Global remittances, development and unintended consequences

I read somewhere recently that the flow of remittances to developing nations is greater than the global flow of development aid. The comment was made with the additional observation that remittances are probably much more effective in fostering development because 1) the use of those remittances is closely supervised compared to foreign aid (personal supervision is always tighter than process supervision), 2) remittances are more targeted to actual recipients, 3) there is much less syphoning off of remittances for administration or corruption, and 4) remittances used for investment purposes, because of the above reasons, has a much higher rate of return than the often white elephant projects of centrally planned aide agencies.

The graph below from India Wins Remittance Race Again by Eric Bellman lends credence to the above claim.

$70 billion in remittances to India alone. Woof!

Note both France and Germany with surprisingly robust remittances from citizens overseas, $25 billion to France alone. I was quite surprised by that number.

Also in the article is the information that roughly 4% of the global population, 250 million people, are living and working as non-citizens in countries outside those in which they were born.

Using newly available census data, the stock of international migrants is estimated at 247 million in 2013, significantly larger than the previous estimate of 232 million, and is expected to surpass 250 million in 2015.

The aggregate sums are huge.

Migrants’ remittances to developing countries are estimated to have reached $436 billion in 2014, a 4.4 percent increase over the 2013 level. All developing regions recorded positive growth except Europe and Central Asia (ECA), where remittance flows contracted due to the deterioration of the Russian economy and the depreciation of the ruble.

A great example of trade-off decisions and unintended consequences. Remittances are a huge and extremely effective form of development aid for developing nations. We should want to make that as easy as possible to occur. But look at the cost of remitting those earnings:

The global average cost for sending money remained broadly at 8 percent in Q4 2014, with the highest average cost (about 12 percent) in Sub-Saharan Africa.

8% of the capital amount. Ouch! Why so high. Well, we have other objectives as well including money laundering for criminal and terrorist purposes. These are not illegitimate concerns but look how they impact the poor.

Concerns over money laundering are keeping costs high by increasing compliance costs for commercial banks and money transfer operators, and delaying the entry of new players and the use of mobile technology.