Remittances Are Effective Weapon Against Poverty

Immigration and migration are among the hottest political topics today, particularly in Europe and the US. The World Bank is to be congratulated for having highlighted one issue in a report issued this week: the economics of money transfers by immigrants to their countries of origin. The figures revealed in the report are staggering, particularly the $167bn (£96bn, €142bn) that flowed to developing countries last year. These are just the official numbers. The real amounts may be larger.

The top destination for migrants is the European Union, currently with 71m, followed by the US with more than 40m. The top recipient countries of recorded remittances in the year were India with $21.7bn, China $21.2bn and Mexico $18bn. For some smaller, poorer countries, remittances amounted to more than 20 per cent of their gross domestic product. Worldwide, remittances are now growing at 8-9 per cent per annum.

The most striking fact in the report is that remittances are somewhere between two and three times the level of development aid from rich to poor countries. Yet they have received little attention from economists and aid and trade bureaucrats. Remittances, goes one argument, are not development and there is no evidence that they increase growth.

But remittances from unskilled workers boost disposable income, have multiplier effects, make education more affordable and, according to the World Bank, increase developing countries’ access to bond markets. Remittances reach their intended targets and are not siphoned off into grandiose white elephant projects. The economic impact of money remittances, the bank says, could be greater than the gains even from trade liberalisation.

What should western policy makers do to encourage this growing weapon for fighting poverty? As the bank argues, policies should increase competition between money-transfer companies in order to reduce fees that are often regressive and fall hardest on the poor. Access to distribution networks such as post offices should be opened up to small competitors.

But there is an awkward dilemma for governments: striking the right balance between measures to counter terrorist financing and money laundering on one hand, and facilitating money flows through efficient channels on the other. It is difficult to believe the right balance is being struck at present.

The average per capita remittance by poor migrants in developed countries is around $200 per month. One would need to aggregate a lot of “$200s” to finance the kind of terrorist network al-Qaeda has reportedly built around the world. It is difficult to believe al- Qaeda would not find easier methods to move funds, or have other means of remitting money, either informally or through the banking system.

Recently I read of a shop in west London owned by a Filippino couple who had been sending cash in small amounts to the Philippines for years. This company pays a biannual licensing fee and charges a flat $10 fee for money transfers, whereas the large international companies charge as much as $30 per remittance.

Last year Chevy Chase Bank closed the shop’s account, as did subsequently the Bank of America and then Wachovia Bank. The banks did so because they felt they did not know the shop’s customers, although the shop had the identification details of its customers.

Money transfer companies use bank accounts to transfer money each day and to wire money to accounts in foreign countries, and without banks they cannot operate. The US Patriot Act in 2001 severely tightened the “know your client” requirement for banks and fund transfers in an ambiguous way. The correspondent bank accounts of hundreds of money service businesses have been closed by American banks anxious of being targeted by the Financial Crimes Enforcement Network. JPMorgan Chase has already decided to cut all ties with money transfer companies and other banks are considering the same step.

The European Commission predictably is threatening to go further, proposing that banks be required to register the name, address and bank account of anyone making an international money transfer, however small. Records will have to be kept for five years.

It is difficult to believe that the measures taken by the US and the EU will have much effect on terrorism. They will merely drive many money transfers underground and cause more money to be carried by lorries. Alas, they will also increase poverty by making it unnecessarily difficult and expensive for hard working immigrants to support their families in their own countries.