FAO Quotables

"But being right, even morally right, isn't everything. It is also important to be competent, to be consistent, and to be knowledgeable. It's important for your soldiers and diplomats to speak the language of the people you want to influence. It's important to understand the ethnic and tribal divisions of the place you hope to assist."
-Anne Applebaum

Monday, January 14, 2013

Notes on "Making Remittances Work" by Gupta et al

 Notes on "Making Remittances Work" by Gupta et al

BONUS LINK:  My entire (so far) grad school notes collection can be found here. 

          Formal remittances in Africa pale in comparison to the rest of the world.  African remittances make up only 4% of the global total.  From 2000-5 they have increased by only 55% while the rest of the developing world’s remittance levels grew 81%.  On average remittances account for only 2.5% of the GDP for African states versus 5% for developing states in other regions (i.e. East Asia and Latin America).  This numbers are somewhat skewed by the informal African remittance market (e.g., hawala system).  The remittance black markets account for 45-65 % of all money transferred back to Africa.
            While these remittances have made a difference in combatting poverty in Africa, it must first be noted that they are no substitute for sound, long-term economic development policies.  Furthermore, governments must be aware of the remittance levels lest they become victims of Dutch disease and RER appreciation.  It is clear, however, the remittances to augment household income and increase the level of sustenance families are able to provide.  Villages see the benefits of these remittances and will pool their resources to send their brightest youths abroad (or to the city) to earn a degree so that they can utilize this income stream.  While the research attempting to show a direct causative relationship between remittances and poverty reduction have opaque, Gupta does note that with a remittances to GDP ratio rise of 10%, one garners a reduction of 1% in people living on less than $1 a day. 
            Other benefits that remittances bestow on African economies include long-term economic growth potential.  Remittances allow many Africans to open savings accounts for the first time.  These actions lead to investment opportunities for entrepreneurs in the African states.  Furthermore, the remittances often serve as a stabilizing factor against international fluctuations in aid as well as global economic meltdowns.  The tendency for villages to send pupils abroad may contribute to a brain drain (at least partially), however, everyone doesn’t leave and there is corresponding evidence (especially in the health care industry) that remittances has increased the number of qualified health care providers in many African states.
            Despite these positive factors there is much that can be improved for remittances in Africa.  First the switch must be made from the informal markets like hawala to formal markets.  Namely this requirement will drive down risk for those transferring money.  An increase in formal markets providers must coincide with less taxes and fees for those remitting money.  These high taxes are the underlying cause the drives individuals to use informal systems.  Regionalization must also be promoted; this will allow regulation across the borders of neighboring countries so that uniform policies can be understood and use.  All of this must drive innovation—remittances are an ideal avenue by which to reach the unbanked.  In a novel effort, US banks set up a deal for remittances with people in Cape Verde that was very successful.  Some remittance credit union networks have been set up in southern African—these networks don’t require those receiving the money to have an account at the bank—making remittance reception easy and attractive.  Banks and MTOs must create ways to bundle services—this means that one could transfer money back to their home state but also investment and get loans.  On the subject of loans, in other developing regions, remittances have successfully been used as collateral for larger loans.  This has led to huge growth in the housing market in Mexico for instance.  For such growth to occur in Africa, however, remittances will have to grow well beyond their paltry 4% market share.  Finally, cell phone technology is already been used to allow people to bank via their phone.  The incorporation of this technology will prove crucial to the future of remittance. 

Rough Notes:

Remittances Compared:
- 2000-5 increased 55% to $7 billion (compared to 81% globally)
- only 4% of total remittances
- Nigeria the only country in the top 25 globally
- smaller relative to GDP as well (2.5% versus the 5% in other developing countries) EXCEPT: Lesotho, Cape Verde, Guinea-Bissau and Senegal
- Higher percentage  in Africa flow through informal channel though (45-65%) and exclude intraregional remittances (strong in southern Africa)

Remittances' Impact:
- FIRST: no substitute for sustained domestically engineered development effort/strategy
- SECOND: stay alert to Dutch disease and RER appreciation
- Augment households resources, smooth consumption, provide working capital, multiplicative effects on household spending
- finance consumption, invest in education, health care, nutrition
- Villages pool resources to send smartest abroad—so higher poverty might mean more remittances
- Remittances to GDP ratio rise (10%) = 1% less people living on less than $1 a day

Remittance benefits:
- Long Term Growth Potential- depends on how they are used.  If they are used in concert with investment channels they stimulate growth
- Financial Development –enable access to financial markets for those previously unable starting with savings products.  Possibility to use them as collateral with microfinance projects.  This is financial deepening.
- they can be a stabilizer against fluctuations in Aid and FDI
- possible increases in health care workers

Remittance Future:
- Less taxation and fees.  Cost of small sums is very high.  This is due to low volume and lack of form institutions capable of carrying out the transfer
- right now many depend on the hawala system (east Africa)—but these carry significant risk
- no major MTO like wester union in south Africa.  9/11 has made it even harder to own or start an MTO
- financial sector reform—permitting citizens to open foreign currency accounts
- cross border fee regulation and uniformity
- connect the unbanked population (US Banks doing this with Cape Verde)
- adapt to migrant need—International Remittance Network (200 credit unions) doesn’t require recipients to have a bank account.
- Cell phone technology allows money sent as text message—cell phone banking—linked to debit cards
- Channel savings to productivity (beyond savings) like human capital development through housing construction and financing—these require greater financial infrastructure though than many African states have
- SSA banks need to bundle services (savings products and entrepreneurial loans) to remittance families –something not done by Western Union

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