Saving for those back home

Remissen; Rimessen; Rücküberweisung
Commuter train coach being cleaned at Swiss Federal Railways maintenance facility in Oberwinterthur/Switzerland.
Article as analysis
Migrants' remittances hit a new record in 2014. Some USD 600 billion were transferred to home countries worldwide. Yet the data situation is unclear and the discussion on development benefits complex.

Since the turn of the century, migrants' remittances to their home countries have risen from US$126 to US$575 billion annually. Of that amount, more than 450 billion went to developing countries. Yet only a small portion went to the poorest and least developed countries (13.9 and 38.2 billion, respectively). Rather surprisingly, only about half of the transfers originate in industrialized countries in each case, while 34% take place between countries in the global South (see diagram). In its report entitled «Sending Money Home», the International Fund for Agricultural Development (IFAD) focuses on transfers from industrialized countries to developing countries. The other figures used in this article are drawn largely from this report.

It is no surprise that the most populous countries are also the biggest recipients of remittances. Smaller countries receive smaller amounts, though proportionally, these transfers in some cases are as much as one-third of gross domestic product (GDP). The countries most dependent in that regard are Nepal, Liberia and Tajikistan. The enormous importance of remittances is also illustrated by the example of Egypt, where they are four times the revenue accruing to the government from the Suez Canal.

Remittances are receiving ever more attention in the discussion on development funding. The UN assumes that an annual amount of US$5000-7000 billion will be required each year to implement the 2030 Agenda for Sustainable Development. In this context, 450 billion in transfers would be a welcome contribution. But, these inflows should be juxtaposed with outflows. The Washington based research and advisory organization Global Financial Integrity thus estimated illicit financial outflows from developing countries at 1,100 billion in 2013. They therefore exceed inflows from remittances by much more than twofold.

How is the money being spent?

Studies on the use of remittances from migrant family members show that the level of such remittances remains relatively stable and reacts less markedly to financial crises or economic downturns than other financial flows. Apparently, migrants first cut back their own spending before reducing the amount of their remittances to their family members. In this way they help, especially in times of crisis, to offset swings in the economic cycle. In addition to general household spending, this money often goes towards children's education or is invested in a family business. As pertains to development benefits, it is of relevance whether spending on investment and consumption goes more into imports or towards stimulating the local economy. Depending on the context, therefore, transfers may positively or negatively impact the development of the local economy. When remittances are regular and constant, one result could be the withdrawal from the job market, as no additional income is needed to maintain a certain standard of living. In positive cases, it leads to less child labour.

Depending on context however, transfers from abroad cover only the most pressing daily needs and would have to be considered more as emergency assistance or reconstruction rather than as development funding. Thus the Filipino population for example benefited considerably from the solidarity of its diaspora following Typhoon Hainan.

One man's need is another's business

Vast sums of money are being made from the remittances business. The average cost of transferring US$200 has fallen from over 15 per cent to 7.5 per cent in the past 20 years, but has stagnated at this latter level. In 2015, however, and in the framework of the 2030 Agenda for Sustainable Development, the world community set the goal of reducing transfer costs to less than 3 per cent. Money transfer offices like Western Union or Money Gram facilitate over 2 billion transfers annually, for which they charge about US$30 billion. In particular, transfers to countries with poor financial infrastructure that are not adequately connected to the international banking network are still being charged transaction fees of over 20 per cent. When it comes to transfers from Switzerland to Serbia and Sri Lanka – as countries with large diaspora communities in Switzerland – this country is among the most expensive worldwide. For a 200 franc transfer, fees of about 30 francs or 15 per cent are levied. Transfers to Muslim countries are generally subject to high costs. In some cases banks even refuse to make such transfers, as they prefer to avoid the trouble of complying with laws on terrorism funding. Migrants must therefore resort to the available formal and hence more costly channels, or to informal channels.

The discussion around the development benefits of remittances must also include wage-earning capacity in the destination country and hence access to the labour market. There is at least partial information about the appalling working conditions of migrant labourers from Asia in the Gulf Emirates. But in Switzerland too, the conditions are not always rosy. Whether a sex worker or an illegally employed domestic worker, many of them regularly send money home.

If migrants' remittances to their home countries are to contribute more to sustainable development, action is needed on three fronts: the fees must fall below the agreed 3 per cent; migrant workers must be paid a living wage; and migrants must have access to the regular labour market.

Sources:

Sending Money Home: Contributing to the SDGs, one family at a time. IFAD, 2017  
Migration and Remittances Factbook 2016, World Bank


Private development aid

es. Remittances are generally regarded as private development aid. The data situation is unclear and frequently based on estimates. The development benefits of these transfers are highly context-dependent. The World Bank is the main source of data. It bases its calculations on information from central banks as well as national statistical offices. Also included are payments to foreign personnel (for example in embassies, UN organizations and foreign firms). This definition does not conform to the general understanding of remittances as transfers from migrants to family members in their country of origin. Besides, the estimates do not include payments made via informal channels. The figures therefore show a distorted picture, which in a narrow sense both overestimates (in countries with a heavy UN presence or many foreign companies) and massively underestimates remittances from migrants.