Remittances: A Complement to International Aid

By Rohit Sudarshan

The future of traditional foreign assistance is in a precarious situation. Over the past five years, Organization for Economic Co-operation and Development (OECD) countries that contribute the largest share of international aid—namely Australia, France, and the U.S.—have seen a downward trend in official development assistance (ODA) as a percentage of gross national income (GNI). Additionally, the United Kingdom’s development agency, DFID, is currently handling a surge of fraud investigations regarding their foreign aid. Countries that are global leaders must promote other financial means for international development. Few options are as important and efficient as remittances.

Remittances are payments made by immigrants to families and friends in their country of origin and represent an effective method for those in developing countries to continue to improve their standard of living. While ODA requires the coordination of government agencies as well as policymakers from many countries, remittances do not face that same constraint. The difficulty in ensuring accountability has meant that governments have misused and absorbed aid money. For these reasons, remittances can be an appealing alternative; they can move expediently and directly to a recipient that needs it.

Dangers

There are understandable concerns in reducing barriers to financial transfers. Lines of credit are vulnerable to cyberattacks and the rise of ISIS has meant that members of a diaspora can exchange their money for harmful and violent uses. With these concerns in mind, the U.S. closed the Somali remittance corridor in 2015. However, this severely impacted the well-being of Somali immigrants to the U.S. as well as many Somalis in their homeland. Consider that Somalia’s latest famine killed approximately 265,000. According to Degan Ali, executive director of Adeso, an NGO committed to finding development solutions within the African continent, the total number of people in Somalia that rely on remittance flows to access basic needs is nearly triple the number of famine victims. This means the closure of a remittance corridor could impact well over half a million people. Policy makers should remember this as they plan a response to the latest famine in South Sudan, a country where aid agencies were restricted from offering assistance and its workers subject to violence. If external aid from western actors is being restricted for political reasons, remittances should serve as a substitute. Unfortunately, across sub-Saharan Africa (SSA), remittances are subject to a “super-tax” where the cost in transferring money in SSA countries is 5 percent higher than the global average, a significant cost for workers with low wages.

Encouraging transparency in remittance transfer ensures that the money can be used for development purposes. Approximately 90 percent of remittances are used for investments in health care, education, and shelter as well as consumption of goods such as food and clothing. A transparent system of remittance exchange can be promoted by multi-lateral bodies as well as by countries in the developed world that host large groups of immigrants, notably the United States, the U.K., and Canada. Furthermore, encouraging transparent remittance transfers allows economists and scholars to study its remittance efficacy, something that is presently difficult to do because of a variety of restrictions and technological and infrastructural barriers that force many remittances to be exchanged through informal networks.

Alternatives to Aid

The early 1970s showed that development aid was nearly five times higher than the amount of remittances. Currently, remittance transfers are 2.5 times higher than aid. Due to the current trajectory, this gap may well increase in the coming decades. According to some economists, even a conservative estimate of migration trends and GDP increases means that the remittance-to-GDP ratio in developing countries will remain constant. Given the unceasing tendency of people to move and remit money, it is crucial that remittance transfers become more safe, transparent, and productive, for those making the transfers, those receiving the transfers, and the two countries involved in the exchange.

Many of the foreign governments that are recipients of aid fail to utilize it effectively for multiple reasons. Cronyism, corruption, and incompetence all play a factor in wasted ODA that does not impact the poorest of the poor – those that need it most. Two strong U.S. allies, Nigeria and Pakistan, are emblematic of this problem. Both countries are divided, have governments that are not always responsive to the poorest residents, and face security threats. Development aid can only go so far as to mitigate these problems, and other solutions can do this faster. In a recent CSIS event, H.E. Dr. Okechukwu Enelamah, the Nigerian Minister of Trade, Industry, and Investment explained that the biggest investment Nigeria must make is in its people, rather than its ports. Remittances, especially when unencumbered by high transaction costs, are direct investments in individuals who have the agency to decide how best to use the money.

Tapping Extensive Diasporas

The top ten countries for remittance recipients, unsurprisingly, all feature developing countries. Nigeria and Pakistan respectively rank fifth and eighth, above more populous countries such as Brazil and Indonesia. That both nations possess an enterprising diaspora is not a surprise; with an abundance of English speakers, both Nigerian and Pakistani diasporas are held in high regard abroad and able to work in lucrative professions that require high skills such as engineering and medicine. If both countries are deemed to be too unstable in the future for traditional aid assistance, remittances from these workers will take on greater importance.

Generally, proponents of “trade not aid” support the free movement of capital and labor. Remittances represent the nexus of capital and labor; they support the easing of banking regulations and encourage governments with extensive diasporas to ensure that remittances are tax exempt. Anti-money laundering laws and “know your customer” regulations should be adapted such that hard-working immigrants that have identification and are well-established in a given industry do not have to submit a series of examinations if they wish to send money to their families. These laws must be changed so that smaller transfers of money, done at consistent periods across a timeframe, are not interpreted as money laundering. One way is for stakeholders in developed countries to share risk across many actors where NGOs, governments, and financial institutions work together on accountability and security.

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Nigerian workers in Algeria use their phones to connect with their families at home. Increased attention to remittances will let them use their phones to transfer money more easily. Photo courtesy of Flickr User Swiatoslaw Wojtkowiak, under a Creative Commons Attribution-Share Alike 2.0 Generic License.

Policy Recommendations for Nigeria

Mobile money, which has flourished in Kenya and is in circulation in the Philippines, is one means to begin safe financial exchange across borders. It has allowed those without a bank account to transfer money and acquire greater experience in financial planning. Unfortunately, the Nigerian Central Bank has deliberately increased remittance fees by seeking to reduce the number of money transfer companies in the country. If the Nigerian government is unable to directly engage in policy planning for its diaspora, it can still be a force for good by reducing protectionism and regulatory burdens that currently exist. It is in their self-interest to do as a survey showed that nearly 80 percent of Nigerian remittances are locally spent on food, land purchase, business, and education. The example of M-Pesa in Kenya, a program that uses software for financial transfers through mobile phones, is particularly relevant to Nigeria. With the right incentives, Nigerian software engineers and innovators can help design similar software and guide the implementation of mobile money initiatives at home. They will require the cooperation of development finance institutions who, unlike aid agencies, are more likely to engage in partnerships with the promise of profit sharing. Their investment of time and money will not be wasted spending; it will be a business partnership with returns for those involved.

Policy Recommendations for Pakistan

Continued frustration with Pakistani support to the Taliban and Haqqani network has caused the United States to reduce military and economic aid to Pakistan. If the recent aid-disparaging comments by YK Singha, India’s new high commissioner to the UK, are any indication, many developing countries are keen to replace aid with an open access to western markets. This access allows South Asian workers, such as those in Pakistan, to send their own citizens to work in foreign industries and adapt technology that can eventually be used to benefit their own development. Brexit lead to a decrease in the value remittances from South Asian workers. The upcoming decrease in immigration, wavering value of the pound, and general economic uncertainty may continue to harm Pakistani workers in the UK whose remittances are worth 7 percent of the country’s GDP. While the current stagnation of Europe limits the UK government’s ability to help, there are encouraging private sector initiatives that will continue to fill this void. Amazon has already disrupted remittance exchange, allowing anyone with an email to send products to people around the world. This type of disruption is inevitable and will only obscure future policy planning if remittance transfers are not made more transparent.

Conclusions

In theory, remittances are an effective development tool because they can bypass a state whose inefficiencies or ill-intentions prevent a country’s poorest residents from experiencing greater prosperity. To understand more about their development impact, an open and transparent system should be encouraged by development and finance actors so that more conclusions can continue to be drawn. Remittance transfers, however, are not a substitute for development assistance; they are complementary and should look to fill the void left by the inefficiencies of international aid. As mobile phones, wireless networks, and other innovative banking measures proliferate, recipients of remittances will no longer need to be located near a physical bank or financial center. Given that remittances generally faced a steady climb since the 1970s, it would be a grave mistake to not tap into this phenomenon as a source of development.

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