What do you think about foreign development aid? Are we sending too much or too little to lesser-developed countries?
If, like me, you follow global development issues, you probably have an opinion on both topics, which have become perennial focal points of heated debate in government halls and online forums worldwide.
But what if all the passion behind those debates is misplaced? What if a far less-discussed solution to global poverty could have a greater impact on the poor than either of these approaches while also avoiding the downsides that make them so controversial?
I watched a fascinating TED talk earlier this month, in which economist Dilip Ratha made the case for a poverty alleviation tool that flies largely under the radar: remittances.
He laid out some astonishing numbers:
- There are 232 million international migrants in the world – if they comprised one country, it would be the world’s fifth largest, with an economy larger than that of France.
- India received 72 billion dollars in remittances last year – larger than its IT exports – while Egypt’s remittances amounted to three times the size of revenue from the Suez Canal.
- Some 180 million of these global migrants send money home regularly, amounting to 413 billion dollars in annual remittances sent by migrants from developing countries back to their homelands.
Ratha said that annual remittance amount is remarkable, “because it is three times the size of the total of development aid money. And yet you and I, my colleagues in Washington, we endlessly debate and discuss about development aid, while we ignore remittances as small change.” (If you’re curious, that remittance total is also about five times larger than the global loan portfolio in microfinance – and naturally, it doesn’t have to be repaid with interest.)
Remittances already provide a lifeline to both poor individuals and families, and to their national economies. In some countries, they make up anywhere from a fifth (Liberia) to a half (Tajikistan) of GDP. As Ratha pointed out, unlike private investment money or development aid, the flow of remittances isn’t subject to the shifting priorities of businesses, NGOs or governments. And it doesn’t only come from wealthy nations. “Remittances don’t flow back at the first sign of trouble in a country,” he said. “They actually act like an insurance – when a family is facing hard times, remittances increase.” Ratha cited that in Nepal, the poverty rate fell from 42% in 1995 to 31% in 2005 in spite of the country’s political and economic crises. About half of that decline is most likely attributed to remittances from India.
The vital role of remittances has led to growing calls to remove migration restrictions in developed countries. And some economists have estimated that an open-border policy could double both the average wage of workers in developing countries and world GDP.
But let’s be realistic: even before Ebola and ISIS came along, political realities in much of the developed world had made the prospects of even modest immigration reform uncertain at best. Even so, other solutions exist.
A good place to start, according to Ratha, would be to reduce the high cost of sending money home. “Money transfer companies structure their fees to milk the poor,” he said. He cited some disturbing average fees: 8% globally, 12% to send money to Africa, 20% to send money within Africa, and an astonishing 90% to send money to Venezuela.
I agree with Ratha that the development community should work together to decrease remittance costs. “If we reduce costs to 1%, that would realize a savings of 30 billion dollars per year. 30 billion dollars per year, that’s larger than the entire bilateral aid budget going to Africa per year. That is larger than, or almost similar to, the total aid budget of the United States government, the largest donor on the planet.”
Thanks to the astonishing proliferation of mobile access in the developing world, platforms exist that could get remittance money quickly and easily into the hands of the poor. But in spite of recent movement toward cross-border mobile money transfers in developing countries, smoothing remittance channels from wealthier countries is an uphill battle. Strict regulations to stop money laundering and the financing of terrorism (among other obstacles) have prevented similar solutions from taking root. However, in Ratha’s view, there is little data to support any significant connection between money laundering and small remittances, and governments should relax regulations on amounts under 1000 dollars.
His talk featured some other intriguing ideas for how governments and development organizations could encourage the flow of money to the poor, involving everything from post offices to a global non-profit remittance platform. While some of these proposals sound more feasible than others, I personally find it hard to disagree with his conclusion: “Remittances empower people. We must do all we can to make remittances safer and cheaper. And it can be done.”
Ratha, D. (2014, October 14). Dilip Ratha: The hidden force in global economics: sending money home [Video file]. Retrieved from http://www.ted.com/talks/dilip_ratha_the_hidden_force_in_global_economics_sending_money_home?language=en.