Remittances: The Vast & Secret Global Movement of Money


I watched a TED talk by economist Dilip Ratha who covered the practice of sending remittances.  A remittance is when one leaves their home country to work in a more developed one and then sends part of their income back.  Dilip is a prime example, he grew up in rural India and barely had enough money for basic necessities.  Through family support he was able to attend college in India and then graduate school in the US.  Right when he arrived to the States he began saving money, from his humble salary as a lab assistant, and sent it home to his family and village.  There are 232 million migrant workers globally who are doing the same thing.

What jumped out at me is the sheer financial scale of remittances and the fact I’ve never heard of them.  They account for 3X more than global aid.  Below I’ve outline the facts about remittances, challenges faced in sending them and possible solutions.

 

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Facts:

1.  There are 232 million migrant workers in world which is larger than the population of Brazil and has a higher GDP than France.

2.  They send regular remittance accounting for $413 billion of “aid” a year.  Global aid is about $135 billion annually.

3.  They serve as a lifeline in countries that are extremely poor and are conflict zones, such as Somalia and Tajikistan,.  Unlike aid, remittances act almost as insurance and increase in hard times.

4.  Ratha coined the term “Dollars wrapped in care” because often the money is spent more directly on helping the needy than traditional aid.  Plus, the migrant knows and is usually related to the recipient.

 

Challenges:

1.  There are barriers to sending remittances:  High cost of sending money with average cost globally at 8%,  in Africa the average is 12% and is as high as 20% in some corrupt places.

2.  Regulation is also high due to fear of money laundering.  Blanket laws have been enacted in developing and developed nations alike which severely hinder sending funds.

 

Fixes:

1. Relax regulation on small remittances.  Sending under $1000 should be made much easier.  The migrant workers don’t tend to send much more than this at a time and the hurdle low enough to still dissuade criminal organizations.

2.  Abolish exclusive partnerships for sending funds.  In many rural places the post office is the only legal way to access money.  Opening this channel up to the free market would drive down rates.

3.  Create a non-profit remittance platform since this would lower rates to close to 0%.  Existing micro finance institutions could easily open up a remittance arm.

4.  Abolish the exobitantly high recruitment agent fees.  Many migrant workers use an agency to help them land a job overseas.  Ratha shared the story of men working in Dubai on construction projects earning $2000 a year.   To just obtain the job they paid a $4000 fee so for the first two to three years their family receives no income.

 

Thoughts on remittances?  Clearly they are a form of financial help for the poor, but are less altruistic than general aid.  Should they be supported through legislation?

 

 

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8 responses to “Remittances: The Vast & Secret Global Movement of Money

  1. I read further into this in a few news articles that I found online. Remittances to developing countries grew this year over 5%. India and China led these numbers with USD 71 and 64 billion respectively. The rates to send these funds, however, is dropping. The rates went to an average of 7.9% from 8.9% a year earlier. People leaving due to conflict in their home country reached its highest level since WWII, and natural disaster was also a main cause. I think that it is imperative to make this a more financially reasonable process, as it is the source of livelihood for millions.

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    • I agree, we need to make sending remittances as easy as possible. Unfortunately, not all nations have the “Land of Opportunity” distinction. If we can provide opportunities for others, we will all be better off. Shouldn’t we live in a world where everyone can be afforded the simple luxuries in life?

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    • I’m glad you looked into this some more. That’s good news that remittances are growing and the fees are dropping. What would be ideal is if Kiva or another micro finance institution lowered the sending cost as low as economically viable (probably around 2-3%). This is especially needed in Africa where the average sending rate is 12%.

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  2. I found the relation of this to the trafficking of drug money very interesting. On the map, a huge amount of money is transferred between the US and Mexico, but is there any way to estimate if this money is sent by cartels? Could the federal government tax these remittances because it is taking value out of the US?

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    • Ratha would argue that remittances are too small of transactions to be a serious source of smuggling. The federal government could tax them, but it seems unethical to me. Do we really want to place additional taxes on migrant workers who are trying to support their usually impoverished families?

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  3. Those agency charges sound like the indentured servitude system that existed alongside slavery all through the colonial and early industrial period.

    Overall, the remittance and workers reminds me of the basic fact that we pushed for economic globalization in terms of flows of goods, people, and finance without allowing for global governance. Hence, we have local laws that are inadequate to the needs created by the other changes. We set up various “races to the bottom” so that sovereign countries are fighting with each other to gut their local laws to compete for global flows of direct investment or financial capital.

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  4. How about a treaty for remittances and shoring up holes in the global financial system? The amount of laundering through banking black holes like Switzerland or other little island nations is probably much worse then money laundering done through thousands of falsified micro-remittances from Julio in LA to Juanita in Sinaloa.

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