In developing countries, remittances play an integral role in poverty reduction efforts, as illustrated by two recent publications on migration and remittances. It is estimated that the flows of remittances in such countries are five times higher than official development assistance. According to the new World Bank’s Migration and Development Brief, developing countries received around $401 billion in 2012 alone, growing as much as 5.3% from 2011 estimates.
The growing importance of remittances is also felt in Asia’s developing nations, whose overseas workers send approximately $260 billion annually to their families. In “Sending Money Home to Asia”, a report by the International Fund for Agricultural Development (IFAD), it is estimated that around 70 million families in the region are reaping the benefits from remittances. Moreover, the report noted that remittances constitute more than 10% of GDP in countries such as Afghanistan and the Philippines. Therefore, it projects the function of remittances as an indispensable channel for capital provision, necessary for poverty reduction and as a lifeline for the poor in developing countries.
Both publications, the World Bank’s Migration and Development Brief and IFAD’s Sending Money Home to Asia report, acknowledge the salience of remittance fees in either encouraging or circumventing remittance flows. The World Bank noted that although remittance cost fell significantly to 8.7% in the first quarter of 2010, it increased to the level of 9.1% in 2012, far from the threshold of 5%, as what the G20 countries pledged in 2008.
In developing Asia, the high cost of remitting money has also curtailed the benefits. Migrant workers from developing countries have to incur an average of 8.35% transfer cost. However, the average value is obscuring cost divergence between countries in Asia. As IFAD reports, sending money to China cost around 9.2%, whereas it only costs 5.9% in the Philippines, in which the lack of competition and infrastructure drives the cost higher in China.
Another important finding by IFAD is that the cost of remitting money to rural households is more expensive than urban households. This reflects inadequate financial infrastructure in the rural areas, in which $100 billion worth of remittances are sent in annually. People living in the rural areas have to travel to urban areas, where two-thirds of the payment outlets located, to receive their remittances, undoubtedly decreasing the remittance benefits due to travel costs.
Since remittances have been argued to increase household income and consumption, what strategies should be employed in refining the current mechanism and tools to support the remittance inflows in developing countries?
The World Bank pointed out that there should be
a mainstreaming of migration and remittance issue, particularly in the post-2015 development framework. The issue itself has gained popularity as the need to find a “new financial source” to boost development is becoming urgent. Thus, the global community will likely see this topic being discussed frequently within the next few years. In fact, it has been recently featured in “a series of high-level dialogues”, including The Thematic Consultation on Population Dynamics in Dhaka early this year.
Reducing the cost related to migration and remittance has also been at the heart of the global discussion. The World Bank noted that migration experts have been pushing for lower documentation and recruitment costs, which are often incurred by migrants. In addition, the brief also pointed out that there has been a discussion to support the issuance of “diaspora bonds” to engage overseas workers further into their countries’ investment for development efforts.
The IFAD’s recommendations strike a similar tone to the World Bank brief. The organization suggested that there should be an effort of “financial inclusion” made by financial institutions in developing countries, since families of migrants often lack information about ways to save or invest their remittance money. In addition, IFAD sees “diaspora savings” as an important tool to help fund development projects in local communities. Such an initiative has in fact been instigated by Athika, a large NGO in the Philippines, through channeling remittances into investment in agricultural projects.
By and large, amid the financial downturns in some advanced countries, remittances have risen to be an important power in bringing income to households in developing countries. However, recent publications have shown that although the value of remittances has grown, the transfer cost is still floating at levels above the pledged threshold. Therefore, efforts to maximize the benefits of remittances on recipient families and local communities, particularly on poverty reduction, should continue to thrive and this includes commitments from the governments of both advanced and developing economies, as well as financial institutions in developing countries.