01 May, 2019

Migrant Remittances - An Often Overlooked Driver of Development

by Alessandro Balduzzi

When migrants flee their homelands, they don’t cut all their ties. Once they establish themselves in rich, new lands, they often send home remittances to those they left behind.

These remittances are becoming a driver of development, particularly in Africa. According to the World Bank, remittances reached a record high of $528 billion in 2018, almost closing the gap with foreign direct investments in several African countries and far outweighing official development assistance.

Compared to private investments, remittances can be a better tool to support development. While international capital flows tend to be cyclical, remittances are relatively stable and act as an insurance for families during economic crises and following natural disasters. Remittances flow directly to the families of migrants. That makes them more efficient investment tools than aid.

Despite their benefits, remittances suffer from a major drawback: high costs. Migrants pay roughly $30 billion per year for the privilege of sending their money home. It costs up to EUR21 to transfer EUR140 from Italy to Morocco. The World Bank estimates that the average cost of transfer amounts to almost seven percent of each transaction. This includes not only transaction fees, but also unfavorable exchange rates.

Why are remittances so expensive? Excessive regulation is one reason. Money change companies must comply with a dizzying array of meet national and international standards. These high regulatory barriers to entry keep out small operators, allowing incumbents to charge high prices.

Technology could greatly help. Many remittances are still sent home using inefficient, paper processes through expensive agent networks and physical branch locations. A study by the GMSA trade association of mobile operators found that mobile money can drop to half international remittance costs. In an interesting case, the UN distributed $120 million in aid to almost two million refugees in Jordan with the help of iris-scanning technology..

Political pressure is growing to reduce these fees. In the 2030 Sustainable Development goals, the UN targets a three percent commission target among the Sustainable Development Goals to be reached by 2030. The World Bank estimates that remittances should cost less than five percent.

Beyond the financial impact, remittances represent only one way that migrants help their homelands. A study conducted years ago by the International Organization for Migration in Tanzania coined the term “social remittances” to explain the importance of the ideas and knowledge that migrants send back home.

A generation ago, it was hard for migrants to keep in touch with their families. Today, the telephone and internet allow easy communication. Social remittances from migrants “spread information and contribute to human development, whether through education, health, livelihood, the environment or governance", the researchers concluded. They can be thought of as agents of change.