It has for a long time been recognized that migration is in large part caused by economic factors; people leave poorer rural areas and move to the city, they move from less developed to more developed countries. In each case they are looking for a better life so go to somewhere where they believe they will find it. It has however usually been considered that these people moving around the world in search of work are doing so mostly for themselves, instead it is increasingly clear that they are doing it as much for their families who have been left behind.
The flow of money from migrants has been shooting up in recent years, according to the World Bank remittances topped $530 billion in 2012. This represents a tripling of remittances within the last decade and indeed it is likely that the amount of money being transferred is much higher as many migrants bypass banks and big money transfer companies that provide the date the World Bank is using.
With such huge amounts of money being sent home we might very well ask whether migration could be a driver of development rather than relying on aid? The level of flows of money recorded by the World Bank is more than three times the total of global aid budgets and of course it does not have strings attached to how it is spent. Many countries get huge amounts from remittances; India and China each received more than £60billion, the Philippines and Mexico both had $24billion sent, while Nigeria received $21 billion. For the Philippines in particular $24 billion would represent more than 10% of the country’s GDP. For some small countries this can be even higher, in Liberia remittances receive the equivalent of 31% of the country’s GDP. The amounts are so big that several countries, including the Philippines, have sent up ministries to manage the cash sent from overseas.
Clearly the proposal is not to replace all aid with no change to remittances; this would just be taking something away so would be in no way beneficial to those who receive aid. Instead Official Development Assistance, “Grants and concessional loans for development and welfare purposes from the government sector of a donor country to a developing country or multilateral agency active in development”, would be replaced with increased remittances. This would be spurred by governments taking action in several ways; providing tax breaks and incentives for those sending home remittances, and by reducing the cost of sending money home by dropping the cut taken by banks and wire transfer firms. The G8 has pledged to reduce the cost of global transfers to an average of 5% by 2014, which would be a significant drop from the 9% it is at the moment and the average should be brought down to the 2-3% where it would be if there was sufficient competition.
Note: For the purposes of this debate we are not going to go into detail about whether this will result in more or less money going to developing nations. It will be assumed that the developed countries would be giving as much by their tax breaks and reductions in costs as they would be in aid. This does not seem too unreasonable, ODA from OECD countries was $135bln in 2011, a drop in transfer costs of 7% would save $37bln, and the rest would be made up by tax breaks and incentives.
Changing from ODA to Remittances is good for freedom of choice in two ways.
First tax breaks and other incentives will mean that migrants have more money. It will clearly be up to the migrant to decide if they want to or can afford to send their money home; they can decide how much they want to send, when they want to end it, how they want to send it etc. At the other end it will be up to the individual recipient to decide how they want to spend the money received.
Secondly it is good for the freedom of choice of the taxpayer. At the moment they are having their choice taken away from them as they have their own money being spent by the government on someone else; foreign countries. The individual taxpayer sees none of the benefit of this money and often they don’t like paying so much aid, 59% of Americans support cutting aid.
This creates freedom of choice for the donor, but at the same time takes it away from the recipient. Recipients, whether governments or NGOs, will no longer have the money to spend. They will no longer be able to target that funding towards those areas that need it most instead the money will bypass them.
Rwanda has been trying to increase the size of remittances in order to increase its autonomy. The President Paul Kagame has said “aid is never enough and we need to complement it with homegrown schemes to accelerate growth.” He wants “a higher level of direct ownership in the nation’s projects” and wants it because western donors had suspended aid. A change to remittances would reduce this vulnerability; it would be much more difficult for ‘donors’ to suspend the tax breaks they provide for remittances to individual countries than it is to cut aid. Indeed remittances are noticeably stable with money still being sent home during recessions and can even be countercyclical as migrants will send more if they know things are bad back home. This then takes the issue out of the hands of the politicians and puts it into the hands of the people.
The change to remittances may or may not benefit the countries themselves. It is likely that remittances will go directly to individuals. Rwanda may have managed to persuade Rwandans in foreign countries to put money into its sovereign wealth fund but this will often not be an option or individuals will not want to give to their government rather than their families. Most of the time the government will be less well off.
There has been a lot of concern that aid, particularly from governments and international organisations, does not always help reduce poverty; it might simply create dependence, or it prevents local enterprise. Dambisa Moyo points out that “Between 1970 and 1998, when aid flows to Africa were at their peak, poverty in Africa rose from 11% to a staggering 66%”. Remittances on the other hand can be very beneficial; they provide the money needed to start enterprises, and they are showing that the community is not dependent as its members have taken the initiative to go and find work.
Remittances have a statistically significant impact on reducing poverty. In 2005 the World Bank suggested that a 10% increase in per capita international remittances will lead to a 3.5% decline in the share of people living in poverty. Governments should therefore change from the method that is failing to one that is more successful at reducing poverty.
Remittances are of course an excellent way of reducing poverty for those who receive them; more broadly however they are unlikely to be successful. Money sent back as remittances are unlikely to be used to target the development needs of the nation so it will not be creating the basis of sustainable growth in the future.
Aid goes where it is needed, remittances don’t. Development aid is able to be focused on those who need it most, the poorest, those who are unable to grow their own crops etc. Sub-Saharan Africa gets $28bln in ODA or 20.9% of aid whereas only $60bln or 11.5% of remittances goes to Africa. Clearly therefore Africa would be proportionally losing out. It is notable that it is middle income countries that get most remittances, the per capital level of remittances received tends to increase until that country has an income of about $2200 before falling back.
There would be a similar problem with directing aid within nations. Remittances will go to the family of the person who is sending the money regardless of whether they really need this extra money. It is likely that many of the very poorest will be those who do not have family members who have been able to migrate for work and send back money, these people would be left in a much worse position without ODA.
Of course not all aid is ending, it will simply fall to aid agencies and charities to provide for the very poorest rather than governments. These aid agencies will no longer need to help out those who are getting remittances so will have more to spend on the poorest. There may even be an increase in individual donations in rich countries to provide aid when individuals realise their tax dollars are no longer being spend on aid so they may feel the responsibility to do something themselves, something that giving through the government shields us from.
Official development aid is spent on projects that will help encourage long term growth for poor countries, for example building schools and hospitals. These benefit the education and health of the recipient country. Remittances on the other hand are most likely to be spent on day to day needs such as food and clothing. The money may also be spent on schooling and health but it would be on the individual level rather than infrastructure so does not increase the overall capacity of the country.
This is to ignore the influence of remittances on the market. Of course ODA may build a school, but it is just as likely to make something that the donor country believes the recipient needs when it does not in fact need that investment. Money being sent home and then invested in an individual’s information will help signal to the market that there is greater need for educational facilities and so someone will build a school when there is enough demand.
Any change from aid to remittances is going to create a brain drain because it will encourage working abroad. If developed countries governments are going to provide tax breaks or top up money for remittances then it becomes more attractive to work abroad and send back remittances because they can earn and send back more.
The brain drain is the migration of skilled workers from developing countries to more developed countries. This happens because the more skilled the worker the more in demand their skills are and the more likely they are to know about and have the ability to move to work elsewhere. This is a concerns developing countries because it means their investment in the future; through education often benefits developed countries rather than themselves. Africa for example lost 60,000 professionals between 1985 and 1990. In total Africa has lost a third of its human capital. This loss of human capital will mean that the countries affected do not have the capacity to take advantage of the increase in remittances by building new businesses.
While developed countries may be making it more financially attractive to come to them to work and send back remittances in practice they are unlikely to actually allow more immigrants into their countries.
Secondly the brain drain is not all negative for the countries concerned; migrants may return home with new skills, and considerably more money to invest and create new businesses. It is also likely that many of those who go abroad would not have found jobs at home, particularly if highly skilled as the developing country has few jobs available for people with their skills, so would have been a drain rather than a benefit to the economy no matter their skill level. It should also be remembered that the costs of educating these skilled workers will be paid all the faster due to increases in remittances – a study of Ghanaian migrants found that the cost of education of emigrants was paid 5.6 times over by remittances.
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