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.

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Hawala: An International Development Tool?

By Catarina Santos

Introduction

Roughly 38 percent of the two billion people in the world’s lowest economic percentile do not have bank accounts and therefore lack access to the global financial market.  Hawala, or “transfer” in Arabic, is a remittance system that runs parallel to formal financial system transactions. Although it is often associated with financing terrorist activities, narcotics trafficking and tax evasion, and is therefore illegal in most countries, hawala can be an important tool to facilitate the sending of remittances. This is especially the case for poorer populations in developing countries and for transactions by undocumented people. In fact, remittances received through hawala account for a third of Somalia’s gross domestic product (GDP).

Despite its ubiquity in many parts of the world, hawala remains under the radar. This article provides a background on how hawala functions, discusses why it can be an attractive alternative remittance system, and considers whether hawala should be regulated as a security threat or promoted as a development tool.

Background on hawala and how it works

Hawala started in South Asia around the 18th century, before Western banking practices reached the region. It evolved over the years and today is used mostly by migrant workers overseas for financial transactions domestically and internationally. This system distinguishes itself from the traditional remittance systems because it is largely based on trust and uses family connections and affiliations within communities to circulate money between “hawaladars,” or hawala dealers.

Why would migrants prefer to use this system over an official banking system? The main reasons are cost effectiveness, efficiency, reliability, lack of bureaucracy, and tax evasion. This system does not require identification documents or formal bank accounts, and does not leave a paper trail.  Users of this method are therefore often associated with undocumented people and people committing illegal activities.

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Remittances for Investment: An Innovative Source of Development Financing

By Ariel Gandolfo

While the ambitious, 169-point Sustainable Development Goals are still being solidified, the next big question in development will most certainly be how to finance them. Official development assistance (ODA) as a share of national GDP in many developing countries has been steadily shrinking, and identifying other sources of financing is crucial. Already, discussions here at the CSIS Project on U.S. Leadership in Development have focused on Domestic Resource Mobilization (DRM) and the importance of strengthening national tax bases and collection systems to increase the funds available for investment in national economic growth.

Western Union is one of the largest remittance services in the world.  Pictured here, an outlet in Angeles City, Philippines.

Western Union is one of the largest remittance services in the world. Pictured here, an outlet in Angeles City, Philippines.

Another source of overseas assistance with potential to impact national development is remittances. Remittances from diaspora populations are usually sent to families of the migrants working abroad, and as such have a limited, micro level effect. Yet global remittances already triple the value of official foreign assistance. Leveraging these inflows – which total in the millions and billions of dollars per country each year – to invest in public funds for infrastructure and social entrepreneurship may, however, contribute to more long-term, macro level economic growth. Continue reading

The Indian Diaspora Investment Initiative: Leveraging Remittances for Development

By Simone Schenkel

President Barack Obama and Indian Prime Minister Narendra Modi greet attendees of the U.S.-India CEO Forum  in New Delhi, India. Photo Courtesy of the White House Photo via Pete Souza.

In a recent trip to India, President Obama announced the creation of the Indian Diaspora Investment Initiative, a U.S. Agency for International Development (USAID) and Calvert Foundation partnership that allows Indian-Americans to use would-be remittances to support key sectors such as financial inclusion, health, education, and agriculture.

While remittances have long been viewed as critical to supporting low-income countries, most funds are transmitted directly to households rather than to community resources. Through this public-private partnership, investors large and small will be able purchase Community Investment Notes later this year through the Calvert Foundation to fund a variety of social enterprise projects. Continue reading

Russian Sanctions, Tajik Remittances, and Chinese Investment

By Michael Jacobs

While the situation in Ukraine and its effect on the Russian and European economies have been the subject of countless news stories and op-eds for several months, the implications for the former soviet countries in Central Asia have largely been ignored. One of these countries in particular, Tajikistan, may face the most severe and direct consequences of a Russian economic slow-down.  This outcome looks increasingly likely as falling oil prices amplify the negative impact of economic sanctions in energy-dependent Russia.

Tajikistan, however much it may depend on the Russian economy now, isn’t waiting around to find out what would happen if the Russian economy falters. Tajikistan recently accepted an offer of $6 billion in new investments from China over the next 3 years, which is part of a larger Chinese push into Central Asia. China may use this investment to build oil refineries and has already built numerous cement factories in Tajikistan in recent years as Chinese workers have contributed to a construction boom in Tajikistan’s capital, Dushanbe. These cement factories have also led to some speculation that in the future China may look to fund the completion of the controversial Rogun Dam, which began construction in 1976 and saw work suspended in 2012. The graphs below illustrate Tajikistan’s dependence on Russia as well as the magnitude of China’s recent investments. As a note, comparisons with China’s investment assume $2 billion are invested each year ($6 billion total investment divided evenly over 3 years).

1.  Tajikistan is the Most Remittance-Dependent Country in the World

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