The developed world could make a big
difference to the global economy simply by helping migrants to do what
comes naturally: send money home.
BY PETER PASSELL |
DECEMBER 4, 2012
Everybody
knows that the tens of millions of migrants from developing countries (documented
and undocumented) who work in Europe, North America and the Persian Gulf send
home a lot of money. What most don't know, though, is that the sums are triple
the development aid budgets of the rich donor countries, and growing rapidly. Nor
are many people aware that remittances have morphed from an afterthought to a
key component in strategies for transforming poor countries into successful
"emerging market" economies. Indeed, it's becoming clear that Lant Pritchett, a
brand-name economist now at the Center for Global Development, was ahead of his
time in arguing that the best thing rich
countries could do for the developing world is to let their migrants do the heavy
lifting.
What may
surprise, though, is that the impact on these large countries with relatively
large economies was dwarfed by consequences for a dozen small countries that
are effectively remnants of colonial empires or economic satellites of the oil
states. Think Tajikistan, Moldova and the Kyrgyz Republic, ex-Soviet republics
that each receive more than one-fifth of their incomes from migrants. Or
Lesotho (29 percent of GDP), which is surrounded on all sides by South Africa. Or
Lebanon, which derives 20 percent of its income abroad, mostly from the Gulf. There's
a three-way tie for most dependent Latin American country, by the way, with El
Salvador, Haiti, and Honduras each pulling in about 15 percent of their income
from migrants living in the United States.
The
flows are volatile. Changes in oil prices affect the gush of money sent from
Russia and the Gulf, for example, while the global recession (in particular,
the collapse of the construction industry) took a hefty chunk out of
remittances from Europe and the United States. But that hit was cushioned in
part by the strength of the dollar and euro through the recession, which meant
the money that was sent paid more bills in local currency back home. Note, too
that the average rate of growth in remittances is so rapid that the cycles are
overwhelmed by the trend.
Of
course, the primary beneficiaries are the migrants' families. But the long-term
effect on economic growth is considerable, and for a variety of reasons. China
had a big head start in this regard. Overseas Chinese provided huge amounts of
capital -- and more important, the mix of technological and managerial knowhow
and experience in international trade -- to power China's takeoff in the 1980s.
India is
far behind, in part because a large percentage of overseas Indians are
semi-skilled workers in the Gulf. Ironically, India's well-developed financial
markets have also played a role: That has made it possible for affluent overseas
Indians to invest in stocks and bonds back home rather than in new businesses.
But there's little doubt that the Indian-American high-tech connection is
beginning to pay off, both in terms of direct investment and in the ease of
technology transfer. Though hard to quantify, the success of India's North
American diaspora clearly offers aid and comfort to interests back home that
are fighting to open the country to foreign business -- an uphill struggle in a country long dominated by
politicians and bureaucrats who have much to lose in a more competitive, less
regulated economy.
Savings
rates in Asia are very high -- embarrassingly high in the case of China, which
saves more than it can easily invest at home and thus depends on big trade
surpluses to sustain growth in output and employment. But Latin America, where
domestic savings rates are anemic, is an entirely different story.
Today, migrant remittances are mostly fueling consumption -- poor people need
to eat more than they need to save. But that could change as Latinos in the
United States climb the economic ladder. Their money could supplement the
availability of capital back home, especially for small business start-ups from
Mexico to Brazil that are now largely shut out of the credit markets.
Actually,
the poorest countries are starving for capital for public infrastructure as
well as for private business. Hence the new interest in "diaspora
bonds" --
government-issued debt denominated in local currencies that is marketed to expats
to finance specific projects. There's no magic here: Migrants know as well as
other potential investors (maybe better) that such bonds carry the risk of
default as well as the risk that currency depreciation will eat into their
principal. Still, the bonds make sense, at least in theory, both because they
appeal to migrants' patriotism and because currency risk matters less to
migrants since their relatives could always use the local cash.
Thus
far, diaspora bonds have worked best where special means of raising capital are
needed least (see India and Israel). But the World Bank is pressing the issue, and there's hope the
bond approach could make a difference, in particular, in sub-Saharan Africa.
What we
know for certain, though, is that more remittances are better than less -- and
that Pritchett's exhortation to let migrants help their home countries by doing
the jobs nobody wants in rich countries was on the mark. Migration policy is not
about to be liberalized in the United States or Europe -- indeed, net migration
could well remain negative, as chronic unemployment (not to mention xenophobia)
dogs the developed world. Even Saudi Arabia, the second-largest national source
of remittances after the United States, is making serious noises about forcing employers to substitute
unproductive Saudi labor for Asian and Arab workers.
But
there is one, widely ignored way to increase the sums going back to developing
countries. The great bulk of remittances are sent home in sums of a few hundred
dollars. And the costs of sending the cash is startlingly high -- as much as 30 percent in some
remittance "corridors." In part, that's because the real cost of wiring $20,000
across borders is hardly different than wiring $200. However, it's also a
function of competition, or lack thereof.
The
World Bank maintains a website in eight languages in which the
fees charged by every major financial institution in every international cash corridor
are posted. Unfortunately, though, the people who need the information the most
are also the people least likely to use websites, and also the least likely to
have the time to cross a city to find a cheaper service.
Governments generally aren't inclined to lean on
financial providers to offer more competitive service; this is a large and
profitable business that knows how to push back. But it may be an arena in which
NGOs could make a difference, publicizing abuses and praising do-gooders in
cities and neighborhoods where immigrants have economic power by virtue of
numbers. Paring the average fee from around eight percent by a single
percentage point would mean an extra $3 billion for recipient countries --
roughly the aid
budgets of New Zealand,
Austria, and Finland combined
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