There is a general consensus that remittances can exert a significant positive impact on development if the receiving countries’ policies and institutions create the incentives to promote investment (Bobeva 2005; Iskander 2010; Natalia et al., 2009; Giuliano and Ruiz- Arranz 2009). Therefore, targeted policies to turn remittances into productive investment can influence their development potential. Migrants’ remitting and investment decisions are influenced by a complex array of factors, such as altruism, return intentions, philanthropic motivation and emotional linkages to home countries. Policy interventions such as sound fiscal policy, liberal exchange rates, and taxation policy can turn remittances into investment even when they are motivated by emotional connections and commitments to the homeland. As migrants are not usually professional investors or entrepreneurs, policy intervention should be innovative enough to provide a wide range of business support services, including adequate
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counselling. There are at least five ways remittance governance can leverage these flows for socio-economic development: reduced costs, financial inclusion of the marginalized, mainstreaming remittances into development finance, governing service providers in home and host countries, and policy coherence.
6.2.1 Reduced Costs
Remittances are largely small transactions made by mostly low-income migrants in destination countries. The costs associated with remittance transfers are a burden for migrants and act as a drag on their development potential. The urgency of initiatives to bring down costs is emphasized repeatedly in global forums, such as in the G8 Declarations at the Sea Island summit in 2004, Heiligendamm summit in 2007, Hokkaido and Tokyo summit in 2008, L’Aqulia summit in 2009 as well as the G-20 Declaration of Cannes in 2011. Despite these efforts, remittance costs remain high in many remittance corridors, which is a significant problem considering that cutting five percentage points could save more than USD16 billion dollars of migrants’ hard-earned income (World Bank 2014b).
In the remittance market, minimal competition, poor technological support for payment and settlement systems, and excessive regulatory and compliance requirements are some of the reasons for high transfer costs (World Bank 2006). The development community has sought reductions in the transfer costs of remittances by promoting technological improvements to increase speed and convenience, and an increase in competitive and efficient markets. Reducing costs by developing financial infrastructure and facilitating more efficient transfer systems appears the most promising area for policy intervention. Other policy initiatives and regulatory reforms that offer promise include licensing liberalization, lowering capital requirements on remittance service providers (RSPs), increasing the participation of
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low-cost postal systems and other state-owned distribution alternatives, and allowing grassroot-level microfinance institutions to become involved in payment services (World Bank 2006).
6.2.2 Financial Inclusion of the Marginalized
There is a growing recognition that financial development is an important condition for fostering investment, economic growth and poverty alleviation (Giuliano and Ruiz-Arranz 2009; Levine 1997, Levine et al. 2000). Therefore “financial inclusion” as a strategy for financial development has garnered considerable attention globally. Migrant remittances are often the only financial transactions made by millions of households who have limited access to formal banking services. Research suggests that remittances can contribute to financial development through three channels: first, by increasing “financial literacy” in remittance- receiving communities, thereby promoting households’ demand for and use of financial products, schemes and other services such as housing and consumer loans and insurance; secondly, by increasing the aggregate level of deposits and credit intermediated by banks, increasing the supply of loanable funds to the financial sector and thereby promoting greater financial inclusion; and, thirdly, by increasing funds in the capital market and through stock market capitalization (Aggarwal et al., 2006; Billmeier and Massa 2009; Brown et al. 2013; Giuliano and Ruiz-Arranz 2009; Gupta et al. 2009; Terrazas 2010).
Remittances may foster economic growth through improved financial inclusion, but this cannot be achieved through laissez-faire practices without active policy intervention. The state is the most influential actor in enabling market-friendly institutional environments for financial development (Beck and Honohan 2008; World Bank 2013). Financial inclusion through remittances can be improved through public policies that encourage the expansion of
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rural banking networks, allowing domestic origin country banks to operate overseas, and facilitating the provision of remittance services by microfinance institutions and more private sector financial institutions.
6.2.3 Mainstreaming Remittances into Development Finance
Migrant remittances are less volatile and sensitive to fluctuations of the global financial market than other forms of financial flows such as foreign direct investment, public debt and portfolio equity and overseas development assistance. During the last financial crisis, remittances were remarkably resilience compared to the one-third drop in foreign direct investment and the almost total collapse of private portfolio flows (Ratha 2009). Remittances helped many recipient countries to build up solid international reserves, offset trade deficits and reduce current account deficits. The recent surge in remittances, despite the sluggish growth of the global economy, has proved the welfare responsive nature of remittances during periods of economic crisis. Remittances are a shock absorber that serves as a hedge against macroeconomic crisis when development finance becomes volatile and disruptive, harming domestic liquidity, depressing currencies, and complicating national foreign debt burdens.
While remittances have increased, overseas development assistance is declining globally and foreign direct investment is concentrated in countries such as China, Mexico, India, and Brazil. These larger economic powers have some advantages compared to small economies in terms of their access to the market, their natural resource endowments, and vast supplies of low-cost labour. Capital-scarce developing countries, on the other hand, are highly exposed to the volatility of international capital markets. Given the chronic deficit of capital, remittances can be an attractive development strategy for developing countries, compensating for capital market volatility and supporting the receiving country with liquidity without
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creating liabilities. As remittances are unrequited transfers, they can substitute for development finance and insulate countries from global market fluctuations (Ebeke and Drabo 2010; Ebeke 2012; Grabel 2009; Kapur and Singer 2006; Shahbaz et al. 2008). While remittances are private transfers, appropriate policy interventions can influence remittance recipients’ motivation to utilize them for investment in education, healthcare, and better housing. Innovative partnership schemes with hometown associations can also support infrastructure projects such as health clinics, educational institutions, and wider neighbourhood improvements.
6.2.4 Governing Service Providers in Home and Host Countries
Remittances are earned and saved in one region and spent in another. Therefore, remittance governance is a complex phenomenon that spans borders. Remittance Service providers (or RSPs) collect funds, mostly small amounts from migrants globally, and transfer these to the migrants’ home countries with fees. With some national variability, the fees are up to 20 percent of the amount sent. Governance challenges in migrants’ host countries where the remittances originate, and in the home countries where the payment system works, are significant. Migrants consider the reliability, cost and convenience of payment systems at the recipients’ end as well as the cost of remittance services on their side when making the decision to remit (Hernández‐Coss 2005). Financial institutions and markets for remittances operate transnationally while policy initiatives to attract and convert remittances into investments remain mostly national. Policy intervention can shape the market structure in the host country in such a way that migrants can choose from a variety of safe and reliable remittance services. Although remittances are not subject to full control by any one government, states are key actors in formulating and adopting innovative strategies (Iskander 2010).
147 6.2.5 Policy Coherence
Many developing countries have developed policies to facilitate migration. These policies mostly aim to protect migrant workers by curbing recruitment abuses, regulating recruitment agencies and intermediaries, and setting standards for employment contracts and welfare services for migrants (Kuptsch 2006). In some countries, policies and mechanisms to curb recruitment are relatively advanced, while remittance governance policies are largely under- developed. This indicates the urgency for policies targeted at establishing a more liberalized remittance regime, for setting standards and developing infrastructure, and for designing remittance-linked products and programmes. To fulfil these objectives, prudent remittance policies are required and should be linked with migration policy, broader financial and institutional policies, as well as being embedded within national development strategies.
An opportunity and challenge for governments is to create flexible policies that manage migration and remittance services, both of which are complex and dynamic. One policy response to the phenomenon of increasingly large, wealthy and investment-oriented diaspora communities interested in home country development is the implementation of policies aimed at making the financial environment attractive. Such policy initiatives must be part of an effort to promote good economic governance structures more broadly.