Remittances: down 15% per worker but up 15% in total

Emirates 24|7 quoting Jean Claude Farah, Regional Vice-President for the Middle East, Pakistan and Afghanistan at Western Union:

According to our assessment, expatriates in the GCC region were able to cover their living costs using only 20 per cent of their salaries and they could keep 80 per cent of it free for remittances to their families or for their savings and investments. Following the inflationary wave in the region, the cost of living surged sharply to about 45 per cent of the expatriates' income. This had a significant impact on remittances. The value of each remittance declined.

The other change in the industry was the increasing number of remittances from the region due to the enormous economic development, which attracted a large number of expatriate workers in different development projects in the GCC countries. The overall value of remittances from the Gulf increased with more people remitting money home thus increasing the number of transactions, but the monetary value of each remittance declined.

The UAE remittance market is estimated at $6.5 billion [Dh23.87bn] in 2008, while remittances ranged between $4.5bn and $5bn during the previous two years.

The Curse of the Remittances

Truth or fiction?

Some in the UAE consider it a problem that foreign workers send money home instead of spending it in the UAE. I don't. But what about what remittances do to the receiving country's economy? Is it all good news?

From Foreign Policy :

According to a new study by the International Monetary Fund (IMF), remittances may actually encourage government corruption and ineffectiveness. In an analysis of 111 countries between 1990 and 2000, researchers found that high levels of remittances often lead to greater corruption and irresponsible economic policies. In other words, officials in remittance-rich countries are often let off the hook for failing to provide basic services, freeing them to divert resources for their own purposes. “[T]here’s less of an incentive for citizens to demand reforms” when remittances are high, explains Ralph Chami, a division chief at the IMF Institute and a coauthor of the report. And because the government assumes citizens with help from abroad will turn to the private sector for essential services such as healthcare and education, leaders face little pressure to change. “The government says, ‘I know you’re getting money; what’s my incentive to fix [the] situation?’” says Chami.

Here's a link to the paper (PDF).

Economists often argue that exporting workers and receiving their remittances (sent to their families) is just another form of exports. Putting these two arguments together, are we to conclude that exports take governments off the hook and lead to greater corruption and irresponsible government projects? Of course not.

I suspect that exporting labor is often the result of bad government policy. People leave because of government failure: the economy is over regulated, excessively managed (and, hence, mismanaged), or -- at the other extreme -- does not provide basic infrastructure like roads. But in such an environment remittances may serve as a safety valve that takes the pressure off fundamental reform.

We don't have to just look for present day examples like Bangladesh or the Philippines. The Irish diaspora might also be an example. Ireland of course is also a shining example of what can happen when market reforms are instituted.

Remittances and the role Western Union

Anyone familiar with the UAE knows that a majority of the population (working and nonworking) are foreign guest workers. The guest workers send much of what they earn to family in their home country.

Last week the New York Times published a major piece on remittances and about Western Union in particular.

To glimpse how migration is changing the world, consider Western Union, a fixture of American lore that went bankrupt selling telegrams at the dawn of the Internet age but now earns nearly $1 billion a year helping poor migrants across the globe send money home.
Migration is so central to Western Union that forecasts of border movements drive the company’s stock. Its researchers outpace the Census Bureau in tracking migrant locations.
...
With five times as many locations worldwide as McDonald’s, Starbucks, Burger King and Wal-Mart combined, Western Union is the lone behemoth among hundreds of money transfer companies. Little noticed by the public and seldom studied by scholars, these businesses form the infrastructure of global migration, a force remaking economics, politics and cultures across the world.

Last year migrants from poor countries sent home $300 billion, nearly three times the world’s foreign aid budgets combined.
...
While some migrant groups still complain of predatory pricing, the company has won unlikely praise.

“Western Union has become a company that values and protects its customers,” said Matthew J. Piers, the Chicago lawyer who sued the company over its fees. “Nobody was more surprised at the change than me, because I was Western Union critic Numero Uno.”

This is a story of how a goliath fell when the telegraph market collapsed and how it reemerged on the strength of its existing network of outlet around the world and grasped the market opportunity in the growth of remittances. And how it remade itself again in response to criticism - and I think more likely, the threat of competition - with a focus on customer service.

Here are the other stories in the NYT series on migration by Jason DeParle.

Lost Luster - In India, Even Cared-For Populace Leaves for Work - In the Indian state of Kerala, remittances from global capitalism are now a central part of the local economy. (September 7, 2007)

Middle Class Migrants - Rising Breed of Migrant Worker: Skilled, Salaried and Welcome - While many countries are seeking to restrict immigration by low-skilled migrants, they are increasingly working to attract those with advanced degrees and scarce skills. (August 20, 2007)

Building Blocks - Fearful of Restive Foreign Labor, Dubai Eyes Reforms - After several years of labor unrest in the United Arab Emirates, the government is seeking peace with the migrant workers who make local citizens a minority. (August 6, 2007)

The View From Cape Verde - In a World on the Move, a Tiny Land Strains to Cope - The West African nation of Cape Verde, where almost everyone has a relative abroad, is a microcosm of the forces of migration that are remaking societies across the globe. (June 24, 2007)

Phoney Money Honey

BBC:

The lives of many Kenyans are being transformed by an innovative mobile phone money transfer service. The free account - M-Pesa - is offered by Safaricom Kenya, a leading mobile phone service operator and is a technological breakthrough say the operators. It enables subscribers to send large volumes of money in an instant transaction. The service, which is in the process of rolling out to most major towns in Kenya, is also cheap - costing on average about $1 to send or receive money. Just a month after launch, M-Pesa is already providing cut throat competition to existing money transfer agencies, notably the government-owned Postal Corporation, a market leader with a massive network of branches.

See also this Reuters report on micro finance:

"Uganda is probably the most saturated microfinance country thus far, and still the reach to the rural areas is not strong." [So said Sam Daley-Harris, director of the Microcredit Summit Campaign.]

Technology may have some of the answers. Some operators are looking at using pre-paid phone credit and Africa's rapidly expanding mobile networks to transfer money and make repayments, reducing the need for credit agents to travel from village to village collecting tiny amounts of cash.

Better communications and credit monitoring will also help. Kenya's new law, for example, encourages lenders to pool information on borrowers' credit history, drastically reducing the risk of default....

Here's the take over at Marginal Revolution:

If you want to pay for something, just make a call to the provider and transfer cell phone credits to the other trader's account. Why should those credits be any less liquid than currency? They are easier to store and transfer and just about everybody uses them. Monetary economics in Africa is very, very difficult. It must start with the presumption that money is the asset with the highest carrying costs, if only because your relatives find it so easy to take away from you.

Hmmm. Since the phone credit system makes it less costly to send money home does MR think this is good or bad?

There are several compelling comments to MR's post:

• Mark writes: We have been using airtime as currency in Nairobi for a while. I regularly take change from taxi drivers in airtime - they don't like carrying cash as they are at risk from thieves.


• doctorpat writes: How do you stop your relatives from "borrowing" all your phone credit?


• Cyrus writes: The airtime, while still subject to on-demand sharing, is not subject to its cousin, socially tolerated theft.

What if I could buy minutes as a hedge against inflation?