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Last Updated: Thursday, 18 March, 2004, 07:54 GMT
The remittance lifeline
By Jeremy Scott-Joynt
BBC News Online business reporter

It is no secret these days that the funding of development has gone private.

A hotel cleaner
The new face of development funding?
Aid flows are shrinking, and rich governments are keener than ever for foreign investment by companies large and small to take up the slack.

But an increasingly important slice of the money heading for the developing world does not come from boardrooms and stock exchanges, let alone from government departments.

Instead it is coming from the cleaner who vacuums your office late in the evening, the undocumented worker who picks the fruit you eat, or cleans the dishes at the restaurant you dined in last night.

More and more often, a sizable slice of whatever they earn will be heading through official means or otherwise back to their home country - sometimes to put food on their families' tables and sometimes to underwrite investment in housing or a small business.

Growing numbers

The significance of this flow of remittances is only now becoming apparent.

The big change came in 2002-3, when - according to World Bank senior economist Dilip Ratha - a re-examination of how the flow of money from migrant workers was calculated showed that differences in definition from country to country were keeping much of the funds out of the headline numbers.

Previous International Monetary Fund figures suggested a total for the Philippines, for example, of $125m in 2001. The redesigned formula upped that 50-fold to $6bn.

Poor countries can't earn decent revenues by exporting coffee and cocoa, so they export people instead
Ann Pettifor, New Economics Foundation
On a global basis, the reworking of the numbers came up with a total of as much as $80bn for 2002.

That could well still be a sizable underestimate, partly because much of the money flows through informal channels rather than banks and officially-sanctioned money transfer firms.

For 2003, some studies put the figure at $140bn.

The official market alone may have amounted to $150bn (admittedly not a figure limited to money sent to developing countries) in 2003, according to studies quoted by money transfer giant Western Union, which itself performed 81 million person-to-person transfers last year.


In terms of the overall flows of funds to and from the developing world, even the 2002 number puts remittances in second place behind the $86bn in net foreign direct investment (FDI), well above government and other aid ($33bn).

Given net payments on debt of almost $100bn, that makes it the main factor in keeping the overall net flow heading from north to south, rather than in the opposite direction.

Indeed, the World Bank's figures indicate that in some places - particularly South Asia - remittances dwarf all other forms of funding. Foreign direct investment (FDI) into South Asia was close to $5bn in 2002, for instance; remittances in the same year topped $16bn.

India: $10bn
Mexico: $9.9bn
Philippines: $6.4bn
Morocco: $3.3bn
Egypt: $2.9bn
Turkey: $2.8bn
Lebanon: $2.3bn
Bangladesh: $2.1bn
Jordan: $2bn
Dominican Republic: $2bn
Source: World Bank. Figures for 2001

And while FDI tends to be concentrated on a tiny number of particularly good prospects - the lion's share goes to just 10 countries - remittances are spread much more widely among countries in need.


It is also seen as significant that the money goes straight to people on the ground, rather than being mediated by governments, NGOs or foreign businesses.

The only obvious cost is getting the money from one place to the other - which can vary from a couple of percentage points, in the case of informal (and usually illegal) money transfer agents, to 15% or more for licensed dealers, according to World Bank statistics.

On the face of it, then, remittances would seem a win-win situation both for poorer countries and the richer host nations.

One gets the money it so badly needs. The other gets workers who are prepared to do many of the jobs that their hosts' citizens are less willing to perform.

Helping hand

In some ways, Mr Ratha says, that presents a perfect opportunity to assist with development - as long as it is realised that remittance money is not a replacement for development funding.

For instance, measures to reduce the cost of sending money could inflate remittance flows significantly, while easing the tight currency restrictions prevalent in many developing nations would also narrow the price gap between informal and formal avenues for transfer.

Money transfer agent
Money transfers are a multi-billion dollar business
"Finance ministers from the G7 (group of rich nations) have gone on record to say that one of their goals should be to reduce remittance costs," he says.

The resource requirements for reducing poverty are "humongous" - and the cost to the developed world of easing the flow of what he calls "money earned the hard way" to friends and relatives back home is minimal.

"It's tiny compared to the size and wealth of the host country, but huge for the home country," he says.

People exports

But not everyone is so positive about what remittance flows really mean.

Some of the money might come home, says Ann Pettifor, former head of the Jubilee 2000 anti-debt campaign and now a director at the New Economics Foundation in London.

USA: $28.4bn
Saudi Arabia: $15.1bn
Germany: $8.2bn
Belgium: $8.1bn
Switzerland: $8.1bn
France: $3.9bn
Luxembourg: $3.1bn
Israel: $3bn
Italy: $2.6bn
Japan: $2.3bn
Source: World Bank. Figures for 2001
But the cost is the outrush of people who end up contributing, first and foremost, to another country's bottom line - not least by earning the hard currency their homeland needs to pay off the massive debts with which much of the developing world is saddled.

"Poor countries can't earn decent revenues by exporting coffee and cocoa, so they export people instead," she says.

The supply of servants and cleaners, many of whom could be skilled workers back home, destabilises the home country's labour market - a sign, she says, not of development but of desperation.

And the immigration restrictions imposed increasingly by rich countries - whether because of job fears or as part of tightened security against perceived terror threats - therefore act as a trade barrier, just as farm subsidies do against wheat or cotton.

More to come?

Still, for the foreseeable future it seems clear that remittances will play an increasing role in the finances of poorer states.

The sums transmitted are growing fast, while richer countries - whatever the rhetoric about jobs for those at home - will continue to suck in migrants.

And the cleaner, the waiter, the farm labourer and the building site worker will - unnoticed by most - continue to displace businessmen and ministers as the main underwriters of setting their home country on the path to development.

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