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Laura Thompson

Remittances: Helpful for Development?

Migrants who leave their home countries often send money back to their families. Remittances make up a huge part of global money flows. And unlike foreign direct investment, they are resilient to crises in the countries in which the recipients live. In fact relatives abroad are more likely to send more money home when people are experiencing problems. But remittances also create dependencies and inequalities. Laura Thompson, Deputy Director General of the International Organization of Migration (IOM), gave us an exclusive interview on the possibilities and limitations of remittances as a tool for development.

DDD: People often forget about remittances. Foreign direct investment and official development aid are more in the focus of consideration. Can you tell us what role remittances play in global flows of capital?

Laura Thompson: The reason people do not normally consider remittances is that they are private flows of money. Foreign direct investment (FDI) is private as well, but specifically designed to redirect money into a productive activity. These financial flows are easier to account for and follow. ODA is also extremely easily to account for. In contrast to ODA and FDI, remittances have been systematically growing in recent years – not only because there are more migrants and more of them might be sending a little bit more money home, but also because there are more formal systems and often fewer constraints for migrants now. They can open bank accounts and it is easier to send money. Data from the World Bank shows that foreign direct investment is certainly higher overall, but it is dropping. The remittance curve is on a constant upward swing and has shown substantial and very important exponential growth from 2002 till today. ODA is a little bit more stable with a slight, though not really substantial, increase.

Remittances totalled 414 billion dollars in 2013.

Remittances totalled 414 billion dollars in 2013, and the World Bank expects that this figure will have grown to 540 billion dollars by 2016. People tend to forget that remittances do not go just from the North to the South. A lot of remittances are transferred within the North as well. It is expected that the number of international migrants will increase from 200 to 300 million over the next 15 years. This huge growth in immigration will also have an impact on the amount of remittances being sent. I think one of the main reason remittances are talked about less is that they are regarded more as private funds sent solely for family use and not necessarily for investment or productive activity.

What do migrants send money home for? You mentioned families – is there data available? Do they send it for education?

L: It is very often used to cover the family’s basic needs– these could include food, housing, accommodation and medical services. The money is also saved sometimes, put aside for the family, but it is also definitely used for consumption – to buy televisions, for example, and other goods people want. The money is also often used to invest, such as in real estate. Migrant workers send money either periodically, perhaps on a monthly basis, or sometimes in response to a specific request or demand from recipients due to a specific need – quite often the need for health care.

…remittances have a direct impact on the recipients’ quality of life. Basically they replace the state as the provider of basic services.

It really depends on the conditions people in the recipient country live in. Where basic services are not provided, there is a higher tendency for people to use these remittances to cover food, health, education, etc. As a result, the remittances have a direct impact on the recipients’ quality of life. Basically they replace the state as the provider of basic services. Where those basic services are provided, a much higher percentage of remittances is used for other things, including real estate investment, and as a result these remittances do contribute to growth because they are used in productive ways instead.

Research shows that foreign direct investment (FDI) is very vulnerable to crises. Can you explain what effect crises have on remittances?

L: I think the majority of organisations would agree that in their experience, remittances are more resilient than FDI and ODA to crises, whether these are natural disasters, financial crises, or political crises. In order to have foreign direct investment, you need a secure environment to attract investment, that makes people want to spend their money and trust a system. ODA is similar, because it is extremely dependent and easily affected by financial crises. Spain was one of the biggest contributors to the multilateral system, for example, and gave a lot of money for development, but they cut their contributions by 70% in response to the financial crisis. ODA is very much dependant on the condition of the donor country.

When the family’s needs increase, migrants feel a greater urgency to assist their family members. As a result, we have seen that remittances are much more resilient to crises…

The effect of local crises on remittances is the exact opposite of the effect on FDI: If a family member works abroad, he or she will tend to send even more money back to the family when a natural disaster strikes or the political situation grows perilous. When the family’s needs increase, migrants feel a greater urgency to assist their family members. As a result, we have seen that remittances are much more resilient to crises, while ODA and FDI are contingent on them to a large extent. Another important impact of remittances it is that they make people’s lives, the recipients’ lives, much more resilient to those crises as well. Logically if you have been receiving remittances and you have got a better house or are in a better state of health because you have had access to health care thanks to the remittances, you are in a better position to confront these crises. Furthermore, as I said before, a lot of the money goes into savings, so remittance recipients have some money saved when natural disasters and financial or political crises strike. We saw that a lot in Egypt: During the Arab Spring, remittances not only continued; they actually increased, whereas ODA and FDI dropped immediately.

Remittances seem to have a good impact on lowering poverty and giving people basic security. Are they helpful for developing nations?

L: Remittances have a lot of beneficial effects; but they do not automatically constitute a solution for development: First of all, remittances increase inequality between the people who receive them and the people who do not receive them in a specific country. This can be attenuated if those remittances are used to create productive activities and generate jobs, but this is often not the case. The funds often only directly benefit family members by meeting their basic needs.

Very often remittances create a culture of dependency.

In countries where a large percentage of the population has immigrated and is sending back remittances, these remittances are more interesting than the salaries in the home countries. This creates a labour shortage such as the one we have seen in Myanmar, for example, at the boarder provinces with Thailand. It is much better to live in Myanmar and work in Thailand, which has created a labour shortage in Myanmar.

Very often remittances create a culture of dependency, where family members who receive remittances are not really interested in working. Their basic needs are covered and they do not need to look for work. This is a phenomenon that is extremely painful for migrants. Another phenomenon that has been observed in some places is that remittances increase local market prices and exchange rates in the country receiving the remittances, which is a huge disadvantage for locals who do not benefit from remittances. There are a lot of other aspects that are important to keep in mind. The people who send the remittances back home take risks – they often migrate under irregular conditions. Together with their families, they bear the costs for migration and suffer the social costs too. Children are often left behind with the rest of the family.

These costs of migration that enable people to send remittances have to be included in the equation.

Migrants who have paid large amounts of money to go abroad are very often subject to unfair recruitment processes or to human smuggling and trafficking. They are also often saddled with high debts. Not too long ago I was in Nepal, where I was told that some of the migrants who leave Nepal to go to Gulf countries spend the first year and a half working to pay the debts they incurred migrating from Nepal to the respective Gulf country. This is in addition to the poor working and living conditions and the low wages the migrants have there. The fact is that the majority of migrants, especially those in irregular conditions, are very often willing to take jobs that local people will not – we call these the 3D jobs: dangerous, dirty and difficult. These costs of migration that enable people to send remittances have to be included in the equation.

Is there a way to enhance the positive effects of remittances? Can the spending be influenced strategically?

When a country provides the basic services for its population – meaning that the population is not forced to rely on remittances to cover these costs –you can certainly have much better and more efficient policies to enforce the productive use of remittances that will drive the country’s development– but you need to have the basic services covered. Another very important aspect is to reduce the cost of remittances. Costs for remittances vary enormously depending on where you are. The objective is to reduce them to 5 % of the total amount, but there are places, mainly in the South and in Africa in particular, where the costs can be up to twenty percent. As a result, a lot of entities have been working on finding ways of reducing transaction costs and we are trying to support them. In 2010, the African Institute of Remittances was created with the support of the European Union and the World Bank. We have been working with the African Development Bank to develop a clear understanding of where the transaction costs of remittances in Africa come from and how we can reduce them. Reducing recruitment fees is another important part of our work. People often work the first 1.5 years just to pay off their debt. If you reduce these costs, they could start sending remittances right from the start. At IOM we have launched public private partnerships aimed at creating a system of ethical recruitment that does not include fees paid by migrants just to get there. You need a much better control system of recruitment agencies, which are normally private entities. The initiative is called IRIS - the International Recruitment Integrity System – and is a voluntary accreditation system for international intermediaries and employers. This system guarantees that hired workers arrive according to a set of principles, some of which are that migrant don’t pay fees; that they get the wages they were promised when they accepted the job; and that they can retain their passports.

Sending money to set up a shoe factory for family, as a place where relatives can work…

So strategically we have a lot of programs at IOM for encouraging the productive use of remittances. Another good example is a programme in Mexico: When migrants living in the US decide to use part of the remittances that they send to Mexico in order to develop productivity in Mexico, they only need to pay 1/3 of what they intend to invest. Another third is paid by the local government and the remaining third by the federal government of Mexico. There are a lot of programs like this where we aim to attract money from migrants to be used in a productive way by offering them advantages. We are talking about small projects, not big money, but every little bit helps. Sending money to set up a shoe factory for family, as a place where relatives can work, is an example. Eventually they might hire two or three people from the community and it might grow from there. It could be a boat that allows the family to fish. We are talking about productive activities that have an impact on the community or society.

If we look at the micro level, how much do remittances contribute to economic growth?

There has been a lot of debate around this. Many people argue that remittances have a very positive effect, not only on the private sector, but in general as well. But there are indirect effects that remittances have on the micro level, even if people use the money to pay for the basic services that the government does not cover. Obviously, a healthier and better educated population is a more productive population. So even on a very basic level, remittances have an impact on productivity on the national level and economic growth in general. Stronger consumption also strengthens the internal market and will lead to more growth in general. Also there is a type of social remittance if we think of the links between the diaspora and the original country. This results in larger investments in the countries. It is not necessarily a direct equation, because the volume of remittances simultaneously reveals the development challenges a country is facing.

We have to keep in mind that these are private funds that the people receiving and sending them can use in whatever way they want.

As a result, nationals abroad feel the need to send money. For an emerging economy, remittances might decrease because locals now have other options and less need. The whole topic of remittances is a very complex issue and requires a broader recognition of the specific responsibilities and capacities of the developed and developing states. What are the gaps that remittances might cover? We have to keep in mind that these are private funds that the people receiving and sending them can use in whatever way they want. The only thing we can do is facilitate advantageous situations for those who chose to invest. Promote the use as investment by creating a mechanism, but that’s really all.

Interview by Frederik Caselitz

Photo: ©iStock.com/jcarillet

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