Sunday, November 23, 2014

Harnessing the Remittance Boom

ROME – For more than a decade, Asia’s economies have been on the move – and so have its people. The scale of migration from rural to urban areas and across international borders is historically unprecedented, and twenty-first-century Asia is its focal point.

In Asia’s developing countries, the power and potential of remittances – the money that migrant workers send home to their families (many of whom live in poor and remote areas) – is immense. Currently, over 60 million migrant workers from the Asia/Pacific region account for more than half of all remittance flows to developing countries, sending home about $260 billion in 2012.

China, India, and the Philippines are the three largest recipients of remittances, while Bangladesh, Indonesia, Pakistan, and Vietnam are also in the top ten. The money is often a lifeline: it is estimated that 10% of Asian families depend on payments from abroad to obtain their food, clothing, and shelter.

But, while remittances to developing countries are five times higher than official development assistance, the enormous potential returns for society have not been realized – and can be secured only if the flow of money can be channeled into effective rural and agricultural development, particularly in fragile states and post-conflict countries. Doing so would contribute significantly to creating jobs, enhancing food security, and fostering stability in countries emerging from strife.

In order to establish such channels, we must scale up key initiatives, identify new opportunities, and map out the road ahead. The fourth Global Forum on Remittances, which runs May 20-23 in Bangkok, will do just that. Convened by the International Fund for Agricultural Development (IFAD) and the World Bank, the forum will bring together policymakers, private-sector players, and civil-society leaders to chart a course for leveraging the development impact of remittances sent home each year in Asia and around the world.

At IFAD, our starting point is always the three billion people who live in the rural areas of developing countries. We work to create conditions in which poor rural women and men can grow and sell more food, increase their incomes, and determine the direction of their own lives. We believe that diasporas and the global donor community can leverage the flow of migrant investment if they form partnerships with national governments for long-term development of the rural communities that are so often the beginning of the migration chain.

More than 215 million people around the world live outside of the countries they call home. But most families that rely on remittances operate outside of the world’s financial system as well. Despite the global prevalence of electronic money transfers, most migrant workers are excluded from the convenience of modern banking services, dependent on costly cash transfers that often require rural recipients to travel significant distances.

As a result, migrant workers are forced to initiate more than one billion separate transactions worldwide each year. That means more than one billion trips for rural women and men to collect their money. Adding up the cost of the transfer, travel, and time, remittances are far too expensive for people living in poverty.

IFAD has been working in more than 40 countries to ensure that rural families can have easy access to remittances, and are better able to use them as savings or investments that go back into their communities. The amount of money at stake is staggering: It is estimated that over the next five years, more than $2.5 trillion will be sent in remittances to developing countries, with almost 40% – coming in the form of payments of $50, $100, or $500 at a time – destined for rural areas. While the majority of family remittances will always be used to meet immediate needs, IFAD’s experience shows that rural families would seize opportunities to save and invest, even small amounts, if they had better options.

While remittances should and can be leveraged to bring about impressive results in poverty reduction, let us not forget that there is an underlying issue that needs to be addressed. Young people, the leaders and farmers of tomorrow, are leaving their rural communities behind in search of better opportunities. We need to turn rural areas into vibrant and economically stable communities that provide opportunities for young people to earn a living, build their capacities, and start a family.

We should not ignore the enormous development potential of remittances to rural areas. Let us empower families to use their hard-earned money in ways that will help to make migration a matter of choice, not a necessity for the generations to come.

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    1. CommentedHoratio Morgan

      While I find this account on remittance flows to be very interesting, I am not convinced that the investment of these flows primarily in rural communities is in the best interest of the rural recipients, the senders abroad, or long-term economic growth in general. Rural residents are perhaps primarily disadvantaged by their limited mobility in an inherently risky and dynamic global economy. A long-term solution to the welfare problems of rural residents ought to address this.

      This is my understanding of the economic reality: labor and capital will be reallocated from one industry (i.e. from agriculture to manufacturing) and/or location (i.e. from rural to urban) to another over time as a central part of the dynamic efficiencies that modern market-based economies engender in response to technological progress as well as economic development in general.

      To the extent that urban areas are relatively capital- and knowledge/technology intensive, low- or semi-skilled rural residents may be better off moving to urban areas where they are likely to be more productive and earn higher wages. At the same time, I do recognize that there may be systematic impediments that make internal migration costly. These costs may emanate, for instance, from the need for skill upgrading, lack of access to affordable housing and health care services. Remittance flows along with public funds may be used to absorb these costs.

      On another note, if the returns from private investments in new commercial ventures are relatively high in urban areas (given better “soft” and “hard” infrastructure and social and business networks), then it is unclear to me how rural residents will be made better off if they are encouraged to invest their saved remittances in less profitable rural-based commercial activities.

      Finally, since individuals are not destined to live in rural areas, I recommend the following general prescription in relation to the use of remittance flows: rural individuals should be encouraged to invest in transferable skills, and concentrate on those economic activities from which they derive the most value from their limited resources. To be sure, this may result in a wave of migration from rural to urban areas. But internal migration should not be frowned upon; after all, the remittances are derived from the relatives of rural residents who became better off after going abroad.