The Economics of Remittance

Every year, millions of individuals migrate with the support of their families, braving oceans, deserts, rivers, and mountains. They put their lives at risk to pursue a simple dream: finding a decent job elsewhere to financially assist their families, who have supported them in the past. The global population of international migrants stands at 232 million, residing in a country different from their birthplace. If a nation comprised solely of international migrants existed, it would surpass Brazil in population and outsize France in economic scale. Approximately 180 million migrants from underprivileged nations regularly remit money back home. Remittances refer to those amounts of money.

It may come as a surprise that in 2013, migrants sent a total of $413 billion in remittances to developing countries. This figure is significant because it is three times greater than the combined amount of development aid. Despite this, there is a tendency to focus on debating and discussing development aid rather than acknowledging the importance of remittances. On average, individuals send $200 per month, which may seem modest, but when multiplied across millions of people over time, these funds accumulate into substantial foreign currency flows. For instance, in 2013, India received $72 billion in remittances, surpassing its earnings from IT exports. In Egypt, remittances exceed revenues from the Suez Canal by threefold. In Tajikistan, remittances make up 42% of the GDP. In economically disadvantaged, smaller, and conflict-ridden nations like Somalia and Haiti, remittances serve as a crucial source of support.

It is unsurprising that these cash transfers have a significant impact on economies and impoverished individuals. Unlike private investment funds, remittances do not quickly exit the country in times of trouble; they serve as a type of insurance. When families encounter hardship or financial struggles, remittances increase, acting as a safety net. Migrants tend to send more money during these difficult periods. In contrast to development aid, which must go through official channels and government agencies, remittances directly benefit the poor and their families, often providing business advice as well. For example, in Nepal, the poverty rate was 42% in 1995. However, by 2005, despite political and economic challenges, this percentage had dropped to 31%, largely due to remittances from neighboring countries like India. In El Salvador, families receiving remittances have lower rates of children dropping out of school. Similarly, in Mexico and Sri Lanka, children born into families receiving remittances have higher birth weights. Remittances represent a compassionate form of financial assistance. Migrants send money back home for basic necessities, housing, education, care for the elderly, healthcare, and even to support entrepreneurial endeavors for their loved ones. Additionally, they send additional funds for special occasions such as surgeries, weddings, and sometimes for unexpected funerals they cannot attend. Despite the positive impact of these remittance flows, challenges exist in transferring the $400 billion in remittances.

One of the main issues is the high expense associated with sending money back home. Money transfer companies set their fees in a way that exploits those who are financially disadvantaged. For instance, they might say, "If you want to send up to $500, the fixed charge will be $30." This means that even if you only have $200 to send, you still have to pay the full $30 fee. On a global scale, the average cost of sending money amounts to eight percent. This implies that if you send $100, the recipient on the other end will only receive $92. Sending money to Africa comes with an even higher cost of 12%, while transferring money within Africa can cost over 20%, such as when sending money from Benin to Nigeria. Additionally, in countries like Venezuela, due to exchange restrictions, you might send $100 but the recipient may receive as little as $10.

Money transfers to Venezuela often bypass official channels, with funds commonly transported in suitcases. In many regions, money flows through unofficial channels due to steep expenses. Some developing nations prohibit outward money transfers, while affluent countries restrict sending funds to certain destinations. Despite these limitations, there are efficient alternatives available. For example, in Kenya, M-Pesa offers money transfers for a fixed fee of 60 cents per transaction. Similarly, a program by the U.S. Federal Reserve and Mexico allows funds to be sent for just 67 cents per transaction. Concerns about money laundering hinder international implementation of these faster and cheaper options, despite limited evidence of such activities in small remittance transactions. Global banks are cautious about offering services to money transfer businesses, especially those serving Somalia, where remittances play a vital role in the economy. Regulatory obstacles often impede the flow of essential funds to regions in need. Exclusive partnerships between post offices and money transfer companies in rural areas limit access to more affordable options, highlighting the need for reevaluation.

To reduce the cost of sending money home, international organizations and social entrepreneurs can: relax regulations on small remittances under $1,000, abolish exclusive partnerships between post offices and money transfer companies, promote competition in the industry, create a nonprofit remittance platform, and aim to reduce remittance costs to 1% from the current 8%. Achieving this goal could save $30 billion annually, surpassing the bilateral aid budget to Africa and approaching the total aid budget of the United States government. Additionally, addressing the high recruitment fees paid by migrant workers is crucial for improving the flow of remittances to their families.

At a workers' camp in Dubai, the scene was dark, hot, and humid at 8 in the evening. After a strenuous day of work, a conversation took place with a Bangladeshi construction worker who was worried about sending money back home. For months, he had been sending money to the recruitment agent who had arranged his job. The money, mostly going to the agent, was eagerly awaited by his wife each month. Upon its arrival, she would hand it over to the recruitment agent while their children watched. This issue is not unique to Bangladeshi construction workers; it affects millions of migrant workers worldwide. On average, a Bangladeshi construction worker pays around $4,000 in recruitment fees for a job that only yields $2,000 per year. This means that for two or three years, the worker is essentially working to cover the recruitment fees, with the family seeing none of the income. This exploitation is not limited to Dubai but exists in the shadows of major cities globally, affecting workers from various countries and genders. An emerging development in remittances is the exploration of innovative ways to leverage diaspora savings and contributions. In addition to sending money home, migrants also save significant amounts in their host countries, with an estimated annual migrant savings of $500 billion.

The majority of the funds are currently held in bank accounts with no interest being accrued. If a nation were to offer an interest rate of three or four percent, with the promise of utilizing the funds for infrastructure projects within the migrants' home country, many migrants would be interested in investing. This opportunity not only offers financial benefits but also allows them to contribute to the development of their homeland. Bonds could be sold to migrants through remittance channels, taking advantage of their regular visits to send money back home. This strategy could also be applied to engage the diaspora community in contributing to meaningful projects, such as funding a high-speed train system or supporting efforts to combat diseases like malaria in rural areas. Remittances serve as a valuable tool for targeted prosperity sharing, benefiting those in need the most and empowering individuals. It is crucial to enhance the safety and affordability of remittance transactions and migrant recruitment processes.