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The amazing power of money sent home

March 2008

 

Migration is a big issue, the world over. People have strong views about whether it is good or bad for the host nation. For most migrants going abroad for a better life means the chance to earn more. However, perhaps the most overlooked aspect of the whole business is just how good migration is for those left behind back home.

It has been known for years that most economic migrants send money home. But a recent study by the United Nations Agriculture Fund shows that these remittances, as they are called, are far more important than was ever thought.

Providing for your nearest and dearest, it turns out, is not just something that bonds families.  It helps to lift poor nations up and strengthens the entire global economy.

In 2006, this study shows, the world’s 150m migrants sent home $300bn, about $2,000 each on average. That is three times the  $104bn total of international aid. It is even double the $167bn of foreign direct investment in emerging market economies, the money flow which have long been presumed to be a key wealth driver for the developing world.

Changing the world, a buck at a time

The largest recipients of these money flows were in Asia, with $114bn, Latin America and the Caribbean with $68bn, and eastern Europe with $55bn. Among individual countries, India received $24.5 billion, followed by Mexico with $24.2bn, China $21bn, the Philippines $14.6bn, and Russia $13.7bn.

What this means is that the dollars wired home in tens and twenties via MoneyGram or Western Union by Mexicans in America, the cash sent home by Poles driving buses or working behind bars in Britain, and the savings earned by Bangladeshi and Filipino employees from the oil-binge Gulf economies really amount to a huge sum.

Not only that, they are more vital than the headline-grabbing big chunks of cash invested by foreign companies looking for new markets or offshoring existing operations.

More dollars, and better dollars

This isn’t just about the size of the flow, but the fact that it is better directed. The route that the money takes within families, direct from foreign-based earner to local consumer means that it has, dollar for dollar, a greater benefit for the receiving economies.

The comparison with aid is instructive. Most aid, 58% according to the OECD, is still tied to export purchases from the donor country, so the recipient gets not what it needs but what the donor wants to give.

Almost all passes through official channels. It has a bureaucratic cost to administer and allocate in the donor country. Then in the recipient nation the really big problems begin. Corrupt officials, bureaucratic delays, and poor value prestige projects all take the edge off the economic effectiveness of that aid money.

Remittances are better than aid

By contrast, money remitted home by migrant workers is highly effective because it goes straight to the families who need it. Aid by comparison is akin to air-dropping pallet loads of cash from high altitude. Some is lost, some is damaged, and most gets into just a few, often undeserving, hands.

A landmark study in the Philippines during the emerging market currency crisis in 1998/9 showed just how importance remittances were to that country. When the Philippine peso, along with many other Asian currencies, dropped in value the value of remittances in strong currencies was worth more in the local economy.

The study watched what happened to this one-off 25% boost in the value of transfers. On average, it added 6% to the household income. Education spending by the family rose from 5.4% of household income to 6.1%. It boosted the chances of its children completing school, and  improved the chances of other family members being able to become self employed by providing capital. Not least, it raised the chance of the family being able to afford a refrigerator, car or TV.

Microfinance on the quiet

This reinforces the case, eloquently made by microfinance pioneer Mohammad Yunis, for the life-changing quality of small loans for small businesses in the developing world. While Yunis’s Bangladesh-based Grameen Bank has formalised the business of turning the poor into entrepreneurs, money sent home from relatives overseas are already a much bigger source of the same kind of capital.

This quiet micro-economic inflow has huge implications. The Philippines has 11% of its entire population working abroad, and 28% of those are in Saudi Arabia. For a country with no oil of its own, remittances from the Middle East will cushion the blow of higher oil import prices. The same is true of Bangladesh.

In 1980 remittances by migrants were officially recorded at $18.4bn, though they were probably in reality double that. Still, the increase to $300bn in a generation is nothing short of astonishing.

Less friction on transfers

The value of money sent home by immigrants will rise further so long as global growth stays on track. The enlargement to the east of the EU, shortages of some skilled professionals in western economies like Canada and Australia, and the oil-fuelled expansion of the cash-rich but labour-poor Gulf economies all contribute.

But another factor, easily forgottten perhaps, is a continuing fall in transaction charges as the money transfer business opens to competition. For example, the Inter-American Development Bank calculates that commission rates on wired money from the U.S. into Latin America have fallen by two thirds in seven years.

As the IADB states that commissions are currently around 5%, they must have been an obscene 15% in 2000. How immigrant workers, slaving at minimum wage in many cases, must have ground their teeth to pass $300 to middleman in order to get $2,000 to their families. Even the $100 now charged is a travesty.

The power of family ties

The power of money sent home out of love and care makes for  interesting conclusions. One, it makes much more sense for emerging nations  to educate their populations to be ready for a world labour market than it does to merely try to build skills to be competitive for goods produced at home. Two, western countries overseas aid goals may be met more easily by circulating in foreign workers, and particularly by educating foreign students, than by direct payments.

Third, it shows that today’s sometimes reviled and misunderstood economic migrants are perhaps the most efficient of all the forces of globalisation, a demonstration that hard work, freely traded, can transform rich and poor nations alike.

 

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