of Shamsudeen’s courses. According to a 2002 study by Syracuse University professor Prema Kurien, Kerala families spent much of their remittances on “lavish gift giving and entertaining.” By 2012, the state had the most cars per capita in India, and it was the country’s biggest consumer of gold. Paradoxically, it was the least industrialized state and the one with the highest unemployment, even though it has the country’s highest literacy rate. Kerala had become dangerously overleveraged on remittances, with nearly two-thirds of households dependent on the Middle East, according to S. Irudaya Rajan, a demographer at the Center for Development Studies in Kerala’s capital, Thiruvananthapuram.
The remittance party ended abruptly with the crash in oil prices, which has since forced crude-producing Middle Eastern countries to cut back on public spending and subsidies. Some of the region’s biggest companies went bankrupt; others have cut back, laying off employees. No country outside the region has been hit worse than India, which has 8 million workers there. In 2015-2016, India’s inward remittances — more than half of which come from West Asia — fell for the first time in six years, dropping from $44.1 billion in 2014-15 to $37.6 billion, according to India’s central bank.
With oil prices back up, the total volume of remittances has since recovered. But Middle Eastern countries are addressing local unemployment by tightening laws for immigrant workers, while also diversifying their economies to depend less on oil and gas. That means fewer jobs and rising uncertainty in the Gulf, which in turn has in 2017 and 2018 led to a decrease in emigration from Kerala to the region, for the first time in half a century. Within India, no place is affected more than Kerala, which derives a third of its GDP from remittances.
“Every aspect of life has been affected,” Rajan says.
To be sure, past crises in the Middle East also have impacted Kerala. Saddam Hussein’s invasion of Kuwait in 1990, for example, forced more than 100,000 Indians, mostly from Kerala, to return home. But its different this time, says K.C. Zachariah, a demographer who leads the Kerala government’s research into the state’s Middle East addiction. The U.S. has doubled its production in recent years, cutting import demand, so oil prices are unlikely to go up to earlier levels anytime soon. “This time, the impact will be felt longer and deeper,” Zachariah says.
Other societies dependent on remittances have also suffered. The 2008 economic downturn greatly reduced housing construction in the U.S., which in turn torpedoed remittances to Mexico. The eurozone financial crisis sent remittances workers in Western Europe back home to Albania and other East European nations. Overall, remittance dependency is increasing, says Kathleen Newland, co-founder of the Washington, D.C.–based think tank Migration Policy Institute. Countries like Kyrgyzstan and Tajikistan share Kerala’s paradox, Newland says: Remittances bring in a third of the GDP but don’t translate into industrial development. “Governments get away with it longer because even without development, people aren’t going to starve,” Newland says. “But it makes these societies very vulnerable.” That vulnerability will only grow, says Dilip Ratha, head of the migrations and remittances unit at the World Bank, whose global projections show the growth rate of remittances over the next few years will be the lowest since the organization began tracking the phenomenon in 1970. “That’s the new normal,” Ratha says.
As for Kerala, there may be a silver lining. Unlike in the past, the doctors, nurses, managers and other skilled workers who constitute a growing portion of the Kerala presence in the Middle East are less vulnerable during times of economic turmoil than their unskilled predecessors, Zachariah says. And Kerala finally may be forced to broaden its economy. “This may weaken Kerala’s links with the Middle East for a while,” Shamsudeen says. “But when you’re drowning in an economic crisis, nostalgia isn’t much help.”
(This story has been updated since it was first published on October 20, 2016.)