Wave of Remittances Riding the Political Tide into Cuba

“The culmination of years of talks resulted in this handshake between the President and Cuban President Raúl Castro during the Summit of the Americas in Panama City, Panama.” (Official White House Photo by Pete Souza)

Role of Remittances in the Region

Remittances have major macro and microeconomic impacts on economies around the world. Historically, they have enhanced the GDP of the receiving country and helped fill the gap between a family’s income and its necessary expenditures, such as healthcare and education. The Latin America and the Caribbean (LAC) region is no exception to these observable benefits. The main source of remittances to the LAC region is the United States and recent data suggests that remittances to this region are increasing. In 2011, the U.S. sent an estimated $44.3 billion in remittances to the LAC region, with Mexico receiving the largest portion. In 2015, global remittances to the LAC totaled more than $65 billion, representing a growth of 6% from the previous year.

Cuba has been a bit of an enigma in the study of remittances to the LAC. Since the Cold War, both Cuban and U.S. foreign policy restricted, and even prohibited, the transfer of money between the two countries. While these restrictions and prohibitions were often circumvented, such policies inhibited the collection of accurate economic data. However, the recent restoration of diplomatic relations between the two countries has relaxed these onerous regulations, increased Cuban immigration to the United States, and contributed to an increase in U.S. remittances to Cuba. Evidence now suggests that the increased remittances are already making an impact on the Cuban economy.

A Cold Shoulder Towards Remittances

In 1959, the Cuban Revolution and the ascendance of the Castro regime created an ideological rift between the United States and Cuba. In 1960, the U.S. ceased diplomatic relations with the island nation and imposed a trade embargo. In return, Cuba allied itself with the Soviet Union. Rocked by events such as the U.S. orchestrated invasion of the Bay of Pigs and the Cuban Missile Crisis in 1962, the neighboring countries have had a turbulent past. Their political differences and tempestuous history led to a series of economic policies by which each government tried to control their flow of capital, particularly in the form of remittances.

From 1960 to 1979, the Cuban government actively discouraged the receipt of remittances, particularly from the United States. Cuba desired to break free of what it referred to as the United States’ imperialistic hold over Latin America and the Caribbean. After the revolution in 1959, “visits by Cuban émigrés, a common channel for unofficial remittance transfers, were prohibited. Thus, state-sanctioned remittances were restricted to in-kind transfers of small-scale packages that contained clothing, medicines, food, and other consumer goods.” In light of improved relations with the U.S. in the late 1970s, the Cuban government moved away from its prohibitive stance on remittances. Starting in 1978, Cuban emigrants were allowed to reenter the country to visit their families, often bringing small amounts of currency with them. Since U.S. currency was illegal on the island, however, remittances were limited. In 1991, the collapse of the Soviet Union, Cuba’s biggest trading partner and ally, forced the island’s government to rethink its economic policies and its relationship with the United States. Facing economic turmoil, Cuba allowed and even encouraged the transfer of remittances through official channels to help boost its economy. In 1993, Cuba legalized the use of the U.S. dollar on the island. Additionally, the Cuban government reformed its banking system to encourage remittances through official transfer methods “by diversifying financial banking instruments and improving trans-national transfer mechanisms” to make receiving remittances faster and easier. In short, economic challenges forced Cuba to become more open to its emigrant networks and remittances.

The United States also tried to control economic flows to Cuba. Beginning in 1963, the Kennedy administration enforced strict prohibitions on remittances and travel to Cuba. Along with the trade embargo, the U.S. hoped that, by restricting remittances and travel, it could limit the flow of dollars into the Cuban economy thereby inhibiting the island’s growth and, ultimately, undermining the power of Castro’s regime. However, in 1978, President Carter’s administration marked the beginning of a new policy towards Cuba. The U.S. removed its remittance ban for the first time since diplomatic ties were severed in 1963. Remittances were, however, quickly subjected to regulation and control, making it difficult to transfer money. Cubans could only send a maximum of $500 home to their families, and those funds were to be used solely to assist relatives with the cost of emigration. In 1994, the U.S. once again banned all remittances to Cuba. Even after remittances were allowed again in 1998, U.S. economic regulations stifled the Cuban remittance market. As diplomatic relations have normalized in the last five decades, the U.S. and Cuba have similarly relaxed economic restrictions on the transfer of remittances.

The Times They Are A Changin’

Between 2008 and 2014, remittances to Cuba experienced a growth of $1.7 billion, causing Cuba to become the seventh largest remittance market in the region, totaling $3.1 billion. This increase is the highest in the LAC region remittance market, with a growth rate of 116.2% between 2008 and 2014. According to one report, Cuba received $3.4 billion in remittances in 2015. Another report estimated that Cuba received $1.4 billion from the U.S. in 2015, almost double the 2014 remittance figure. With these numbers, it is clear that Cuba is continuing its tremendous growth pattern, making remittances more profitable than some of Cuba’s biggest industries, including sugar, tobacco, medicine, and tourism. This growth can be attributed to several factors, as both U.S. and Cuban economic policies have transitioned to encouraging the transfer of remittances between the two countries. Furthermore, as official transfer methods become more transparent and easier to use, Cuban emigrants in the U.S. are able to send remittances home instead of using unofficial and unrecorded money transfers, which do not contribute to official remittance data.

In 2009, President Obama ended restrictions on family remittances. In 2011, restrictions were further loosened, allowing anyone in the US to send remittances to Cuba. In 2015, transfer limitations were lifted, increasing the permitted amount of remittances that could be sent for non-family members, humanitarian projects, and private sector growth. The revised 2015 policy also increased the maximum amount of remittances that could be sent per quarter from $500 to $2000. Additionally, those sending remittances no longer needed a specific permit, meaning that more people could send larger sums of money. The Obama Administration has largely led this easing of regulations on travel and remittances through the OFAC, Department of State, Treasury, and Homeland Security. There have been several attempts by Congress to either enhance or to prevent the easing of regulations, but Congress has not passed or taken action on these proposed legislations.

Cuba has faced economic hardships, largely due to the U.S. embargo, since the Revolution in 1959, but its economy has recently experienced another decline. In the post-Soviet era, Cuba turned to Venezuela as a main trading partner. Cuba and Venezuela had a successful arrangement in which Venezuelan oil was traded for Cuban professionals, especially doctors. However, declining oil prices triggered an unprecedented collapse of the Venezuelan economy, which, in turn, has caused economic turmoil in Cuba. The economic depression in Venezuela and the ensuing depression in Cuba have forced the Castro government to impose new austerity measures. Even with these measures in place, however, the Cuban economy has continued to decline. In a drastic attempt to address this economic turmoil, Raúl Castro has “allowed entrepreneurs to start small businesses, cut the state workforce by 11% and opened a free-trade zone for foreign firms at the port of Mariel.” The expansion of the private sector links the reception of remittances with the emerging entrepreneurship on the island in a way that gives the Cuban people a bigger role in the development of their own economy. In fact, in the wake of this rise of small businesses, Cubans are more likely to use money from remittances establish small business and entrepreneurship than spend those funds on household expenditures, a trend not seen in many other LAC countries. The economic downturn, in addition to these new opportunities for private-sector growth, may encourage Cubans abroad to send more money back home.

In addition to Cubans sending more money home and doing so through official means, there has also been an increase in Cubans living abroad. Beginning in 2013, Cuba eased travel restrictions for its citizens, allowing them to more easily obtain exit visas. More recently, there has been another increase in Cuban emigration to the U.S., which some argue, is due to fears that the normalization of relations will lead to changes to or the termination of the Cuban Adjustment Act of 1966. The Cuban Adjustment Act (CAA) currently offers U.S. citizenship to Cubans who enter the United States (after a brief inspection) and establish residence for at least one year. Many Cubans speculate that normalizing relations and travel will give the U.S. reason to end this policy. This sense of urgency can explain a large part of the recent surge in Cuban immigration to the United States. Since immigration is expensive, the threat of the CAA’s termination is encouraging Cubans living abroad to send more money home so that their families can also leave the country.

Future Outlook

Since the normalization of diplomatic relations, migration to the U.S. from Cuba has increased along with remittances sent from the U.S. to Cuba. It is likely that U.S. remittances to Cuba will continue to grow in the coming years as other restrictions are gradually removed. Thanks to the thaw in Cuban and US relations, foreign investment from other countries, hesitant to provide economic aid in the past, has also started to flow into the country. Economic growth and normalized U.S. relations could make Cuba a bigger player in Latin America and the world.

Looking forward, there are still many unknown variables that could impact the normalization of relations between Cuba and the US, and, more specifically, the flow of U.S. remittances to Cuba. One immediate factor is the upcoming U.S. presidential election. With immigration and the U.S. economy significant issue areas in this election cycle, the new President may decide to continue with normalization or regress from open relations with Cuba. Regime changes in embattled Venezuela and Cuba could also accelerate or hinder normalization. In the case of Venezuela, further economic decline could push Cuba to accelerate private sector growth and normalize relations with the United States. On the other hand, economic improvement, rising oil prices, and new leadership in Venezuela could allow Cuba to once again rely on it as a trading partner, reducing the urgency to normalize relations with the United States.


The Economics of Migration

In the current debate surrounding refugee migration, most people seem to fall into one of two camps: those who favor hosting refugees, and those who oppose it. But many seem to have forgotten that human migration has supported human progress and contributed to global development for centuries.

For opponents of migration, the large influx of foreign born laborers seeking jobs, education, and security is something to be feared. They fear that refugees and other migrant groups are low skilled workers hoping only to benefit from social welfare programs and decrease the standard of living in their host country.  Evidence suggests, however, that on average over a third of migrants entering the workforce have completed post-secondary education, and that in most countries, migrants contribute more in taxes and social contributions than they receive in individual benefits.

We must rise above this seemingly instinctual reaction and consider the benefits that migration has had in those countries that migrants and refugees leave behind. Not only does migration increase wages for workers that stay behind, but migrant workers often remit money to their families back home. This supplementary income is, in turn, invested in education and health care, important indicators of a country’s development that can lift people out of poverty. The Migration and Remittances Factbook 2016 suggests that total remittances were estimated to have reached $601 billion in 2015, of which $441 billion went to developing countries, a total that is almost three times larger than official development aid flows. These remittance flows to developing countries have grown significantly in recent years, from $325 billion in 2010, to $372 billion in 2011 and $401 billion in 2012.

Nevertheless, the high financial costs of international migration and the transmission of remittances are inhibiting the benefits of migration. The 2015 Sustainable Development Goals (SDGs) address these issues. Target 8.8 notes that labor rights, including those of migrant workers, should be protected, and Target 10.7 calls for the facilitation of the orderly, safe, regular and responsible migration of people through the implementation of planned and well-managed migration policies. In addition, Target 10.c strives to reduce the costs associated with remittances to 3% by 2030. Taken all together, these innovative targets would reduce the cost of remittances and encourage sustainable and profitable international migration.

As the Sustainable Development Goals suggest, we need to recognize what technology can do today and use it to redesign the world for a more inclusive and prosperous tomorrow. Modern technology requires specialized knowledge, and the easiest way to gather such knowledge is to recruit from outside of the system. It is easier to move brains than it is to move knowledge and expertise. As such, migration is key to the diffusion of knowledge and its long-term positive impact on worldwide development. In short, we cannot have global markets, trade, products, and services without global migration.

Show Me the Money

Last month the Consumer Financial Protection Bureau (CFPB) proposed a revision to its Remittance Transfer Rule that would bring any private or public company conducting more than one million yearly money transfers under its jurisdiction. The reform would require these organizations be subject to the CFPB’s remittance procedures and regulations established last October. It would hold companies accountable for:

  • Disclosing remittance information to customers such as receive date, fees, and exchange rates
  • Allowing customer disputes and refunds over remittance errors
  • Permitting customers to cancel remittance orders within 30 minutes of being sent

images-1According to the CFPB, there are 25 non-bank institutions that make more than one million international money transfers a year, and that send over 80% of yearly remittances. All of these companies would fall under the expansion of the remittance act and would be subject to regulation. The proposed change is a large step forward for remittance protection because it places private companies formerly exempt from the Dodd-Frank Act under the CFPB’s jurisdiction. Previously, only large public institutions such as banks were subject to remittance regulations. This new standard would attempt to level the playing field and prevent companies such as Western Union from improperly exploiting customers with limited access to money transfer locations.

The new legislation is unique in its approach as to what qualifies as a large money transfer company. Instead of monitoring the amount of money transferred, it monitors the number of transfers. The reason the CFPB decided to establish the regulation with a transfer minimum instead of a dollar minimum is due to a lack of knowledge about the remittance market. The CFPB has a better idea of the number of remittances each company sends yearly and is less knowledgeable about how much money each company sends. Setting the threshold at one million international transfers a year allows the regulation to encompass more companies than if the CFPB had tried to establish a monetary quota.

imagesWhat does this proposal mean for US remittances? The regulations could be a step in the right direction and the change could lead to an increase in US remittances or at least a more favorable attitude towards US remittance procedures. They recognize that money transfers are a profitable business that companies can use to exploit people with inelastic demand who want to send money internationally to friends or family members in need. But until the proposal is actually passed, it is difficult to say exactly what impact it will have on US remittances.

Some argue that the new regulations do not go far enough. The change does not impose any regulations on fees or exchange rates across companies, one of the greatest hindrances to remittances. Even with these regulations, it is still the customer’s responsibility to research the exchange rate and fees to find the best price. Companies also still have the power to establish unfavorable exchange rates and fees for the customers with more limited options, knowing that in certain areas there are few other money transfer companies. But this legislation could be a precursor to large scale changes in CFPB remittance policies.

There is no guarantee, however, that this act will actually pass. It faces opposition from the small business community. The Dodd-Frank Act labels any business making less that $19 million a year a small business and small businesses are exempt by law from the regulation of the Dodd-Frank Act. Of the 25 institutions that the proposed changes would encompass, ten make more than one million yearly transfers but still qualify as small businesses. The big question is whether the CFPB has the right to enforce regulations on small businesses even though the regulations may be in the public’s best interests.

Long Arm of the Taxman Reaches to the Diaspora

On a global scale, remittances are one of the most important financial flows to economic development. The World Bank has found that remittances have reached $414 billion globally, and expected to cross the $500 billion by 2016. This massive amount of money flowing across borders has lead many academics and policy makers to dream up ideas of ways to harness remittances to help develop their countries. In particular, Eritrea has decided on a more proactive and heavy-handed strategy, specifically by taxing their diaspora community as if they were their own citizens. By using strong-arm tactics and threats to the families of the Eritrean expatriate community, Eritrea’s government is trying to expropriate their money.

Map of Eritrea and its surrounding countries

What has become known as a diaspora tax is a 2% income tax imposed by Eritrean consulates in various cities around the world. This is usually assessed with forms to list monthly or yearly income going back to Eritrean independence in 1993. Unpaid taxes are expected to be paid after a person’s 18th birthday, with students even expected to contribute at least 50 ($84). One man in 2012 was demanded to pay 600 euros in “arrears” to visit his mother, and then 800 euros to visit a seriously ill brother. The retribution for failure of payment can be harsh. Family members in Eritrea can be harassed, with seizure of property and black-listing of bank accounts all considered as possible retribution. There have even been reports of people not being able to leave Eritrea unless they paid their diaspora tax.

This is an important issue due to the size of the Eritrean diaspora and migration. A report from the World Bank on migration and remittances stated in 2010 that emigration out of Eritrea was 941,000 people, roughly 18% of the total population. The impact from this migration is massive for the Eritrean economy, with estimates of remittances being 32% of GDP in 2005. This figure lines up with a Chatham House report from 2007 that estimated that remittances were an estimated $350-400 million, which would mean $7-8 million would have had to been gained by the Eritrean government without even considering what would have had to been paid before the remittances were sent. With the mining sector becoming more important, Eritrea may become less dependent on remittances for their economic development. Even so, a report by Berhane Tewolde has shown that over one-fifth of Eritreans live in a house with at least one migrant, of which ¾ receive remittances from abroad, highlighting just how important remittances are for normal Eritreans.

Eritrean diplomat Semere Ghebremariam O. Micael, expelled from Canada

The condemnation from the international community has been swift, both for the practical implications of the diaspora and also the use of the funds by the Eritrean government. Eritrea’s government is widely considered as a highly corrupt country, ranking 160 out of 177 countries in the last Corruptions Perceptions Index by Transparency International. It also has been ranked last in Report Without Borders’ Press Freedom Index, behind North Korea. This terrible ranking stems from the fact that 30 journalists are imprisoned, the most in Africa, and the governments control of media while jamming incoming independent broadcasts. They are are also allegedly funneling money to Al-Shabaab in Somalia, causing regional destabilization for the sake of indirectly attacking Ethiopia, Eritrea’s long-standing enemy. The United Nations Security Council has already acted upon the diaspora tax, banning them through Resolution 2023 in 2011. Even so, Eritrean consulates around the world have continued trying to collect the tax, with Canada expelling Semere Ghebremariam O Micael, Eritrea’s consul in Toronto, for continuing to collect the diaspora tax. Micael’s response was that he was only providing “information” on how to provide donations.

It’s hard to tell whether this policy of taxing the diaspora will continue with increasing pressure from the international community. Even the stability in Eritrea can be questioned, with an attempted coup failing in January 2013. One thing that is for certain is that only normal Eritreans are the ones with the most to lose from this policy.

President of Eritrea, Isaias Afwerki

Bitcoins: A New Way to Send Money Home?


In order to send $200 from the United States to Kenya it costs around $15. To send to the Philippines $10.  To send to the Dominican Republic $13.  On average, sending remittances costs around 8.58% of the amount sent.  Due to the high cost of sending money overseas, it is no wonder that migrants want to find the cheapest way possible to send their money back home.  With the emerging popularity of Bitcoin, migrants may have found a way to send money overseas while avoiding the high fees of companies like Western Union and MoneyGram.

Bitcoin, a form of virtual currency, offers a way to transfer money anywhere in the world for an extremely low fee.  It was established in 2009 and has since gained a reputation for its prices being highly volatile.  Bitcoin is earned through data-mining, a process which, in the simplest of definitions, involves a computer running an open source software program that solves complex mathematical problems.  Once a problem is solved, a Bitcoin is gained.  However, this process is slow and solving the mathematical problem can take weeks.  Perhaps an easier way to obtain Bitcoin is to purchase it via websites like MtGox.  As soon as an individual obtains Bitcoin it is easily and immediately transferable peer-to-peer.

Using Bitcoin to send remittances essentially decreases the need for companies like Western Union or MoneyGram, thus making it a seemingly good idea to use for overseas money transfers.  These companies may begin to compete with newly forming Bitcoin exchange companies like Buttercoin and BitPesa, who intend to open local Bitcoin exchanges within countries and trade Bitcoins for local currency.  While Buttercoin and BitPesa will charge a fee, it is not expected to be nearly as high as fees charged by traditional money transfer companies.

Another incentive for migrants to use Bitcoin is the speed at which the money will transfer.  Traditional money transfer routes can take anywhere from under an hour to five days or more to wire money.  With Bitcoin’s peer-to-peer network, transferring money is as quick as sending an email.

However Internet availability in the developing world is a major hurdle when it comes to sending remittances via Bitcoin.  While the sender is unlikely to have problems accessing and maintaining an internet connection – since many senders live in well developed countries – the recipients of remittances may have difficulty accessing the internet.  This poses a problem for Bitcoin because it functions as an online currency, and without access to the internet it cannot operate.

The volatility of Bitcoin may have migrants skeptical about using it at all for remittances.  However, this worry is quelled by the fact that Bitcoin exchange companies plan to absorb any change in price.  For example, when an individual sends $200 worth of Bitcoin, that price is locked in and the recipient will receive that money even if the price of Bitcoin drops.

But perhaps Bitcoin’s biggest downfall, at least when it comes to sending remittances, are the Bitcoin exchanges.  The idea of migrants using Bitcoin to send money back home is still new, and essentially an untapped market.  Some of the largest recipients of remittances, India, the Philippines, Mexico, Nigeria, and Egypt, simply do not have established Bitcoin exchanges yet, and their migrant populations do not know what Bitcoin is.  Companies like Buttercoin aim to tackle this problem by setting up local Bitcoin exchanges in countries that receive high amounts of remittances.

With remittances expected to rise to $707 billion by 2016, Bitcoin can become a viable way to send and receive remittances anywhere in the world for those looking to cut out high money transfer fees.   It remains to be seen, however, it is likely that Bitcoin exchanges are going to have an impact on traditional wire transfer companies in the future.


When All Else Falls, Remittances Rise

After the recent military ousting of president Morsi by the Egyptian military, the US has decided to put a cap on military aid to the tumultuous country. This is not the first time. Back in August, the U.S. had cut some of its economic aid to the Egyptian government. Cutting off military aid may have a louder effect, considering military aid to Egypt greatly  surpasses economic aid. Thus far, the Egyptian government has been expectedly peeved in response to these actions.

With government aid in the news, it’s relevant to look at some of the other financial flows to Egypt. At CGP, we try to get a more complete picture of foreign assistance by looking at investment, philanthropy, and remittances.

With the recent turmoil, investment, the most fickle of the four flows, has subsided after the sharp rise in the spring of 2013. Much of this earlier rise came from neighboring Arab nations, after Europe and the US pulled out. Since the military takeover, sources suggest that all in all FDI has dried up and billions have been lost.

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Remittance Services in a Race Against Time and Barclays

Money-transfer services (MTS) are often the easiest way for people to send money abroad. A sender gives his money to a service either online or in a branch office, and is charged a small fee according to the size of the amount to be transferred. Almost instantly, the MTS’ branch offices in the destination country are authorized to pay out cash to the designated recipient. The branch offices have access to the company’s bank account, which aggregates all the profits made from service charges and stores all the money entrusted to the MTS to transfer abroad until it is paid out. MTS operations cannot function without this type of business bank account that allows them to store their profits and their customers’ money. In the United Kingdom, most MTS firms have bank accounts at Barclays.

However, this past June, Barclays announced that it would close hundreds of accounts belonging to its MTS organizations. These include several accounts of notable organizations through which remittances are sent to Somalia. Without a secure bank account, most legitimate UK-based MTS companies will likely have to shut down; like all businesses, they simply need a bank account to function. Since the Barclays announcement, the Somali diaspora and the aid community have desperately raced to prevent or forestall the account closings, hoping to enable the MTS companies to continue their operations.

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