The Migrant Money Machine
The developed world could make a big difference to the global economy simply by helping migrants to do what comes naturally: send money home.
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.
Start with the numbers. Remittances to developing countries, which were below $100 billion as recently as 2002, reached $372 billion in 2011. Not surprisingly, India and China topped the list of recipients with $64 billion and $62 billion respectively, followed by Mexico ($24 billion), the Philippines ($23 billion), Egypt ($14 billion), Pakistan ($12 billion), Bangladesh ($12 billion) and Nigeria ($11 billion).
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