Remittances as a force for sustainable development
My parents moved from China to the UK in 1989 after Deng Xiaoping started the process of opening the Chinese economy which included the relaxation of migration rules. In London they found work in professional roles as engineers. My mother’s salary in the UK was 24 times higher than for her public sector role in China. The expectations on them from their families were clear. Every month they would dutifully send money back to their parents and siblings, and on their infrequent return trips home they would bring suitcases full of gifts including televisions and Western fashion accessories. This is a universal story of the worker who may be an internal migrant travelling from their village to a city or an international migrant who travels to another country in search of higher pay and better opportunities, sharing the benefits of their new life with their family back home. Remittances are the money and goods that flow from migrants to their families and friends in their origin countries. The volume of remittances often exceeds official development aid, but they are fundamentally different in that they are private funds. (Migration Data Portal, n.d.) In the light of employing capital for purpose, this essay will explore ways in which stakeholders can employ remittances to create more inclusive economic growth in developing countries. The essay calls for the creation of an international working group of government stakeholders, financial services providers and multilateral organizations to standardize regulation and technology interoperability for digital remittance platforms.
The World Bank estimated that in 2018 global remittances to developing countries was $528 billion. This was a 10.8% increase from 2017 which also saw record breaking remittance flows. (The World Bank, 2018) The top recipient of remittance flows was India, with $80 billion in received remittances followed by China with $67 billion. Some countries are extremely dependent on remittances. Forbes found that in 2017, for nine countries remittances contributed over 20% of GDP. The two highest dependencies on remittances were seen in Kazakhstan and Tonga, for which remittances contributed 35% and 33% respectively to national GDP. (McCarthy, 2018) There are two observed benefits of remittances. Firstly, they can reduce the volatility of recipient countries’ economies by stabilizing overall demand for goods and services. (Chami, Hakura, & Montiel, 2009) Secondly, they have created a fiscal cushion for countries with cash shortages. (Chami et al., 2008) However, although we might expect this significant flow of funds to developing countries to fuel economic growth, studies so far have seen little evidence of this being the case.
A World Economic Forum article (Fullenkamp, 2015) presents some reasons why remittances are not producing as much sustainable growth as we might expect. In countries that receive remittances, that money is spent on a multitude of paths that have different impacts on economic growth. For example, while money spent on schooling has a largely positive impact on growth, spending on land or housing does not contribute to GDP growth. There is also the issue of moral hazard, in which a family receiving remittances has less incentives to engage in productive work because they hope to rely on money transfers from abroad. Finally, the intentions behind remittances are usually as insurance against poverty and to fulfil basic needs of food, clothing and shelter rather than on investment which would promote economic growth. Fullenkamp suggests that remittances can promote growth by stabilizing macroeconomic conditions and enabling governments to focus on investment projects including infrastructure and public institutions.
To improve the role of remittances in international development, various actors must collaborate. These include governments, financial services providers and the individual families that decide how to spend their money. The key recommendation for harnessing the power of remittances to promote sustainable development is the creation of a working group that addresses the challenges and inconsistencies facing remittances. The coalition should be stewarded by an existing program within a multilateral organization such as the World Bank Consultative Group to Assist the Poor (CGAP) or the United Nations International Organization for Migration (IOM) with the neutrality and global reach to have an influence in shaping policy. Government stakeholders, policy advisors and financial services providers should also be represented on the coalition, providing valuable insights on process, regulations and technology. The coalition would work together to define standardized regulations to enable cross-border transfers, interoperability and sustained innovation in the field of remittances, as well as ways in which to maximize the impact that remittances have on sustained economic growth. Three specific issues that the working group would be expected to discuss are explored below. They are regulation and the role of governments as stewards of remittances, interoperability and collaboration between remittance service providers (RSPs) and financial education of the recipients of remittances.
Regulation and the role of government
Currently, where formal remittances are those made through official channels, informal ones are private and unrecorded transactions. It is difficult to estimate the scale of informal transactions, but studies have found that their popularity varies by region and type of migrant. For example, informal remittances are more popular in sub-Saharan Africa and Eastern Europe than in East Asia and the Pacific, and international migrants are more likely to use formal channels (banks, Western Union, post offices) than internal ones. (Social Science Research Council, 2009) There are multiple reasons why migrants prefer informal channels. There is the issue of cost which is often very high and reduces the amount of money that reaches the recipient. There are also often bureaucratic hurdles including anti-money laundering (AML) regulations which can make transactions burdensome. Governments can create a more amenable environment for remittances by reducing the AML regulations for smaller transaction sizes.
Technology has improved access to many basic financial services in developing countries including person-to-person transfers. Mobile money is one such service, in which a network of agents provides basic financial services to their communities. Mobile money has transformed the way that low-income and rural populations transact in many developing countries in sub-Saharan Africa and Southeast Asia. This digitalization of remittances has enabled faster and more secure transactions. Where a woman in Zambia, say, may have previously relied on informal networks of bus drivers and travelling friends to deliver money back home, she is now able to go to a nearby agent with their mobile money and a phone and send money to her sister across the country. While mobile money has eased the process of internal remittances in many countries, challenges remain with international remittances. Cross-border regulations and tariffs often impede transfer processes and increase the cost of sending money overseas. Inconsistent banking regulations from country to country make it difficult for organizations to collaborate in the transfers industry. If the coalition were to create an international set of regulations around digital cross-border transfers, there would be less ambiguity and more room for RSPs to connect senders and receivers in different countries.
Where remittances create a fiscal cushion and reduce poverty, governments can channel tax revenues into productive investment. The working group can advise and ideate on how governments can best channel funds and take advantage of macroeconomic stability created by inbound remittance flows to develop infrastructure and meet specific long-term economic development goals.
Interoperability and collaboration between remittance service providers
In developing countries there is a huge range of organizations involved in remittances and financial services. The International Fund for Agricultural Development puts the number of remittance service providers to be greater than 3000 organization. (IFAD, 2017) In addition to traditional banks, there are money transfer companies like Western Union, telecommunications operators with mobile money solutions and postal offices. Often these organizations work in silos, due in part to a reluctance to work with competitors, but also due to technical challenges, including the difficulties of interoperability. Interoperability refers to the process by which systems work together and share data. In the context of remittances, it would be the process by which, for example, Western Union might work directly with mobile money. In such a situation a son in the UK can transfer money at the Western Union in London to his mother in India who could then withdraw the money in cash from mobile money agent. The technological platforms of different types of RSPs were designed independently and getting them to work together through reverse engineering can be a challenging process. The coalition should design a standardized architecture for technical interoperability for these different types of organizations to enable collaboration amongst different service providers for the benefit of consumers, as well as to create room for future growth in the area of digital remittances. An environment of “co-optition”, a mixture of collaboration and competition, can increase the quality of remittance services as well as reducing the costs involved in remittance flows.
Financial education of remittance recipients
The coalition should address how individual recipients of remittances can contribute to economic growth and the challenges of consumption without growth and moral hazard. Educating recipients on, for example, the potential economic value of educating girl children may influence recipients to channel their funds into meaningful social investments. Providing business advice and workshops around how to set up or grow small businesses could guide remittance money into productive growth and investment that is crucial to sustainable development and addresses the moral hazard problem presented to the recipients of remittances. In addition to advising recipients on how to channel their funds into productive growth, the coalition should develop guidelines on educating for consumer protection. Many people in rural and low-income communities who have not been including in traditional banking are unfamiliar with protecting themselves from fraud. Teaching consumers the importance of protecting their banking information and pins when collecting cash, as well as the main types of financial fraud can build a stronger trust in financial systems.
Structure and organization of the working group
The working group would be housed in an existing program within a multilateral organization such as the World Bank CGAP or the IOM, with dedicated staff tasked with running the programs. The coalition would be centered around three task forces that would focus on the challenges laid out above. Members of the coalition would likely have a heavier focus on one of the three task forces. The government and regulation task force would require the expertise of policy think tanks and the cooperation of governments of developing countries. The technology and interoperability task force would combine the knowledge and systems architecture expertise of the RSPs with technical experts, and NGOs. Finally, the consumer education and protection side task force would combine the social aims of the multilateral organization with the last-mile delivery RSPs, such as the consumer facing departments of banks and agent networks of mobile money organizations. The three task forces would be aligned with the coalition’s overall mission of harnessing the power of remittances to create sustainable and inclusive growth, and each task force would align its mission to the overall mission.
Conclusion
Migration is currently at an all-time high, with 258 million people constituting 3.3% of the global population living outside the country they were born in. (International Organization for Migration, 2018) The number of people they support at home is even greater, with 800 million people estimated to be direct recipients of remittances, a number that is 2.5 times the size of the US population. (Lacy Swing, 2018) On an individual level, remittances have enabled the families of migrants, including my own extended family in China, to cover basic needs including food, clothing and shelter, and act as a form of private insurance in the case of emergencies. They have enabled macroeconomic stability, but currently have not been seen to improve long-term economic growth. For the development community to harness the potential of remittances, a focused working group is required. This essay calls for a working group housed within an existing multilateral organization to focus on three task areas — the role of government in enabling and standardizing regulations relating to remittances, the need for technical interoperability and co-optition between remittance service providers and finally the need to educate recipients of remittances on how to invest money rather than spend it on consumption. Remittances provide a way for migrants and their families to transform lives on an individual level and economies on a global level. Directed work can help them to make the largest impact possible in the story of global development.
Bibliography
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