Remittances: fuelling consumerism or aiding development?

As official aid flows decline, can remittance earnings plug the gap? Is the money sent home by emigrants simply used for consumption? Could it be more productively harnessed for development? Should governments intervene to lower transaction costs and devise mechanisms to direct remittances into productive investments?

A series of papers from the Inter-American Foundation (IAF) reports on a conference to develop greater understanding of remittances in Latin America and the Caribbean. They show how some of the poorest workers in the USA are remitting vast sums, at times making such sacrifices that they fail to invest in developing skills to improve their prospects in America.

Global remittance flows are estimated to exceed US $100 billion a year. In the western hemisphere they quadrupled in the 1990s to US$16 billion a year as more workers found employment in the USA. In El Salvador remittance income of US$1.7 billion represents 13 percent of Salvadoran GDP. Remittances to El Salvador often exceed the total value of exports and constitute more than half in the Dominican Republic and Nicaragua.

It is not the poorest of the poor who emigrate. In Central America and the Caribbean increasing numbers of young men and women of some means – many middle class – emigrate. While households sustained by remittances are financially better off, the rate of family breakdown, families, parentless households and children reared by grandparents testifies to the social costs.

The value of collective remittances is probably only one percent of the total. There are community-to-community projects using remittances for infrastructure or production but, for the most part, collective money from the USA is channeled through priests or mayors for religious festivals or social projects. USA-based hometown associations (HTAs) have proliferated in recent years but most are small and raise less than US$10,000 a year.

Other findings include:

• Remittances play a major role in reconstruction after conflict, earthquakes and hurricanes.
• The cost of transferring remittances is high. Most transfer businesses charge between 10 and 20 percent of the amount transferred although competition is working to reduce the transfer charges in Mexico for example.
• The vast majority of fees remain in the USA.
• Official efforts to capture and leverage remittances have generally failed, but recent Mexican attempts to entice HTAs to invest in job-creation projects show some promise.

All the conference presentations stress that those sending and receiving remittances are the best judges of how the money should be used. Policymakers are warned not to tinker with the market but instead to encourage competition in provision of financial services to enable their nationals abroad (including the large number of undocumented workers in the USA) to access them.

Policymakers are urged to:

• grant nonprofit status for USA-based emigrant organisations to allow them to operate tax-free
• emulate El Salvador’s recent law giving tax breaks to Salvadoran investors living abroad
• open branches of Central American banks in the USA to reduce the cost of money transfers
• create an alternative transfer system of the kind set up by the Haitian Development Bank in conjunction with small rural credit unions and cooperatives.

Source(s):
‘Approaches to Increasing the Productive Value of Remittances: IAF and Other Case Studies in Financial Innovation and International Cooperative Community Ventures', papers presented at a conference held at the World Bank, March 19, 2001

Funded by: Inter-American Foundation, UN Economic Commission for Latin America and the Caribbean, World Bank

id21 Research Highlight: 15 February 2002

Further Information:
Patrick Breslin / Carlo Dade
Inter-American Foundation
901 North Stuart Street
10th Floor
Arlington VA 22203
USA

Tel: +1 (0) 703 306 4311 / 703 306 4341
Fax: +1 (0) 703 306 4365
Contact the contributor: pbreslin@iaf.gov

Contact the contributor: cdade@iaf.gov

Inter-American Foundation, USA

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