Sending money home

Can remittances reduce poverty?

At least US$232 billion will be sent back home globally by around 200 million migrants to their families in 2005, three times official development aid (US$78.6 billion dollars). Moreover, migration and remittance experts argue that the unofficial transfers could be as large as formal flows. What impact is this having on poverty reduction?

The US Treasury Department froze the funds of Al-Barakaat, Somalia's main bank, in November 2001 for suspected links with Al-Qaeda. For people relying on remittances from families abroad, such as Muhammad Abdi (above), this has had a devastating effect. He has nine children and the financial support he received from his sister in Sweden was critical. He has not had any money since the bank's funds were frozen.
Photo by: Martin Adler/Panos Pictures

Remittances are a portion of the earnings a migrant sends to relatives back home. Most migrant workers send home between US$2,000 and US$5,000 a year - or 20 to 30 percent of their earnings. In most cases, these migrants receive low incomes working in the service or agricultural industry, for example as caterers, cleaners, or farmers. They respond to a demand for foreign labour in the host country.

Understanding how remittances work

The social and productive base (such as natural resources, human resources and industry) of an economy defines the ways in which remittances function. They should be seen as foreign savings: as with aid, international trade or investment, remittances interact with the structure of the local economy in the home country.

To understand the extent to which a local economy provides opportunities for migration and the flow of remittances, we need to analyse the productive forces in an economy. For example, how efficient is the economy? How modern is it? How much diversification is there; how do entrepreneurs operate? What technology tools exist? Does the government provide an enabling environement to motivate interaction between investment and production?

If an economy is unable to produce competitively, its labour force will be reduced and eventually some workers will migrate to take care of their families. But recipient families can only do so much with the money received; they are dependent upon whether their local economy can provide an effective supply of services and products in response to demand.

Consumers' knowledge of what they can get depends on efficient information of the marketplace and a supply-driven economy and business that reacts to remittance recipients' interests (such as savings, credit, education and health). Women, for example, can improve their social position when the local economy offers incentives: if the local economy cannot meet that demand, goods will be imported.

How can remittances help?

Sending money home is a commitment to family needs that represents between 20 and 50 percent of a migrant's income - which, when added together, has an enormous potential to help reduce poverty. In this issue of id21 insights, Richard Adams shows that when remittances are increased by 10 percent, the share of those in poverty declines by 3.5 percent. Ismail Ahmed's article on Somali remittances illustrates how US$1 billion provides a lifeline to one of the poorest countries in Africa and warns of the danger of restricting the flow of remittances with tighter regulation. Approximately US$46 billion are sent back to Latin America and the Caribbean each year by 30 million migrants. As Rodolfo García Zamora demonstrates, remittances have an enormous potential to contribute to poverty reduction and economic development, if invested in infrastructure and employment activities.

Sarah Mahler discusses how remittances are mostly spent on basic family welfare such as food, clothing and education. However, little research exists on the gender issues involved. These large financial transfers have the potential to generate wealth and increase savings and investment for the household and the wider economy. Marta Ruiz-Arranz's research shows that migrants invest their savings in small businesses, real estate or other assets in their home country and that remittances increase when economic conditions back home improve.

Remittances also have a macroeconomic impact and don't necessarily decrease with global economic downturns. They may even offset or stabilise the ups and downs of financial cycles. Graeme Hugo describes the important economic role of remittances in Asia and shows that if they stop suddenly the impact can be dramatic. The terrorists attacks of 11th September 2001 in the USA and the war in Afghanistan caused a 17.6 percent decline in remittances to the Philippines.

The challenge for practitioners

Practitioners (such as donors, national governments, non-governmental organisations) need to create opportunities for remittances to improve and be absorbed into a local economy. Policies must allow remittances to promote development and alleviate the failures or weaknesses of the local economy.

Institutions working on economic development need to focus on three areas:

• Integrating remittances into the economy of a country: exploring the interaction between the local productive base of an economy and the cause and effect of remittance and other migrant transfers.
• The macroeconomic behaviour of remittances: specifically, that of the factors that generally influence responses of productive forces such as investment or trade. This means paying close attention to the effect that price increases, foreign exchange rate fluctuations, interest rates or unemployment have on sending remittances home.
• The impact of remittances on economic growth: this is particularly important in countries with a strong impact on national income, particularly where remittances represent more than 5 percent of a country's Gross Domestic Product, or 30 percent of total exports.

Policy implications

The following policy options would strengthen 'transnational' families and the home country's economy:

Reduce transaction costs
The average cost of sending money home is almost 10 percent of the total sent, due to market inefficiencies such as lack of competition, use of costly transfer methods and inadequate means of transferring money. Policies need to encourage a competitive environment, adopt and promote cost-effective and value-added payment technologies attractive to consumers.

Develop financial democracy
Making use of remittances to assist in providing access to financial systems and affordable financial services is an important policy tool. Senders and recipients need access to bank accounts, savings, loans, insurance services and so on; commercial and microfinance institutions can attract senders and recipients into the financial system and increase savings. They can also use remittances within the community for entrepreneurial activities. Offering women access to financial institutions is particularly important as they are often excluded from credit and savings opportunities.

Improve health and education
At least 10 percent of remittances are spent on education and health. Insurance and banking institutions can work with schools and health care systems to offer services such as health insurance and scholarship investment funds. Governments and the private sector can promote investment in education funds to increase enrolment rates, school attendance and length of time spent in education for children in communities receiving remittances, as Ernesto López Córdova's article explains.

Promote tourism and trade
One third of migrant remittance senders visit their home country once a year and spend an average of US$1,000 per stay, buying home-produced goods. This demand for tourism and trade is often unmet by an inadequate supply of services and goods. Governments and private sector institutions need to develop profit-making schemes such as investing in small hotels and introducing migrants to lesser-known tourist attractions in their home countries.

State policy for migrants abroad
The huge number of migrants worldwide and their engagement with the home country means that governments need to promote an outreach policy to the community living abroad. This would build confidence between the diaspora and the state, enhance and strength links between the two and ensure joint development strategies.

Do no harm
Remittances are first and foremost a private family affair: no one can tell other people what to do with their money. Taxation or imposing tough measures, as described by Ismail Ahmed, is harmful to individuals already facing serious constraints. Regulatory measures that are harmful to senders will reduce the impact remittances have on development.

Manuel Orozco
Remittances and Rural Development Program, Inter-American Dialogue, 1211 Connecticut Av. NW, Suite 510, Washington, DC, 20036 USA
morozco@thedialogue.org
www.thedialogue.org

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