Courtesy Reuters

Between 2003 and 2008, on the back of a growing world economy, remittances more than doubled, reaching as much as $330 billion in 2008. Now, with the world's largest economies in steep decline, many fear that the flow of remittances will also take a hit, threatening the millions who depend on funds sent by relatives and friends working abroad to meet basic needs.

In fact, remittances are proving to be one of the more resilient pieces of the global economy in the downturn, and will likely play a large role in the economic development and recovery of many poor countries. Remittances provide the most tangible link between migration and development, a relationship that has only increased in importance since the crash. To ensure that these funds can move efficiently and easily around the globe, governments of rich and poor countries should attempt to make remittances as accessible and cheap as possible.

In the economic boom years of the last decade, the amount of remittances to developing countries grew to several times the size of official development aid. For many states, remittances are now the largest and least volatile source of foreign exchange, and for some countries -- such as Lesotho, Moldova, Tajikistan, and Tonga -- they exceed one-third of national income. Meanwhile, in many countries such as El Salvador and Nepal they help anchor the value of the national currency by bringing in the foreign currency required for financing imports and foreign debt. More locally, remittances provide funds for education and health expenses as well as capital for small businesses. In Sri Lanka, for example, the birth weight of children in remittance-recipient households is higher than that of children in other households.

Lant Pritchett, an economist at Harvard University, recently estimated that allowing 3,000 additional Bangladeshi workers into the United States would generate greater income gains than the annual income contribution of Grameen, the pioneering microfinance bank, to Bangladesh. Although private remittances cannot take the place of official aid efforts, this does suggest that an increase in remittance flows could be an effective way to continue development efforts in the face of shrinking national budgets.

Historically, remittances have tended to rise in times of financial crisis or natural disasters because migrants living abroad send more money to help their families back home. For example, remittance inflows increased to Mexico following its financial crisis in 1995, to the Philippines and Thailand after the Asian crash in 1997, and to Central America after Hurricane Mitch in 1998.

But today's global economic crisis is different. The world's wealthier countries are also suffering, which, in turn, is causing employment opportunities for migrant workers to disappear and their incomes to fall. For the first time since the 1980s, remittances to developing countries are expected to decline between seven and ten percent in 2009.

The anticipated drop, however, will not be as dramatic as many fear. Despite growing economic hardship in host countries, many workers are choosing to remain, both because immigration controls have made reentry more difficult and because income levels back home are even lower. In order to continue sending remittances, many migrants are accepting lower compensation, switching jobs, sharing accommodation with other migrants, and cutting back on living costs -- one meal saved in Dubai or New York is worth several in Mumbai or Mexico City.

A shift toward stricter immigration and labor policies means that a large number of these migrants are losing their legal status -- which means they are increasingly forced to rely on unofficial agents to send money, such as couriers; informal traders; bus drivers; airline crew; trading companies; and hawala brokers, who use a paperless remittance system. This is a reversal of a previous trend that began after 9/11, when many countries cracked down on informal remittance channels and pushed migrants to use banks and registered money-transfer operators. With the return to unofficial means, official data may be understating the true size of global remittance flows by as much as 10-50 percent.

As the crisis deepens, a lack of jobs will force some workers home. But they will return with savings that are typically recorded in official statistics as remittance inflows. During the Persian Gulf War in 1991, for example, a large number of Indian migrants came back home from the Gulf, driving up the amount of remittances to India. Migrants not only bring back savings but also business skills. Jordan's economy performed better than many observers had expected between 1991 and 1993 because of the return of relatively skilled workers from the Gulf.

Return migration in the current crisis appears to be negligible so far, but if it happens, the workers coming back home should be provided with help in setting up small businesses and reintegrating into their communities, instead of being the object of envy or fear of job competition.

In the global downturn, fluctuations in currency rates have led to some surprising increases in remittance levels -- especially between India and the United States. Remittances meant for consumption will likely fall as the U.S. dollar appreciates against the Indian rupee, because the same basket of local goods and services in India can now be purchased with fewer U.S. dollars. However, the remittances meant for investment -- or the purchase of goods with long-term payoffs -- will rise as the depreciation of the rupee produces a "sale effect" for housing and other assets in India.

Indeed, as the Indian rupee has depreciated more than 25 percent against the U.S. dollar in recent months, there has been a surge in remittance flows to India. In March 2009, the World Bank revised its estimate of remittance flows to India in 2008 from $30 billion to $45 billion; a few months later, the official number for 2008 was reported as $52 billion. There are signs that a similar surge in investment-related remittance flows is happening in Bangladesh, Ethiopia, Moldova, Nepal, Pakistan, the Philippines, and Tajikistan.

The crisis is also producing "reverse remittances" in the case of migrants who are left without work or with less work than before, but who choose to remain in their adopted countries. To fund their living costs, some of these migrants are forced to spend savings they have previously sent home. This phenomenon is most visible in the United States, where some workers from the Dominican Republic and Mexico are relying on such funds to stay put during the economic downturn.

With lower levels of foreign aid and investment likely over the short term, remittances will have to shoulder an increasing percentage of local development needs. Unfortunately, the greatest risk to remittance flows does not come from the economic downturn itself but from protectionist measures taken by many destination countries, including those in the developing world. Such measures include lower annual quotas, higher salary and skill requirements, and longer waiting periods for hiring migrant workers.

All parties -- national governments, private enterprises, and workers themselves -- would benefit from a market-based approach. In the face of falling revenue, businesses need flexibility in hiring decisions, not to be forced to fire or hire workers based on nationality. There is increasing evidence that migrant workers, especially the unskilled millions, do not compete for jobs taken by native workers. And if there is competition for skilled work, it is mostly a short-term effect; over the medium term, skilled migrants contribute to the growth of businesses and to the development of new products and processes. In the United States, for instance, migrant workers have made valuable contributions to the domestic health and information technology industries.

Many remittance providers currently charge fees of more than ten percent. That is too high. To facilitate the transfer of funds, source countries should make it easier for migrants to access cheap and reliable providers. This would require improving competition and transparency in the remittance market, applying a simpler and identical set of regulations across state and national boundaries, and greater use of postal networks and mobile phone companies. Onerous regulations intended to combat money laundering and the financing of terrorism are a major impediment to cross-border remittances. Such regulations need to be balanced and simplified.

The exclusive partnership arrangements between money-transfer companies and the postal and banking networks of most countries are a hindrance to competition among firms offering remittance services. Instead of operating under these closed agreements, all providers should have access to global financial networks. A standard remittance is a simple financial transaction that -- if lightly regulated and processed using modern technology -- can cost as little as one percent. If funds were transferred through banks and other financial intermediaries, migrants and their beneficiaries would be encouraged to save and invest. Intermediary banks could also use remittance inflows as collateral to borrow larger sums in international credit markets for local investments.

To best leverage these flows for development, it is time to create an international body -- an "International Remittances Institute" -- that would monitor the flows of labor and remittances and oversee policies to make them easier, cheaper, safer, and more productive. The proposed African Remittances Institute, supported by the African Union and the European Union, is a small but important step in this direction. But a global institution can only be created with the support of the entire global development community -- as such, the forthcoming Global Forum on Migration and Development in Athens early next month should consider this proposal. It is not just a question of economic growth for the developing world but of economic recovery for the West.

  • DILIP RATHA is Lead Economist of the Migration and Remittances Team at the World Bank.
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