Oct. 9, 2014 by Darius
I saw a very interesting TED talk today. “The Hidden Force in Global Economics: Sending Money Home” by Indian economist Dilip Ratha examines remittances and their role around the world.
There are 232 million international migrants around the world. If they were all in one country, its population would be larger than Brazil, and its economy would be larger than that of France. Of these international migrants, 180 million send remittances home regularly. The amount of money involved is huge: remittances add up to $413 billion worldwide, more than three times the amount of official aid.
Unlike official development aid, remittances don’t dry up at the first sign of political turmoil in the home country. If anything, the opposite happens. Remittances also go directly to the families that need them and increase in response to both national events (like natural disasters) and very local events, like an unexpected death in the family. Many studies have shown that families in poor countries who receive remittances do much better than families who do not receive remittances.
The biggest obstacle to remittances is the high cost of sending money internationally. Most money transfer companies prey on the poor by imposing a high fixed cost to send money, such as a fee of $30 for any transaction up to $500. This adds up to an average cost of 8% to send money internationally. To send money to Africa, the cost is even higher, around 12%. To send money within Africa, it is higher still.
According to Ratha, there is little data to support a connection between money laundering and remittances. Too many laws intended to prevent money laundering needlessly hurt families and countries who depend on remittances. Ratha made several recommendations:
- Relax regulations on small remittances (under $1000 in value). These remittances are not being used for money laundering.
- Right now, oftentimes the government forms an arrangement with a money transfer company by which that company is the only way to send money to a country. These exclusive partnerships between government and money transfer companies should be abolished to encourage competition and bring down costs.
- Large, nonprofit philanthropic organizations should create a nonprofit, low-cost remittance platform. If the international community brings down the cost of remittances to 1%, it would free up $30 billion per year for poor countries—more than current annual bilateral aid to Africa.
Ratha also spoke about the emotional importance of remittances: for many migrants (himself included), sending money home is a way to remain connected, however remotely, to life in the home country.
Migrants who earn money don’t send all of it home. Migrants save an estimated $500 billion a year in their countries of work. Most of this money is left in bank accounts that do not earn interest. Ratha suggested that it might be possible for an organization to create a financial institution where migrants can place their money for interest. This interest would then be used to promote development in their country of origin. According to Ratha, many migrants who send home remittances seek an active role in improving conditions back in their country, so this would be a welcome system.
You can find the whole TED talk at http://www.ted.com/talks/dilip_ratha_the_hidden_force_in_global_economics_sending_money_home