Workers’ remittances: a boon to development

Every day, thousands of Africans -living abroad line up in money-transfer offices to wire home the odd dollar they are able to save. From the US, Saudi Arabia, Germany, Belgium, Switzerland and France — the top sources of remittances to developing countries — some of the money finds its way deep into the rural areas of Africa. There, it may send a child to school, build a house or buy food to sustain those remaining at home.

Over the years, some of the money has made its way to the Kayes region of Mali. There, the World Bank reports, contributions from Malians living in France have helped build 60 per cent of the infrastructure. About 40 Malian migrant associations in France supported nearly 150 projects, valued at Ä3 mn over a decade.

Advertisement for money-transfer services in Mogadishu, Somalia, a country highly dependent on migrants’ remittances.

Photograph: Panos / Sven Torfinn

Yet most of the money sent home by migrants is unrecorded, and therefore does not enter many countries’ national statistics. Development planners increasingly stress the importance of tracking this money. That will help governments try to increase remittances as a source of development finance and better channel them into productive sectors.

Throughout the continent, financial and monetary policies and regulations create barriers to the flow of remittances and their effective investment. “For a capital-poor continent like Africa, you can’t ignore this source of income,” says South African Institute of International Affairs researcher Mills Soko. “In Africa it’s not accorded the attention it deserves.”

A number of developing countries, including Brazil, Mexico, India and the Philippines, offer incentives to attract such transfers into local savings and investment funds. A private firm, Bannock Consulting, reports that these countries have set up migrant pension plans, offer preferential loans or grants for business ventures using remittances and provide access to capital for recent returnees. As a result, they are reaping rewards from having a large pool of citizens living abroad.

All too often, policy debates on migration have focused on the loss of skills and labour from poor to rich nations. An estimated 3.6 million Africans are living in the diaspora, some of them highly trained professionals. The migration of such workers has caused the loss of skills and labour in vital areas of the economy. Agriculture, a key sector in many African countries, has suffered because of losses from the rural areas. As a result, African governments have often tended to discourage migration.

Today, more people are living outside their countries of birth than ever before. In 2000 an estimated 175 million people worldwide (one in every 35) were living outside their native countries. With the advent of globalization, these numbers are set to increase by a projected 2–3 per cent annually. Remittances offer an opportunity for developing countries to look at ways of benefiting from their citizens who have chosen to live and work abroad, rather than focusing on the negative consequences.

Growing source of funds

Remittances are defined as the portions of cross-border earnings that migrants send home. There are two types, official and unofficial. Official transfers use banks, money-transfer organizations and sometimes the Internet. Unofficial remittances are sent through friends or migrants themselves or through traditional networks, known in some countries as hawala or chiti, which allow money deposited with a trader in one country to be paid out by a partner in the recipient country.

At $126 bn in 2004, remittances were developing countries’ second most important source of foreign exchange. That same year, foreign direct investment inflows were $165 bn, while total official development assistance amounted to $79 bn.

Over the last few years there has been a surge of interest in the potential of workers’ transfers. In its report Global Development Finance 2005: Mobilizing Finance and Managing Vulnerability, the World Bank identifies remittances as an increasingly important source of development funding which, in some countries, outpaces official development assistance. “Remittances to developing countries from overseas resident and non-resident workers are estimated to have increased by $10 bn (8 per cent) in 2004, reaching $126 bn,” the Bank reports. The previous year they grew by $17 bn, with much of the increase occurring in low-income countries. Most recipients are middle-income nations, but remittances to poor countries are significant in relation to gross domestic product, the Bank notes.

Yet the figures reported by the Bank take into account only official transfers. If unofficial flows were added, the total numbers could be 2.5 times more. “Flows through informal channels . . . are not captured in the official statistics, but are believed to be quite large,” the Bank reports.

For an undocumented Zimbab-wean who lives in Dallas, Texas, in the US, unofficial transfers are the best bet. “I, like many of my colleagues, rely on informal networks of friends to send money home, because I do not have proper documentation.” He says that he sends a minimum of $200 each month and sometimes transfers as much as $1,000. He also prefers informal transfers because of the higher exchange rate on the parallel market, in which traders are willing to pay as much as double the official rate.

Weak financial systems

Zimbabwean economist John Robertson says that while ordinary Zimbabweans are enjoying the benefits of money sent from abroad, the central bank, desperately in need of foreign reserves, is not. The country is in dire need of official foreign exchange (forex) since the withdrawal of financial support by the International Monetary Fund (IMF) and the World Bank a few years ago due to the political crisis that has engulfed the country since the disputed 2000 elections. As in many other African countries, weak or nonexistent formal financial systems discourage formal transfers to Zimbabwe. The country’s financial sector has been under siege over the last few years and many banks have been forced to close down.

To tap funds held by Zimbabweans living abroad as a source of foreign currency, the central bank last year launched the Homelink money-transfer system. But interest in the scheme has been lukewarm. “When the programme started, there was an enthusiastic response from those living abroad, but that zeal has lessened,” says Mr. Robertson. “The main reason is that there is a huge gap between the official selling rate of forex and the parallel rate.”

Other African countries have found ways to get around similar challenges. Realizing that informal channels were being used as a way of avoiding restrictive foreign exchange rules, Sudan simply devalued its currency. As a result, clients found it more attractive to exchange money at the official rates.

Uganda has liberalized its financial market, allowing foreign denominated accounts and loosening trade in foreign exchange, among other things. This has reportedly led to an increase in remittances through official channels.

But many countries find it difficult to fix a problem of which they are unaware. Many African countries have no data on the nature or amount of flows they get. According to the World Bank, less than two-thirds of African countries report remittances. “Flows through informal channels are not captured at all,” reports the Bank.

Africa lags behind

While remittances to developing countries have more than doubled in the last decade, they have grown little in Africa, the Bank notes. Total remittances to Africa amounted to $9 bn in 1990 and by 2003 had reached $14 bn, and the continent receives about 15 per cent of flows to developing countries. Over the last decade, Egypt and Morocco have been the largest recipients on the continent and North Africa as a whole received more than 60 per cent of total transfers.

In sub-Saharan Africa, Nigeria is the largest recipient, taking between 30 and 60 per cent of the region’s receipts. Though official figures are not available, economists believe that money sent home by Nigerians in various parts of the world now exceeds $1.3 bn annually, ranking second only to oil exports as a source of foreign exchange earnings for the country.

For some smaller economies, workers remittances account for a large chunk of national income. Lesotho receives the equivalent of between 30 and 40 per cent of its gross domestic product (GDP) from workers abroad, mainly in neighbouring South Africa. In Eritrea, the World Bank notes, remittances represented 194 per cent of the value of exports and 19 per cent of GDP. During the 1990s, remittances covered 80 per cent of the current account deficit of Botswana.

The challenge facing many African countries that receive substantial income from remittances is how to direct them into programmes that benefit society as a whole. At an African regional meeting of the Global Commission on International Migration (GCIM) held in Cape Town, South Africa, in March 2005, delegates agreed that while remittances could contribute to poverty reduction and development, countries in the region need to do more to enhance remittances’ positive effects.

The GCIM, a global panel that addresses international migration issues, was launched in 2003 by UN Secretary-General Kofi Annan and a group of interested countries, including South Africa . Its aim is to influence the development of coherent, comprehensive and global policies on migration.

The meeting also noted that countries would benefit by reducing transfer costs, ending monopolies established by certain money transfer companies that limit competition, improving their banking systems and encouraging governments to pursue macroeconomic policies that create a favourable environment for remittances from nationals living abroad.

Promoting development

According to the World Bank, the developmental impact of remittances will depend on their continued flow, and that in turn will depend on the ease with which money can be transferred. The Bank estimates that if transaction costs were lowered even by 5 per cent, remittances to developing countries would increase by $3.5 bn a year. In many countries formal money transfers are expensive and at times heavily taxed. US researchers who have examined ways to reduce transfer fees report that average costs amount to 12.5 per cent of the sums transferred, amounting to $10–15 bn annually.

It would also be beneficial for African countries to promote the use of official transfer channels. They could do this by offering incentives to recipients to save more within the formal banking sector. To make formal transfers attractive, countries would also need to offer favourable exchange rates and establish efficient banking systems. In some countries formal banks exist only in urban areas, leaving rural dwellers with no choice but to depend on the informal sector.

Some countries have adopted innovative approaches, such as setting up transfer services among large migrant communities in industrial countries. In Paris, France, three banks — the Banque de l’Habitat du Sénégal, the Banque de l’Habitat du Mali and the Banque des Ivoiriens de France — offer special incentives to their nationals at rates lower than those charged by private agents. As a result, the banks make about 400 transfers a day. In 1999, some $24 mn was transferred to Senegal through the scheme, reports the International Organization on Migration (IOM). The amount transferred to Senegal was equal to about 25 per cent of total remittances to the country that year.

Following the money

Most of the money sent home by migrants is for household consumption, notes the World Bank. Some is used for education, health and other human capital development. Some is invested in land, livestock or housing construction. “Still less is used for investments, such as savings or business, or to repay debt, such as a loan for the expenses of going abroad,” notes a World Bank study, Migrant Labour Remittances in Africa: Reducing Obstacles to Developmental Contributions, by Mr. Cerstin Sander and Mr. Samuel Maimbo.

Money sent back home by migrant workers can support housing construction and development projects.

Photograph: Panos / Sven Torfinn

Yet there are also some risks for economies that rely too much on remittances to finance development, notes the IOM. Unlike aid, remittances to individual countries in Africa are highly volatile and unpredictable. Between 1980 and 1999, the standard deviation of annual transfers was 17 per cent in Egypt, more than 50 per cent in Cameroon, Cape Verde, Niger and Togo and greater than 100 per cent in Botswana, Ghana, Lesotho and Nigeria. Naturally, economies highly dependent on these financial flows can be hit hard when the flows suddenly decrease, and families can suddenly find themselves out of money.

Burkina Faso is a good example. Flows dropped drastically from $187 mn in 1988 to $67 mn in 1999, mainly due to the economic and political crisis in Côte d’Ivoire, where many Burkinabè work. As a result, the contribution of remittances to the GDP declined from 8.8  per cent in 1980 to 2.6 per cent in 1999. By 2003, remittances to Burkina Faso had slipped further to $50 mn. For such countries, the challenge is managing remittances, while diversifying economies to reduce dependence on remittances for income.

Taken for a ride

A substantial amount of the money sent to poor countries does not actually get there. Instead, it lines the pockets of go-betweens. In a March 2005 study, the UK’s Department for International Development (DFID) reports that 18 banks and money-transfer operators it examined skimmed up to 40 per cent of the cash consumers send abroad, including to African nations such as Ghana, Kenya and Nigeria. The DFID estimates that annual remittances from the UK are around $4.2 bn, equivalent to 78 per cent of the country’s overseas aid budget.

To help people find the best deals for sending money abroad, the department set up a website (www.sendmoneyhome.org) that features information on transfer operators, exchange rates and transfer costs.

Discrimination

Immigrants in industrial nations also face discrimination through policies in the public and private sectors that make it difficult for them to earn decent wages, says Mr. Bala Sanusi of the UK-based coalition African Diaspora Voices for Africa’s Development (ADVAD).

“Some of the current immigration policies are unfair to Africans in the diaspora,” he says, because they limit the freedom of skilled workers to move in search of better opportunities. In a submission to British Prime Minister Tony Blair’s Commission for Africa, ADVAD criticized some regulatory measures that have been enforced in industrial countries, especially since the September 11, 2001, terrorist attacks in the US. Because of tightened security, restrictions have been placed on the ability of migrants from poor countries to enter or live in industrial nations or to perform such simple daily tasks as opening bank accounts.

Often, banks will only transfer money for account holders. Yet opening an account can be difficult for many migrants, requiring evidence of formal employment, official identification and proof of residence. In the US alone, estimates of illegal immigrants range from 7 million to more than 20 million.

New or tighter “know-your-customer requirements and other regulations, adopted as part of anti-terrorism and anti-money laundering initiatives, contribute to better controls, accountability and transparency,” notes the World Bank study by Mr. Sander and Mr. Maimbo. But such regulations have also “raised hurdles to using banks, both for individuals and money transfer organizations.”

Developing policy

What is urgent, says South African Home Affairs Minister Novisiwe Mapisa-Nqakula, is to keep the debate on international migration open and constructive. At present, she says, the debate seems to be characterized “by an emphasis on security at the expense of development.” The debate must instead be “driven by a vision that sees the interests of humanity as a whole above the narrow interests of states or groups of states.”

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“I, like many of my colleagues, rely on informal networks of friends to send money home, because I do not have proper documentation.”

— a Zimbabwean migrant living in the US

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The first prerequisite, she says, is to build a solid body of research on the issues pertaining to migration and development. Data on the mobility of professionals in and from Africa remains sketchy. The complex relationships among international migration, training, labour markets and related economic and security issues are largely unexplored. About two-thirds of countries in sub-Saharan Africa currently do not report any data on remittances. For these countries, investing in monitoring systems would go a long way towards understanding the nature and quantity of flows.

Last year, at the Group of 8 summit in Sea Island in the US , industrial nations pledged to improve flows and enhance data-collection standards in both sending and receiving countries. They pledged to work with the international financial institutions, such as the World Bank, to achieve these goals.

Poverty reduction

At the national level, coherent policies on migration and development must be developed and incorporated into programmes that spur economic development, experts say. In many countries, the primary tools for poverty reduction, known as Poverty Reduction Strategy Papers (PRSPs), are silent on migration. The World Bank, which together with the IMF directs lending to developing countries through PRSPs, reported in March 2004 that PRSPs from Africa show considerable ambivalence towards migration — either not recognizing it as an important issue or not addressing it at all. The World Bank’s PRSP review notes that overwhelmingly, where economic migration is mentioned, “it is seen as a negative,” with many countries viewing migration as depleting them of human resources vital for development. Only Cape Verde and Senegal mentioned emigration as a positive factor in their PRSPs and both proposed strategies to promote remittances and engage emigrants in national development. Cape Verde noted, however, that restrictive policies in host countries have cut remittances.

As elsewhere in the world, in many African countries responsibility for migration is often divided amongst several ministries with different and even competing interests. Government officials dealing with other international issues, such as trade negotiations, often do not understand the implications of their work for international migration.

The World Bank forecasts that by 2020 remittances to developing countries will reach $200 bn annually. African countries cannot afford to be marginalized from this increasingly important source of financing. For starters, larger economies such as Nigeria should lead the way in developing policies to engage and use their citizens living abroad, says former US Ambassador to Nigeria Howard Jeter.

“There is a wealth of financial, technical and intellectual expertise in the diaspora,” he says. “Africa needs to exploit these human and material resources to help tackle the challenges of development, environmental degradation, food security, energy supply, HIV/AIDS and equitable economic growth.”