The Remittance Economy

First published in City Limits Magazine, New York City.

Luis Toapanta wants to move back to Ecuador to be with his two children, his wife and his parents.

Unfortunately, if he were to leave New York, Luis will no longer afford to send his children to school. He says that no matter how much he works in Ecuador, he would not be able to provide for his family as well as he would if he stayed apart from them.

“I want to give them the best that I can, I want to give them the things that I didn’t have,” he says.  I am starting to think that the love of a father can be much more valuable to them than material things.”

Luis’s situation is not at all uncommon in the migrant worker community.  Workers like Luis leave their families behind in their home countries to provide money for education and necessities.  Many of them work seven days per week to maximize the amount that they can send back through remittance agencies.

Most migrant workers that live in rich countries like the United States, Europe, and the Gulf states earn comparatively little compared to natives in those countries. Many of them work seven day per week to maximize the amount that they can send.  The price that they pay to send the money varies greatly depending on the amount of competition in the corridor.  In many cases, the immigrants themselves pay more because they are unaware of other options, or they are uneasy about patronizing traditional financial institutions such as banks.

Transnational remittances were a negligible piece of the world economy until the late 1990s, but globalization and relaxed immigration laws in countries like the United States have led to tremendous upward trend.  The World Bank estimates that migrants around the world remitted $414 billion dollars in 2009. The vast majority went to developing countries.

Remittances to different countries are charged different prices depending on competition and the state of financial infrastructure in the receiving countries.  In corridors with high levels of migration such as the U.S.-Mexico corridor, there is more competition and lower prices.

The recipients also lose money when their money is converted into the local currency. The main reason for high remittance prices in some areas, according to World Bank analyst Kai Schmitz, is not necessarily that the agencies charge more than they should, though they do in some cases where there is little competition on one corridor. The main reason for the high prices mainly has to do with infrastructure and a lack of transparency.

“In many cases in poor countries where remittances are received the banks have poor systems,” says Schmitz. “Sub-Saharan Africa is some of the poorest countries.  They need the remittances more, but the migrants pay the highest prices.”

Another problem that drives up the cost of remittances is that in some cases, the remittance agencies arrange exclusive agreements with banks in developing countries, though this persists in some countries where very few banks operate, it has been outlawed in many.

Very often, the remitters themselves are in fact satisfied with the service.  A 2009 survey by New York’s Neighborhood Economic Development Project found that well over half of remitters surveyed were “very satisfied” with their experiences

Analysts say that the high rate of satisfaction has more to do with a lack of information than genuinely good service.

The largest share of remittances comes from migrants living in the United States, but there are still very few consumer protection measures for remitters themselves.  The PATRIOT Act of 2001 included a few regulations for international payments. These provisions are mostly aimed at preventing the funding of terrorist activity, but a measure of transparency came with it.  Remittance companies are now required to provide customers with a receipt showing the exact amount that they were charged, and the amount that the recipient will receive.

Remitances for economic development

Remittances from expatiates, like foreign direct investment, are one of the principal sources of foreign currency for developing countries.  In some countries such as the Dominican Republic, El Salvador, Jamaica and the Philippines, remittances amount to a huge portion of gross domestic product.

According to World Bank estimates, if just the price of sending remittances were to be reduced by just 5 percent, another $16 billion dollars would be going into the pockets of the receivers.  A reduction in fees could free up more money for development.

The San Francisco-based Transnational Institute for Grassroots Action (TIGRA) is trying to address the lack of development assistance from remittance companies and the lack of legal consumer protection for remitters.

“Sending money hardly costs anything and they charge a lot,” says Francis Capoltura, TIGRA’s founder. “There’s an inherent sense of unfairness in the whole issue. The remittance industry is depending on low wage migrant workers all over the world, generating huge profit margins based on the sacrifices that people have to do to send money.”

TIGRA’s Remit4Change program gives accreditation to banks and remittance agencies that charge fair prices for sending money and show a commitment to reinvestment that addresses the root causes of migration. When a remitter sends money through a company that participates in Remit4Change, he or she can choose a development project to funnel a small portion of the remittance charge to.

One project that TIGRA helped set into motion directed a small amount of remittance agency profits into helping rural Filipino women start a business to help sustain themselves.  The women make and sell traditional fishing nets made from coconut husks.  The initial capital that was needed to employ these 77 women was $100.

“We want to provide migrants with that sense of rediscovery, new meaning to their migration story,” says Capoltura. “People want to know that their leaving hasn’t gone to waste, that they can contribute meaningfully.  It strikes at the core of their reason for leaving.”