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

Notes on "Nigeria's Shot at Redemption"

Notes on Nigeria’s Shot at Redemption by Ngozi Okonjo-Iweala (Dec 2008):

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

This is a great article I read for my international economics class.  It stands as sage advice for newly resource rich countries or potentially resource rich countries like Madagascar.

Mistakes made:

- The mistakes left Nigeria saddled with enormous debt

- 1973-4 and 79-80 gave Nigeria $300 billion windfall entre 1970-2001

- They didn’t account for the two givens of oil windfalls: non-renewability and price volatility

- They focused on the wrong things (or didn’t focus broadly enough) and assumed that oil prices would always rise—didn’t account for price volatility. 

-  In an effort to avoid Dutch Disease (deterioration of non-resource traded good sectors due to abundance and development of natural resource sector at its expense) they ignored the dangers of debt overhang.  This means: credibility gap and inability to attract foreign financing despite potential for high RoR investments. 

- corruption and bad governance degraded public institutions

- Failure to correct for inflation each year

Lessons Learned:

- even brief mismanagement can yield decades of hangover effects.  Management of an oil windfall is paramount

- need for oil-price-based fiscal rule: disconnects oil revenue from government expenditure—this dampens the effect that pricing changes can have on the overall economy by limiting appreciation and volatility of real exchange rate (RER).  This was signed into law.

- OPBFR is not enough since even accruing oil revenues still means asset depletion, therefore gov spending requires a robust rate of return which requires a:

- due process mechanism:  competitive bidding for gov contracts.  Also NEEDS still a systematic cost-benefit analysis system for public investments—they did a good job of this when they bought back their Paris Club debt in 2005. 

- governments must anticipate that oil prices won’t always rise and accordingly must adopt conservative fiscal policies.

- corrective measures can’t be limited to economic policy but must extend to embrace good governance and transparency—the EITI++ rating is essential in this as well as its publication of government revenues. 

3 actions: responsible gov. investments with high RoR, future generations benefit assurance and management of oil price volatility. 

3 outcomes: avoid debt overhang, lower volatility of RER, diversified economy to include non-oil industry. 

What's a new (better) approach to oil revenue management?

- oil price boom of the early 21^st century gives Nigeria a shot at redemption that may be a worthwhile model for other countries to emulate. 

- management must have it’s eye on future generations so that they can benefit from a resource that will eventually disappear—this is done with a healthy and diversified economy and low indebtedness. 

- Nigeria did this in two steps:  first it tackled corruption and political stability (99-2003), then it expanded its focus (2003-2007) to economic and anti-corruption reform (emphasizing, fiscal, structural and institutional and governance reforms measures).

- EITI- Extractive Industries Transparency Initiative—voluntary measures to promote transparency and accountability.  Country must publish what it pay and make public revenues from oil, gas, mining.  Nigeria one of first adopters in May 2007—they have also exceeded this minimum and set a basis for other countries. 

- reforms carry momentum which must be capitalized.  It also requires political leadership to break the cycle of corruption and put things like OPBFR into law

Others:

- Holland 1950’s discovered natural gas in north sea.  Brings a lot of dollars into country.  Real exchange rate productivity of economy

 - Distributional fund is the right way to do it.  Alaska has done this to a certain extent with a certain amount of revenues getting earmarked and the citizens getting a check.  Subisidies are inefficient because they don’t target specific disadvantaged groups—everyone (including the rich) get benefit of subsidy. 

SUMMARY: 
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      Nigeria experienced an oil boom from 1973-4 and then another from 1979-80.  In all they experienced a $300 billion windfall from 1979-2001.  They squandered this windfall in four ways.  First, they failed to account for the two givens of the oil industry: it is non-renewable and it is subject to price volatility.  Second, they focused too much on the wrong thing.  The government was so worried about combatting Dutch disease (i.e., an overdevelopment of an extractive industry at the expense of the non-traded good sector) that they completed ignored the significance of the threat of debt overhang.  Third, they failed to correct for ensuing rising inflation each year (as the Real Exchange Rate skyrocketed in appreciation 56%).  Finally, rampant corruption and poor governance only served to amplify all of these problems. 

            All of these mistakes combined to illustrate that even a short period of mismanagement can produce decades of hangover effects.  Significantly the Nigerian governments actions at the end of the 90’s offer valuable lessons with regard to oil revenue management.  The biggest step the government took was signing into law the Oil Price Based Fiscal Rule (OPBFR).  The law effectively disconnected the oil revenue from government spending.  This served to dampen the volatility of RER appreciation.  They were also one of the first nations to voluntarily join the Extractive Industries Transparency Initiative (EITI) in 2007.  This initiative made revenues from oil, gas and mining all available to the public.  This transparency encouraged fiduciary responsibility throughout all sectors.   Furthermore they were proactive in combatting their debt overhang.  A major stride came in 2006 when they bought back their Paris Club debt. 

            All in all, Nigeria handled their new oil windfall in measured steps.  The first step took place from 1999-2003 as they tackled corruption and built political stability.  Once progress had been made there they enacted major reforms in the anti-corruption and economic arena.  These efforts served to diversify the economy, promote RER stability and eliminate debt overhang.  The final step was (and continues to be) to harness the momentum of change.  This requires political leadership as the government must be kept on task in diversifying their investments from oil revenue to insure a high rate of return.  This return is necessary to give their future generations the assurance that the benefits from the oil will last after the resource itself is long gone.  One significant shortfall of the Nigerian government not mentioned in the article is their embrace of gasoline subsidies for the general public.  This measure robs their government coffers of billions of dollars and benefits myriad individuals in Nigeria that have no need for a subsidy.  They would be far better served to target those they benefit with a yearly distribution of revenue from the oil industry as is done in Alaska.