Daniel Ortega. Photo by Granma.
Daniel Ortega. Photo by Granma.

Policy Innovations Digital Magazine (2006-2016): Briefings: Remittances Are No Free Lunch

Dec 25, 2006

Home is not only where the heart is, it's also where the money goes. Migrants and foreign workers are sending money earned abroad to their home countries at increasing rates. The value of these financial transfers—known as remittances—has skyrocketed in recent years as technological advances have made it easier to wire mom and dad a few bucks.

According to the World Bank's Global Economic Prospects report, officially recorded remittances worldwide exceeded 232 billion dollars in 2005. It is estimated that remittances sent through informal channels could increase this number by up to 50 percent. What's more, total value of remittance flows is larger than that of official development assistance. In many countries, remittances also outpace flows of foreign direct investment.

The countries receiving the most recorded remittances are India (21.7 billion dollars), China (21.3 billion dollars), Mexico (18.1 billion dollars), France (12.7 billion dollars), and the Philippines (11.6 billion dollars). Those for which remittances account for the largest proportion of GDP are Tonga (31%), Moldova (27.1%), Lesotho (25.8%), Haiti (24.8%), and Bosnia and Herzegovina (22.5%).

While a lot of money is changing hands, it's unclear whether the effect of remittances in the recipient country is a net positive or negative. In October, the World Bank released Close to Home: The Development Impact of Remittances in Latin America. The report finds that in Latin America and Caribbean nations, remittance levels are correlated with higher savings rates, better access to health and education, increased macroeconomic stability and entrepreneurship, and reductions in poverty and social inequality.

Yet some in the media have taken issue with the report's positive spin. The Financial Times dismissed the idea that remittances are a substitute for sound macro- and micro-economic policies in recipient countries. In The Wall Street Journal, Bob Davis pointed out that, in El Salvador, remittances distort the economy by raising the value of local currencies. In poorer countries, remittances often crowd out local investment. The reliable influx of ready cash from abroad can obscure the need for local development.

"The skepticism expressed in The Wall Street Journal article is healthy," says University of Delaware Professor Mark Miller. In a recent interview with Policy Innovations, Miller stressed that "brain drain" often plagues societies that rely on high-levels of remittances. "Remittance flows are adversely affecting development in many cases," he said.

A growing number of rich countries are regulating remittances as part of a foreign policy toolbox. One week after the UN Security Council unanimously approved a sanctions resolution on North Korea as punishment for its nuclear test in October, major Chinese banks restricted remittances payments to North Korea. In Japan, remittances to 15 organizations and individuals linked to North Korea's missile and weapons programs were frozen.

As a result, North Korean workers in China have begun leaving the country. Banks in Dandong and Shenyang, where many businesses trading with North Korea have accounts, are finding it difficult to collect payments for exports to the Stalinist state. Experts say a ban on financial transactions involving North Korea is an effective way to curb Pyongyang's efforts to build missiles and weapons of mass destruction.

In Nicaragua, the remittance issue played a role in the recent presidential election that returned Daniel Ortega to power. Prior to the vote, U.S. Congressman Dana Rohrabacher sent a letter to Homeland Security Secretary Michael Chertoff, asking him to make contingency plans to block remittances to Nicaragua should the leftist ex-President win.

As head of the Sandinista movement that took power in a 1979 coup, Ortega battled the U.S. backed Contras in a long, bloody civil war. During the 1980s, the United States accused the Sandinista government of hosting international terrorist groups such as the FARC, ETA, and the IRA. Citing the possibility that Nicaragua could once again become a haven for terrorists, Rohrabacher implored Chertoff to consider terminating the "unregulated movement of an estimated 2.5 billion dollars" over the last five years from the United States to Nicaragua.

This is not the first time the remittance issue has been used by U.S. officials in Central American politics. In El Salvador's 2004 presidential election, U.S. officials and the right-wing candidate, Tony Saca, warned of the same scenario if the left-wing candidate, Schafik Handal, prevailed. Saca won.

As globalization deepens and spreads, the impact and visibility of remittances seem likely to increase. Traditionally, remittances were sent via stamped mail or in the hands of a trusted courier. The potential for theft or loss ensured that migrants would think twice about sending home large sums of money. Nowadays, technological advances have upped the dollar ante considerably.

Rich countries are paying closer and closer attention to the vast sums crossing their borders. The increasing interplay between the remittances and foreign policy, development assistance, and national security ensures that this issue will remain high on the agenda of rich and poor countries alike.

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