TWN Info Service on Finance and Development (Feb11/04)
22 February 2011
Third World Network

Maximizing the development impact of remittances
Published in SUNS #7091 dated 18 February 2011

Geneva, 17 Feb (Kanaga Raja) -- Migrants make important economic, developmental and cultural contributions to sending and receiving countries and their remittances have positive impacts on poverty reduction and development in originating countries, mostly developing ones, substantially contributing to the achievement of the Millennium Development Goals.

This is the assessment of the UN Conference on Trade and Development (UNCTAD) in a note prepared by its secretariat for an expert meeting on maximizing the development impact of remittances that took place 14-15 February.

Significant barriers to migration and remittance transfers need to be addressed in order to harness opportunities for development and poverty reduction, including through easing financial transfers, setting appropriate incentives, improving policy coherence in migration and remittances policies, and facilitating the temporary movement of people, said UNCTAD.

According to an UNCTAD news release, discussions at the two-day expert meeting dealt with such topics as the opportunities and challenges posed by trends in migration and remittances; the ways, means, and preconditions needed in order to enhance the development impact of remittance flows; surmounting the practical difficulties of sending remittances home; and addressing barriers to remittance flows, including through trade and cooperation agreements facilitating temporary and circular migration.

Speakers at the meeting said that more can be done to ensure that families and developing-nation economies derive lasting benefit from these wages earned overseas. They stressed that less of this money should be lost in transmission, and more should be invested in the stable, broad-based social and economic growth of economies that originally were weak enough for citizens to feel compelled to leave and work elsewhere.

"Remittances account for about 2 per cent of the gross domestic product (GDP) of all developing countries, and for higher percentages in many," said UNCTAD Deputy Secretary-General Mr. Petko Draganov, in opening the meeting on 14 February.

"In Lesotho, Nepal, Samoa, Haiti and Bangladesh, these money transfers make up more than 8 per cent of GDP. Although the effects across countries are varied, remittances have reduced poverty at the household level in many developing countries. A recent UNCTAD study found that in countries where remittances make up 5 per cent or more of GDP, on average a 10 per cent rise in remittances leads to a reduction of 3.9 per cent in the poverty headcount ratio."

He added: "Evidence shows that a significant amount of remittance transfers to developing countries is spent on household consumption and human capital." Such emphasis on food, education, housing, health and related purchases can ripple outwards through the domestic economies of poor nations and - if managed well - can create jobs and business opportunities that raise living standards and keep future potential migrants at home.

According to the UNCTAD secretariat note, the UN Department of Economic and Social Affairs (DESA) estimates that the total migrant stock increased from about 195 million to 215 million between 2005 and 2010 at 1.8% annually on average, while the share of migrants in the total population remained stable in the same period (only moving from 3.0% to 3.1%).

Migrant workers, who are the main source of remittances to their home countries, numbered about 86 million by 2009. The stock of international migrants is expected to rise to 405 million by 2050. Most migrants live in Europe, Asia and North America, with growth rates in 2005-2010 in North America and Europe standing at about 10% and 8% respectively. Growth is expected to continue but at lower rate in those two regions.

The top migrant destinations in 2009 were the United States, the Russian Federation, Germany, Saudi Arabia and Canada. As a share of total population, the top receiving countries were Qatar (87%), the United Arab Emirates (70%) and Kuwait (69%), and their popularity as destinations has increased owing to their more resilient labour markets as has been revealed during the recent economic crisis.

Female migrants constitute a significant proportion of international migrants, though their numbers have remained relatively stable, going from 49.2% in 2005 to 49% in 2010. Migrant women are in many cases the only contributor to family finances, the paper notes.

In terms of sectoral distribution, migrants are concentrated in key sectors such as construction, tourism, manufacturing and agriculture, accounting for 29%, 23%, 17% and 16% respectively.

The crisis has severely impacted on sectors that absorb large amounts of labour (e. g. construction, tourism, and financial services). In 2009, the unemployment rate of the foreign born between 15 and 24 years old reached 15% in the United States, 20% in Canada and 24% on average in the European Union (EU). Consequently, migration to OECD countries fell by about 6% in 2008 to about 4.4 million people, reversing a continuously upward growth trend.

Unemployment is projected to continue to rise, at 10% on average in 2010. More than 57 million people will be unemployed compared with 37.2 million at the end of 2008, which makes OECD labour markets less appealing for new migrants and difficult for existing migrants. Globally, according to DESA, the number of international migrants continues to increase despite the crisis.

The number of migrants may increase as post-crisis economic prospects improve, says UNCTAD. Labour demand will continue to exist in the OECD countries, due to aging population trends and continuous demand for certain jobs in domestic, healthcare, and education services.

Emerging developing countries are expected to attract higher migration flows as the amount of labour force in developed countries is projected to remain stable at about 600 million until 2050, whereas in emerging developing countries, it is expected to increase from 2.4 billion in 2005 to 3.6 billion in 2040.

Turning to the trends in remittances, the secretariat note finds that Asia is the biggest remittance-receiving region, followed by Latin America and Africa. From 1990 to 2008, Asia experienced the fastest annual remittance growth (17%), followed by Latin America (14.3%) and Africa (10.2%). In 1990, workers' remittances to Asia were roughly 20% less than to Africa and 47% greater than to Latin America. In 2008, they were roughly 2.3 and 2.4 times the size of inflows to Africa and Latin America respectively.

The level of remittances fell during the crises due to decreased migration flows, in particular to OECD countries, and due to the reduced income of migrants. In 2009, remittances to developing countries reached $316 billion, down 6% from $336 billion in 2008. They are expected to increase by 6% in 2010, 6.2% in 2011 and 8.1% in 2012, to reach $374 billion by 2012.

UNCTAD notes that remittances are not only of value to developing countries. In 2009, developed countries such as France, Germany and Spain were among the top recipients. Spain has been a major recipient since the 1960s. The United States is the largest source of remittances, with $46 billion in recorded outward flows in 2008, followed by the Russian Federation, Switzerland and Saudi Arabia.

In 2009, remittances accounted for 1.9% of the gross domestic product (GDP) of developing countries and Least Developed Countries (LDCs). In terms of share of GDP, smaller countries such as Tajikistan, Tonga and the Republic of Moldova, and a few LDCs including Lesotho and Samoa, were the largest recipients in 2008, suggesting the greater role of remittances in these countries' economic and social development.

The impact of remittances on LDCs can be even higher. Remittances account for more than 5% of gross national income (GNI) in almost a third of the LDCs. The share is more than 10% in some LDCs such as Cape Verde, Gambia, Haiti and Lesotho. Remittance inflows are considered to be one of the contributors to LDC graduation, for example, in the case of Cape Verde's graduation from LDC status in 2007.

The UNCTAD paper also finds that remittance inflows have proved to be resilient relative to foreign direct investment (FDI) and are an important component of financing for development. FDI fell by about 40% from $598 billion in 2008 to $358 billion in 2009. It is not expected to return to the pre-crisis level until more solid economic recovery driven by output levels and trade recovery gains momentum.

As economic conditions improve in migrant receiving countries, remittance flows to developing countries are projected to increase by 6.2% in 2010 and 7.1% in
2011, partly offsetting the weak recovery in other financial flows to developing countries.

The UNCTAD paper argues that remittances are expected to reduce poverty, as they are, in many cases, directly received by the poor, augmenting their income and alleviating their poverty. In some countries, remittances may make up over 50% of the recipient's total household income.

While there are concerns about brain drain, remittance-dependence, and the negative impact of remittances on small countries' export competitiveness due to pressure on currency appreciation, in general, remittances have contributed positively to advancement of the Millennium Development Goals (MDGs), says UNCTAD. It cites as an example, Nepal, where remittances, together with urbanization and higher wages, have resulted in a decline of the incidence of poverty of about one percentage point annually since the mid-1990s (from 42% to 31%).

The Asian Development Bank estimates that 4.3 million people in the Philippines remain above the poverty threshold simply because of remittances. Remittances contribute to improving child and maternal health by allowing the purchase of food and medicines. In Guatemala, Mexico, Nicaragua and Sri Lanka, children in remittance-receiving households have higher birth weights and better health indicators than children in other households.

According to UNCTAD, recent analysis demonstrates that an increase in international migration is positively linked to a decline in the number of people in poverty. Various studies indicate that a 10% increase in the share of remittances in a country's GDP leads to, on average, a decline from 1.6% to 3.5% in the proportion of people in poverty.

The paper draws attention to significant barriers that exist in harnessing the positive roles of remittances in development and poverty reduction. There are barriers that increase the risk or cost of sending home remittances, and barriers that impede new flows of remittances.

The former can be found in both home and host countries; they include lack of safe, reliable, affordable and accessible transfer systems for remittances, taxation, information asymmetries regarding the nature of the services, prices and competition. The latter include migration policies and trade-related barriers including market access limitations related to the temporary movement of natural persons.

On the cost-related barriers, the secretariat note said that affordability is one of the most important barriers to remittance flows, as the transfer fee is a key cost component of sending remittances. The global average total cost fell to 8.7% in 2010, but it remains high.

UNCTAD also points out that barriers to migration in general, and more specifically to the temporary movement of natural persons (Mode 4), can impede temporary and circular migration processes (temporary workers going back home and returning to host countries upon new contracts) and potential growth in remittance flows.

The paper finds that introducing stricter requirements for visas and work permits without providing facilitated options for temporary migration in sectors where demand for foreign labour is high is counterproductive. Experiences in Eastern Europe have shown that strict migration policies exacerbate human trafficking, pushing would-be immigrants into irregularity and fostering irregular migration.

By and large, says UNCTAD, temporary migration is facilitated in highly skilled professions, whereas it is more restricted for lower-skilled labour. Trade agreements can partially address these barriers through the World Trade Organization (WTO) services negotiations in the context of the Doha Development Agenda (DDA). Barriers to Mode 4 found in key markets include quotas, economic needs tests, burdensome visa procedures, and the lack of mutual recognition of qualifications.

Fewer commitments have been made by WTO members in Mode 4 than in other modes of supply. Commitments during the Uruguay Round have been low and limited to the higher-skilled categories (managers, executives and specialists), with approximately one half relating explicitly to intra-corporate transferees. While Mode 4 technically covers all skill levels, only about 17% of horizontal commitments cover low-skilled personnel, and only 10 countries have allowed some form of restricted entry to "other level" personnel.

"Existing mode 4 commitments have not produced the expected results for developing countries and LDCs. This imbalance was supposed to be corrected in the DDA, nevertheless, offers in mode 4 remain limited," says the paper, underscoring that commercially meaningful commitments in Mode 4 could bring important development gains for developing countries estimated at between $150 billion and $300 billion, without including other benefits such as development and poverty reduction impacts. A great part of these benefits will take the form of remittances.

"A coherent trade liberalization policy that not only liberalizes movement of goods and capital but also provides real market access in mode 4 will contribute positively to economic integration, poverty reduction, facilitating managed migration flows, and increased remittances."

A special arrangement on Mode 4, including market access and regulatory issues, could be explored, the paper suggests. It could contain elements such as a stand-still clause on restrictions; focussed request and offer sessions with special consideration for LDCs in the WTO Council for Trade in Services (e. g. providing objective criteria for economic needs/labour market tests or progressively expanding quotas); and specific regulatory principles applicable to Mode 4 in the domestic regulation negotiations (e. g. balancing requirements for experience vs. academic qualifications, and non-discrimination in relation to the origin of service providers).

An early harvest on the most-favoured-nation waiver for LDCs enabling unilateral openings in Mode 4 could address some of the barriers in areas of interest to both destination countries and LDCs. "Positive outcomes in these areas could become a deal-maker in the General Agreement on Trade in Services (GATS) and other negotiations under the DDA. It could also facilitate continuous flows of remittances, and incentivise circular migration."

The UNCTAD paper stresses that the level of coherence and coordination of policies, regulations and institutions relating to migration and the use of remittances varies among countries. A comprehensive approach that seeks to: (a) set clear and aligned policy goals and priorities; (b) strengthen regulatory and institutional capacity; ( c) assess labour market needs; and (d) provide pre-departure and return reintegration training of migrants, as well as multi-stakeholder consultations processes, could facilitate remittance flows for development and rights-based managed migration. +