Financial remittances – a tool for development?

16 Oct 2014
  • Ms. Laura Thompson | Deputy Director General, International Organization for Migration

Photo from the cover of GLOBAL DEVELOPMENT GOALS (Reuters)

By IOM Deputy Director General Laura Thompson
This article originally appeared in the Global Development Goals: Partnerships for Progress, a publication by UNA-UK. Click here to view and download the full publication

The hard-earned money that migrants send every day to their loved ones back home represents a vital economic lifeline for millions of struggling families around the world. These remittances improve standards of living in countless ways and help to make vulnerable communities more resilient to shocks, like economic downturns and natural and man-made disasters. For recipients, remittances increase household income and provide the resources to pay for basic needs such as food, education, housing and medical services. In disaster-prone areas, remittance-recipient households are likely to be more resilient to the effects of natural hazards through better housing, increased ability to rely on savings as a buffer to cope with unexpected events, and improved access to communication networks and emergency information before and during disasters.

Remittances are also a form of social insurance against political and economic crises and a kind of livelihood diversification, particularly in the face of climate change. Egypt is a good example. Migrants provided for their families in the country when political instability struck during the Arab Spring. During this time, remittance inflows increased while investors and donors were pulling out.

The global scale of remittances is staggering. The World Bank expects that by 2016, the amount remitted through official channels on an annual basis will be more than $540 billion, which is roughly the equivalent of the GDP of Sweden. With the number of international migrants expected to rise from 232 million today to 300 million in the next 15 years, a global increase in the amount of money remitted is likely to follow suit. In addition to financial help, non-monetary (social, technical or in-kind) transfers made by migrants and diaspora also support people and communities in their home countries.

More resilient, but costly In recent years, foreign direct investment and overseas aid have been shown to be much more volatile than remittances. In an uncertain economic environment, remittances are a vital source of foreign currency for many countries, with remittance inflows equalling or exceeding foreign exchange reserves in at least 50 developing countries. However, transfer costs remain high, particularly between countries in the global South. Intra-African transfers are the most expensive, with transfer costs exceeding 20 per cent in some cases, compared to five per cent or below in some remittance corridors between the Gulf and countries in South Asia. The World Bank estimates that developing countries would receive over $16 billion more each year than they do now if the cost of sending remittances could be reduced by five per cent over a period of five years, in line with the (now expired) 5x5 Objective, endorsed by the G8 in 2009. Many migrants use informal channels to send money, rather than banks or authorised money transfer operators, because they are more convenient or cheaper. Often they have little choice but to do so, because they cannot access formal services due to their irregular immigration status, or simply because there are no formal means, particularly in countries undergoing or recovering from crisis. However, because these informal money transfers are difficult to track, they face the brunt of increasingly restrictive antimoney- laundering and counter-terrorism regulations, leading to the closure by major banks of the accounts of some money transfer operators. One such example is the British bank, Barclays, which was only prevented from closing the account of Dahabshiil, a money transfer company widely used throughout Somalia, by a court injunction. In such circumstances, informal channels sometimes provide the only means available in countries in crisis, and are a useful and important service to migrants who are often unbanked or otherwise financially excluded. Indeed, if their actual value was recognised, they might even be considered as part of a strategic framework to reduce transfer costs globally. While the quantitative value of remittances is undeniable, it is important to note that the migration process undertaken by remittance-senders takes place in a wide range of circumstances that often have migrant workers assuming significant risks and costs. One indicator of the number of migrants who take considerable risks is irregular migration, which in the United States was estimated at 11 million migrants in 2011, and in the European Union between 1.9 and 3.8 million migrants in 2008. Furthermore, many migrants, but particularly those migrating on a temporary basis or with irregular status, are more susceptible to unfair recruitment practices, smuggling (and subsequent indebtedness), challenges in the country of destination related to poor working and living conditions, and low wages. Marginalised communities Indeed, many migrants – either because of their skills, legal status or because they are not favourably integrated in the labour market – fill jobs that are unattractive to local populations in order to be able to pay off the debts that they and their families have incurred during the migration process, and remit to those they have left behind.

As an indication, less-skilled third country nationals constituted 79.2 per cent of all non-EU nationals in 2008. Many of these factors contribute to migrants being additionally exposed to hazards, particularly in urban areas where development planning, risk reduction and other measures may not extend to marginalised communities.

Although remittances have the potential to reduce the poverty level of the recipients, the development effects may be negated by dependency on remittances as the sole or primary source of income and there are documented incidents of local market distortions. Most critical are the social costs of migration and the economic, social and structural inequalities that are exacerbated by remittances between recipients and non-recipients. Another question that arises is to what extent the practice of remitting and the volume of remittances reveal the development challenges that senders and recipients face. For instance, on the one hand migrants may face considerable social pressures to remit. On the other hand, remittances are often used to afford basic services, to overcome gaps in social security and education systems, and credit markets. Accordingly, an appraisal of the impact of remittances on development presents certain complexities that need to be taken into consideration, recognising that the responsibility for development lies with states and not migrants.

Maximising development potential Remittances must be taken into account in the development goals that are currently being set for 2015 and beyond. Their role is within a framework that recognises the human dimension of migration – the social, cultural and financial contributions of migrants, as well as the massive sacrifices that many have had to make along the way. At this stage, policymakers have the opportunity to consider remittances and other social benefits of migration under a new, wider lens, where remittances are recognised for what they are – the private funds of migrants, rather than a suitable source of financing for development. One of the main priorities should be the reduction of transaction costs. Their reduction would make more money available for migrants and the recipients of their remittances. This will require a concerted, collaborative effort among governments, the private sector and the international community.

A multi-faceted strategy should seek to address not only the shortcomings of the international regulatory framework, but also the promotion of innovative remittance mechanisms and a wider array of money transfer operators. Financial education initiatives for migrant workers and recipient households are a proven way of increasing the likelihood that remittances positively and directly impact the life of recipients and their communities. Above all, remittance-linked initiatives must be part and parcel of a wider development agenda that addresses the systematic lack of basic services for communities in countries of origin rather than relying on remittances to fill the gaps.

Governments have a great role to play by promoting policies and programmes that create enabling environments for remittances and, more generally, by including all aspects of migration in their development-planning policies. Any discussion about remittances should occur in a framework that factors in costs and opportunities and takes into account the wide range of social and economic issues that shape migration flows.

Ambassador Laura Thompson is the Deputy Director General of the International Organization for Migration.