What are remittances?
Countless people around the world rely on remittances as a key source of income, but the system hangs in a careful balance
Remittances have been in the news a lot lately—whether in discussions of the U.S. election, the refugee crisis, or diplomatic efforts, remittances are viewed as tools against poverty and as economic sanctions.
In a sense, remittances are the original peer-to-peer payments: funds sent by migrant workers back to family in their home countries. Typically working low-wage jobs, these migrants send as much as 40 percent of their paychecks home. The average per capita remittance by poor migrants in developed countries is around $200 per month, according to the Financial Times.
Last year, remittances to developing countries amounted to $431.6 billion, according to a World Bank report released this month. And remittances provide three times more money than formal development aid and foreign investments in many countries. (In certain cases—like Nepal—remittances can account for a third of a country’s GDP.) That makes them a powerful, recurring source of income for millions of people, particularly in developing countries. Often, remittances help them access nutrition, healthcare, and education. (Western Union estimates that 30 percent of the funds it transfers is related to education.) These effects are even more dramatic in times of crisis.
Of course, there are tradeoffs: Critics warn that remittances can make people—and even whole economies—dependent on outside flows of capital, which in turn makes life for those who do hold jobs in those countries much harder. A 2007 article in The Atlantic paints a grim portrait of this trend in Mexico:
Remittances are unquestionably a boon to Mexican living standards, but they are also changing the character of Mexican life. In some towns with a long history of migration, leaving home to work in the United States has become a rite of passage for young men, often in place of completing school. Many of these towns are bereft of men and dominated by single-parent households. The money flowing in reduces local incentives to work and fuels inflation. Many of the houses being built boost real-estate prices beyond the reach of people working in Mexico.
Little has changed since that 2007 report, except that global remittances have only continued to grow.
How remittances are sent
Remittances can be sent in a variety of ways, but the cost of money transfer must also be taken into account. Popular methods include banks (which level an 11-percent fee), money transfer businesses (which cost an average of 7 percent), and the post office (which costs about 5 percent).
Overall, according to the WBO, the global average cost of sending $200 is about 7.5 percent. It’s most expensive to send money to sub-Saharan Africa, with an average cost of 9.5 percent.
As money laundering and other financial crimes become rampant throughout the financial system, regulations have made remittances more difficult—and more expensive. Of course, certain costs apply for any person sending any money anywhere.
Though most financial transfers from migrant labor don’t generally pose national security threats, remittances fall within the scope of such AML and CFT regulations as the Patriot Act, passed in the wake of September 11. Wire transfer businesses need banks to send funds successfully. But many international banks have closed bank accounts of money transfer operators on a widespread scale. For example, over the past couple years, banks in a dozen or so of the major remittance-sending countries closed 84 bank accounts of remittance providers in the Philippines due to security concerns.
Mostly, though, workers are left with few options. Though the money they send may help their families establish upward mobility, and even bank accounts, many senders themselves are underbanked. In 2014, the CFPB conducted an analysis to determine whether remittance activity could help workers without credit lend legitimacy to their borrowing potential. But the study found that, to the contrary, remittance histories are positively associated with delinquency.
Remittances in politics
Remittances often flow between countries that don’t exactly see eye-to-eye: The United States and Syria, for example.
But the threat of turning off the spigot, or making it more difficult than regulations currently do, looms—making remittances something of a political tool. An April Reuters article reported that the United States has warned North Korea that a fifth nuclear test could trigger sanctions aimed at remittances.
For example, as immigration debates have ratcheted up, presumptive Republican presidential nominee Donald Trump has threatened to throttle or tax remittances to Mexico, currently the biggest beneficiary of funds from the United States, which is the largest source of remittances in the world.
The consequences are hard to estimate. If remittances were cut off, there would be devastating impacts on families as well as economic growth, at least in the short term. As the World Bank and World Economic Forum have found, remittances tend to help improve the standard of living of not only the recipients, but also of communities as a whole.
But economists struggle to measure the overall impact of remittances, as data tends to be limited. And positive effects of remittances are somewhat undercut by downsides like inflation, complacency, and brain drain.
Nevertheless, as Faisal Khan points out on his blog, a number of nations are working to rethink their approach to remittances, particularly in light of a recent slowdown due to weakened oil prices, which has hit Middle Eastern countries that have historically been sources of remittances.
As it stands, although countless people around the world rely on remittances as a key source of income, the system hangs in a careful balance.
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