Remittances, Development and the Way Forward

This paper was prepared for the conference “Building Bridges: Diaspora for Business and Development”, held in The Hague, The Netherlands on 8 June 2013

Never before has ‘Migration and Development’ drawn a lot of attention from Dutch politicians. Foreign Trade and Development Cooperation Minister Ploumen recently presented to parliament the policy paper ‘What the World Deserves: A New Agenda for Aid, Trade and Investment’. The minister stated that migrant organizations (MOs) have a useful function in poverty alleviation efforts through remittances, in their networks and knowledge of local conditions. The minister included MOs in the policy dialogue on migration and development, and financed their ‘development-relevant’ projects. Migrants can also, according to the Paper, contribute to the development of their countries of origin by, among others: contributing financially to projects that develop specific regions; establishing enterprises that create employment and economic development; and by being deployed as migrant experts.

The Dutch government’s starting point is that remittances are private, and that governments should not interfere with how these remittances are used. The World Bank has a more nuanced standpoint regarding this.  According to them “Remittances sent home by migrants to developing countries are equivalent to more than three times the size of official development assistance (ODA) and can have profound implications for development and human welfare. Remittances can contribute to lowering poverty and building human and financial capital for the poor.” [1]
There is thus more than enough reason to take a closer look at remittances.

Remittances

Remittances are, according to the International Monetary Fund (IMF), personal transfers consisting of all current transfers in cash or in kind made, or received, by resident households to or from other non-resident households.

Most remittances are used for food, clothes, school fees and medicines, thus increasing their recipients’ access to basic social services. Remittances are also invested in the private sector, particularly in houses and plots. There are both positive and negative effects of remittances. On the positive side, remittances are known to reduce poverty, increase savings, increase investments in human capital and increase recipient countries’ access to international credit markets. Most importantly, remittances are often counter-cyclical in the sense of increasing when other investments decline (e.g. in times of conflict, economic recession and natural disasters, where immediate assistance is needed).

On the negative side, remittances are known to cause inflation, increase imports and create dependency among their recipients. In some situations remittances may contribute to or prolong state fragility, as their macro- and micro-economic importance gives legitimacy and stability to fragile states that are in need of political and economic reform. Remittances also often increase differences between those with and without access to remittances, and in this sense may cause or increase social tensions and conflicts. Moreover, the flow of remittances is known to lead to more out-migration. [2]

Migrant remittances has emerged as a significant source of finance for many third world countries, surpassing the inflows of ODA, and increasingly also that of Foreign Direct Investment (FDI).  At the same time, remittances are more complicated, because these are basically personal transfers of money and are not easily tapped for development projects. In this paper, we will put remittances in the context of the situation in the Netherlands, examine the ways in which remittances have been mobilized for economic development, and outline some future steps.

Table 1. Migrants in the Netherlands, 2012.

	Number of persons	Percentage of the population
	x 1000	%
Total	16,730	100.0
Indigenous Dutch	13,236	79.1
Migrants from Western countries	1,557	9.3
including: Polish	101	0.6
Migrants from Non-western countries	1,938	11.6
Turkish	393	2.3
Moroccans	363	2.2
Surinamers	347	2.1
Antilleans	144	0.9
Other migrants from non-western countries	691	4.1

Source: Central Bureau for Statistics, Year Report Integration 2012, December 2012

As of 1 January 2012, migrants compose 20.9% of the total population of 16.73 million people in the Netherlands, with 11.6% coming from non-Western countries and 9.3% coming from western countries. Among the biggest groups of migrants are those of German (377 thousand) and Indonesian (378 thousand) origins. Both countries have a long migration history to the Netherlands. The Turkish (393 thousand), Moroccans (363 thousand) and Surinamers (347 thousand) continue to be the biggest number of migrants coming from non-Western countries.

Table 2. Destination of Remittances from the Netherlands, 2011. Amounts are in US$ millions.

Country	Remittance	……..	Country	Remittance
Belgium	1159		Indonesia	500
Germany	447		Morocco	431
France	230		China	280
Spain	155		Nigeria	152
Poland	104		India	93
United Kingdom	80		Thailand	58
			Philippines	53
US	52		Turkey	51

The data for this table came from the World Bank, Bilateral Remittance Matrix, 2011.

Total remittances from the Netherlands in 2011 amounted to $4842 million. Of this, roughly one half went to EU and other developed countries, like the US. The remittance totals for Belgium and Germany are, to a large part, due to salaries of people who live there but work in the Netherlands.

The amount remitted to Turkey seems unusually small, given that it has a rather large migrant community (393 thousand).  It has dropped precipitously from 2000, largely due to the reclassification of the expenses of migrants while in Turkey from ‘remittances’ to ‘tourism revenues’, as well the conversion of money from foreign currency accounts to local currency. Other factors include: family reunification has lessened the number of beneficiaries; integration of Turkey with EU banking system; second and third-generation migrants have less inclination to remit.[3]

Remittance Flow Dynamics

The more migrants a country sends out, and the higher their income,  the more they would tend to remit. This is a very general ‘rule’, but there are more factors that affect the amount of remittances. From the IOM:  “Drawing on the existing literature, Spatafora (2005) lists five  broad groups of external variables that could affect remittances:
a. Economic activity in the host country, improved economic conditions in the host country allow existing migrants to send more remittances and may also trigger greater emigration from the home country, increasing future remittances. An economic downturn would have the opposite effect.
b. Economic activity in the home country. Negative economic shocks in the home country may encourage existing migrants to send more remittances and push more people to migrate.
c. Economic policies and institutions in the home country. The presence of exchange rate restrictions and black market premiums or general macro-economic instability may discourage migrants from sending remittances, or shift away from formal channels.
d. General risks in the home country. Political instability, including low levels of law and order and risks of expropriation, may discourage remittance.
e. Investment opportunities. Higher potential returns on host country assets may induce migrants to invest their savings in the host country rather than remitting them home.” [4]

Table 3. Remittances from Selected Countries from 2005 to 2011. Amounts are in US$ millions

	2005	2006	2007	2008	2009	2010	2011
Netherlands	5928	6610	12635	14914	10526	9462	10974
Belgium	2754	2699	3202	4048	4238	4152	4574
Germany	13148	13081	14521	15701	16171	15058	16677
Spain	8136	11326	15191	14826	12751	12244	12904
Greece	902	982	1460	1912	1843	1932	1941
UK	3877	4732	4834	4637	3400	3439	3256
US	46293	49656	51654	54399	51639	51597	51592

The data for this graph was taken from the World Bank  Remittance Data Outflows, 2013. [5]

The economic crisis since 2008 has had only a limited effect on remittances from Europe (see Table 3). Remittances decreased in 2009 (for Germany, the decrease was in 2010) in most cases by only a small amount. The decrease in the Netherlands and UK were more significant.  [Since the data is only until 2011, it does not reflect a possible bigger drop in Spain and Greece in 2013.] Across all countries, total remittances as a result of the 2008 crisis decreased by 5.5%, compared to a 40% drop in FDI. This shows that, while economic recessions would negatively affect the level of remittances, they usually do so only slightly and temporarily.
Remittances can generally be classified into two kinds: ‘family support’ remittances which are for regular family expenditures (e.g. consumption, education), and ‘discretionary’ remittances which are driven by investment or altruistic motives.  Migrants who are: irregular workers, earn lower salaries, or have a spouse and family in the home country, tend to have more family support remittances; while those who are: regular, earn higher salaries or do not have a family to support in the home country tend to have more discretionary remittances. But, these are only generalizations; the reality is that most migrants have a certain mix of both types. Family support remittances are quite stable, while discretionary remittances are more sensitive to overall economic conditions.
Discretionary remittances make up 20-30% of total remittances. They are particularly interesting for those who want to maximize the use of remittances for investments or development projects. But migrants who primarily send family support remittances also send discretionary remittances and could also be encouraged to pool their limited resources together with other migrants, in order to make investments.

Government Attempts to Utilize Remittances

The governments of remittance-receiving countries have tried, over the years, to maximize migrant remittances for ‘development’. Among the steps taken were[6]:

Selling ‘development bonds’ to migrants. A number of governments offered migrants bonds (e.g. ‘resurgent India bonds’) with special features e.g. tax-free status, preferential interest rates, preferential exchange rates. While there were enough people availed of these bonds, they mainly catered to the higher-income, higher educated migrants, who already remitted via formal channels. Criminals and corrupt officials also used these bonds to launder their money.

Matching Fund Programs. The shining example of this is the Tres por Uno program for Mexican migrants in the US. Every dollar raised by Mexican Home Town Associations (HTAs) in the US for projects in Mexico, was matched by one dollar each from the federal, state and local governments of Mexico. In 2005, Mexican migrants collected $20 million for development projects, and the Mexican government matched this with $60 million. The collective remittances of Latin American HTAs account for 1% of their total remittances.

Investment Incentives.  The governments of India and Pakistan had programs that provide incentives e.g. preferential access to foreign currency and capital goods  for migrants who invest in backward areas and export processing zones. The drawback of such schemes is that they encouraged capital-intensive production in the midst of high unemployment.

Abolishing Exchange Controls. The most successful ‘scheme’ in terms of increasing remittances is the abolition of foreign exchange controls. In 2002, the Philippines quadrupled its formal remittance receipts by abolishing exchange controls. Other countries have similar experiences.
Reforms that make it easier to set up and run new businesses, as well as a flourishing economy have also increased remittances for investment.

The Way Forward

Even though the sending of remittances is a private matter between a migrant and his/her family, there are measures that could be taken to promote an increase in the proportion that is invested in community projects or businesses in the country of origin.
The role of governments should be more in creating an enabling environment that promotes the growth of remittances and their use for national development, instead of actively trying to channel remittances. Other actors could be more effective in channeling remittances.  Migrants themselves, individually or through their organizations, should be more in the center of efforts to better channel their remittances.

Remittance Fund Diaspora Business Centre (DBC).  The Diaspora Business Centre is an initiative that seeks to raise public and private resources for a Diaspora Remittances Fund (DRF). The DRF gives poor and disadvantaged people in migrants home countries a prospect for economic self-sufficiency; it also offers undocumented migrants and rejected asylum-seekers a chance to voluntarily return to their country and to start their own business.
The DRF concentrates on countries of origin of the diaspora and projects that aim for economic self-sufficiency. The DRF works with projects in the informal and primary sectors, with specific attention to attaining food security. It does two things: provide financial support, as well as technical guidance and support to capacity-building. This is why the DRF is forming a pool of diaspora senior experts that would advise businesses in developing and emerging countries. In this way, the DRF stimulates entrepreneurship, self-reliance and sustainable development of Small and Medium scale Enterprises (SMEs) on location. Through concrete advisory projects in the workplace by these professionals,  businesses could build up their expertise and to prosper in the local economy.

Support for Migrant Organizations’ Community Projects. Migrant organizations often support community projects in their countries of origin. Governments of host countries as well as the home countries could support these initiatives.  France has a Co-Development program which provides technical and financial support to migrant organizations (especially those from Mali, Mauritania, Morocco and Senegal) in their development activities.  The Mexican government provides counterpart funding for projects by Home Town Associations. Non-government organizations could also support MO’s projects. It is also important to have programs to strengthen the capacity of the MOs to pursue such projects.
The Dutch government should expand its program of providing matching funds (directly or indirectly) to migrant organizations’ projects in their countries of origin.

Financial Literacy Trainings[7]. These trainings could be given both to migrants in the host country, and to their spouse and family  in the home country. Giving the training to migrants would put them in a better position to manage their finances, which would hopefully result in them increasing their savings and the capacity to remit. Giving the training to the spouses of migrants would enable them to better manage the remittances that they receive.
Migrant organizations could conduct these trainings in host countries, while migrant-related NGOs could do this in home countries. These trainings have been proven to be effective at the level of the migrant; however, the challenge is to give these to enough migrants in order to make a significant macro effect.

‘Pasali Method’. One problem with remittances is that they tend to exacerbate income differences within the receiving country – within regions, and even within a community. This is because communities and households which have many migrants benefit, while others (which are poorer to begin with) do not. Pasali has set up a Social Business in a backward community in the Philippines (which does not benefit significantly from migrant remittances). It will soon offer to Overseas Filipinos ‘participations’ or discrete investment packages which will yield yearly returns. Migrants who invest in these participations would have their profits deposited with a Philippine bank account, which will then mostly go to their relatives. Thus, they will indirectly be able to help their relatives by first investing in a backward area somewhere else.
A prerequisite for this is that there should be an efficient banking system in the country, especially for inter-regional cash transfers.

SME-Migrant Organization Partnerships. Migrant organizations, either by themselves or in partnership with SMEs in their host or home countries could set up businesses. Individual migrants could participate in these businesses through ownership of shares or through ‘portfolio’ investments with these companies. A necessary condition for this are that laws and regulations do not hinder migrants from starting businesses.

‘Virtual Return’. The International Organization for Migration (IOM) has a program called ‘Migration for Development in Africa’ which is a capacity-building program that facilitates the transfer of skills and resources from the African diaspora to their countries of origin. It includes a program for temporary or ‘virtual’ return where migrants contribute their skills without endangering their host-country residency status.

This program recognizes the potential of, and utilizes, migrants’ skills, and not only their of cash remittances.

References

Migrants’ Remittances and Development: Myths, Rhetoric and Realities, by Bimal Ghosh,  International Organization on Migration. 2006.

Migratie en Ontwikkeling: Beleidsevaluatie van het Ne derlandse Migratie en Ontwikkelingsbeleid sinds 2008, by Bram Frouws and Ton Grimmius. for the Dutch Ministry of Foreign Affairs, 2012.

Migrant Remittances and Development Cooperation. by Jorgen Carling, Peace Research Institute, Oslo. 2005

World Bank Migration and Remittances Data.
– Remittance Data Outflows, April 2013
– Bilateral Remittance Matrix 2011

Carlo Butalid, for the Dutch Consortium of Migrant Organizations (DCMO)

8 June 2013

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[1] World Bank website Migration and Remittances

[2] DIIS Policy Brief Fragile Situations

[3] Microeconomic Determinants of Turkish Workers Remittances: Survey Results for France-Turkey. By Elif Unan, May 2009.

[4] Migrant Remittances and Development Myths, Rhetoric and Realities, IOM

[5] The remittance figures in Tables 2 and 3 both come from the World Bank, but the Bilateral Remittance Matrix table used for Table 2 uses a stricter definition of remittances than the Remittance Data Outflows table which was used for Table 3.

[6] IOM, Migrants Remittances and Development: Myths, Rhetoric and Realities.

[7] A useful reference on this is FReDI ‘Financial Literacy for Remittances and Diaspora Investments’, by GIZ