September 2013, No. 3 Vol. L, Migration

Three notable facts about migration are often drowned in the stringent debate surrounding migration policies. First, the contribution of migrants to their host and home countries is enormous, over $500 billion in remittances alone (of which over $400 billion went to developing countries in 2012). Second, South-South migration is actually larger than South-North migration, implying that not only emigration, but also immigration matters for the developing countries. Third, internal migration is nearly four times the size of international migration and is an integral part of an economy’s structural change and development process. Yet, movement of people is rarely included in the development strategies of countries.

Migration to a richer destination can provide a fast path to reducing poverty not only of the migrant but also of the family members left behind. After migration, a person’s income multiplies rapidly, often by a factor of 10, and the income gains are shared with family members and friends back home through remittances. These remittances are used for purchasing food, housing and health care for the family, education for children, and business investments. Over time, migrants facilitate exports and imports between countries. The more skilled ones also share their knowledge and expertise with people back home. Some of them return home after years of working abroad, bringing with them skills and savings. In the destination community, migrants provide cheap labour and scarce skills for their employers and, over time, many of them invest in real estate, businesses and new enterprises that create employment.

Remittances, the money migrants send home to family and friends, provide the most tangible and perhaps the least controversial link between migration and development. In 2012, international remittance flows to developing countries, as officially recorded, amounted to nearly four times the size of official development assistance. (The true size of remittances, including unrecorded flows, is larger, perhaps a multiple of the current level in many poor countries.) In addition, remittances tend to be stable and resilient during financial crises. Unlike private capital flows which fell precipitously during the global financial crisis in 2009, remittances to developing countries declined by less than 5 per cent and recovered quickly afterwards. In times of an economic downturn or a natural disaster or political crisis back home, migrants send a bit more to help their families. Thus, remittances often act as insurance against unexpected adverse events.

STRENGTHENING THE LINKS BETWEEN REMITTANCES AND DEVELOPMENT—THE GLOBAL REMITTANCES AGENDA

Migrant remittances provide an economic lifeline to many countries. India received $70 billion in remittances in 2012, more than three times the size of foreign direct investment. Egypt received $21 billion, three times the value of its revenue from the Suez Canal. In many smaller countries, such as Tajikistan or Liberia, remittances are between one-third and one-half of the national income. Remittances are the largest source of foreign exchange in many countries, especially poor or conflict-affected countries, providing critical support to their balance of payments. At times, however, large remittance inflows can lead to currency appreciation that needs to be addressed by improving the business environment and increasing productivity in the economy.

Since remittances are personal funds, governments have no effective way of directing the use of these funds for specific purposes. Yet, governments can facilitate the flow of remittances by reducing the cost of sending money, and promote access to savings, loans and health insurance products linked to remittances (see figure 2 for a summary of the global remittances agenda). They can even reduce sovereign borrowing costs by using future remittance flows as collateral. They can also issue diaspora bonds to mobilize diaspora savings. But, first of all, governments must strive to improve the quality of data on migration and remittances.

The quality of data on remittances and on migration that precedes remittances leaves much to be desired. For now, data on international immigrant stocks (loosely defined as foreign-born population) are available by country, but only at decadal intervals for most countries outside the Organisation for Economic Cooperation and Development. There are no higher frequency data for monitoring the movement of people on an annual basis, which hampers the analysis of impacts of recent events, such as the global financial crisis. There are no data on outward migration. Data on bilateral flows of migration and remittances are critical inputs to policy-making, but we have only begun to create bilateral flow matrices. And internal migration statistics are guesstimates at best.

Data on remittances are available on an annual basis, but not for all countries (for example, Canada). Monthly or quarterly data are not available for most countries even though they are of critical importance in monitoring the balance of payments (for example, in Pakistan). Even the annual data on remittances leave out a large part of the flows through unrecorded channels. Many countries are still using an old definition of remittances and need to start collecting data according to the new guidelines in the Sixth Edition Balance of Payments Manual issued by the International Monetary Fund. That the outward flows of remittances are grossly underestimated in most countries renders the estimation of bilateral flows nearly impossible. There are currently no data on domestic remittances, not even estimates.

It is hard to believe in these days of modern technologies that sending money costs 9 per cent on average and, in some South-South corridors, 15-20 per cent of the principal amount remitted. The remittance fee structure is also highly regressive: the smaller the remittance, the higher the fee. International regulations, especially anti-money laundering and countering the financing of terror (AML/CFT) regulations, are increasing the cost of using mobile phone technology and Internet to send money across international borders. These regulations are also preventing international banks from operating bank accounts of money transfer companies, thus contributing to higher costs. Exclusive partnership agreements between national post offices and major money transfer companies are increasing the market power of the latter and stifling competition from new players. Capital controls are preventing outward remittances from many developing countries, and exchange controls and dual exchange rates are discouraging remittances in many countries.

Since 2009, the G20 has adopted a 5 x 5 goal of reducing remittance costs to 5 percentage points in 5 years. Average remittance costs have fallen from roughly 12 per cent to around 9 per cent currently. But there is more work to be done, especially in many South-South corridors and some low-volume North-South corridors involving small countries.

For many poor people, the only point of contact with the financial system is often through sending or receiving remittances. After three or four trips to a bank or credit union, the sender or the receiver of ten decides to open an account in that financial institution. This observation has not yet been harnessed to its full potential by the proponents of financial inclusion for all. Promoting account-to-account transfers would help the mobilization of savings and matching of savings and investment opportunities. Yet, the current trend is for many international banks to close the correspondent banking accounts of money service businesses (for example, recently the accounts of Somali remittance companies were closed in the United Kingdom and the United States) for reasons of compliance with stringent financial regulations. Such regulations require rebalancing. If remitters and recipients open bank accounts, soon they would also be customers for housing or car loans, which would benefit both banks and the people.

Of particular significance is a need to link remittances to micro-insurance, especially health insurance for the poor. The circle of poverty is of ten perpetuated by debilitating illnesses that many household members (especially the heads) face in middle age; health insurance for family members can be easily promoted by facilitating payment of premiums by migrants using remittance channels.

Indeed, remittance channels that allow the sender to target remittances to specific uses in the recipient end (for example, paying mortgage, school fees, utility bills or insurance premiums) can arguably increase remittances and improve their development impacts.

DIASPORA BONDS

In addition to sending remittances, diaspora members accumulate large amounts of savings in destination countries, estimated to be over $400 billion annually. The bulk of these savings is invested in bank deposits in destination countries earning little or no interest. These savings could be mobilized by selling diaspora bonds that offer an interest rate of 3-4 per cent in dollar terms. Diaspora members would be interested not only in the financial returns, but also in the development projects that such bonds could finance in origin countries. Interest rates on diaspora bonds can be significantly lower than those on institutional bonds because diaspora members have a lower country risk perception than institutional investors. Also, the price of diaspora bonds that are held by a large number of small retail diaspora investors is likely to be less volatile than institutional investments.

Diaspora bonds can be marketed primarily to diaspora members, but there is no reason to limit their sales only to the diaspora. These bonds must be registered under the securities act of the destination country. For prudential debt management, bond proceeds must be invested in projects that generate adequate financial returns. Financing of international airports, high-speed trains, roads, power generation, telecommunication, schools and hospitals are likely to attract diaspora financing via diaspora bonds. Some countries are also considering paying off higher-cost debt using diaspora bond proceeds to reduce the interest burden. Before issuing a diaspora bond, however, consultations with the diaspora are necessary to understand their abilities and attitudes towards investing in their home countries.

REDUCING MIGRATION COSTS

Reducing migration costs can be even more effective in improving migrants’ earnings and savings (thereby increasing remittances and diaspora investments) than the global remittances agenda outlined above. It is well documented that the cost of migration, especially t he fees paid to recruitment agencies, can be exorbitant. Reducing recruitment fees and eliminating recruitment malpractices should be a priority for policymakers in both sending and receiving countries/regions. Missing from the policy debate are the high fees and the long and cumbersome processes for obtaining passport and visa and residency permits. In many countries, obtaining a passport can take months, of ten longer than a prospective employer could wait. But, of course, improving the process of passport issuance may require major improvements in the national system of identity cards and birth registry. Reducing visa fees seems less of an issue, but it is worth noting that high visa fees—often in the name of reciprocity—can discourage temporary labour migration and frequent business travel. High cost of residency permits (for international as well as internal migrants) can act as a tax on both migrants and their employers, and reduce the ability of the migrants to send money home.