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Global Issue 15

Global Insight Making Money Move In developing countries, many people have little contact with the formal banking system other than through sending or receiving remittances remittance flows to developing countries exceeded US$400 billion in 2012, almost four times the size of official development assistance (figure 1). The true size of remittances, including unrecorded flows through informal and formal channels, is larger, perhaps a multiple of the current level in many poor countries. In addition, remittances tend to be stable and resilient during financial crisis. Unlike private capital flows, which tended to fall Given modern technologies, it is hard to believe that sending money costs nine per cent on average and, in some south-south corridors, 15-20 per cent precipitously during the global financial crisis in 2009, remittances to developing countries declined by less than five percent and recovered quickly afterwards. Migrant remittances provide a lifeline to many countries. India received $70 billion in remittances in 2012, more than three times the size of foreign direct investment (FDI). Egypt received $21 billion, three times the value of its revenue from the Suez Canal. In many smaller countries, such as Tajikistan or Liberia, remittances are between one-third and one-half of the national income. Since remittances are personal funds, governments cannot dictate their use funds for specific productive purposes (such as buying tractors). Nor should they do so, because that interferes with individuals’ incentives and reduces welfare. Yet, governments can facilitate the flow of remittances by reducing the cost of sending money, and promote access to savings, loans and health insurance products linked to remittances. They can even reduce sovereign borrowing costs by using future remittance flows as collateral. And they can issue diaspora bonds to mobilise diaspora savings. Given modern technologies, it is hard to believe that sending money costs nine per cent on average and, in some south-south corridors, 15-20 per cent of the principal amount remitted. The fee structure is also highly regressive – the smaller the remittance, the higher the fee. International regulations, especially anti-money laundering and countering the financing of terror (AML/CFT) regulations, are increasing the cost of using mobile phone technology and internet to send money across international borders. These regulations are also preventing global banks from operating bank accounts of money transfer companies, thus contributing to higher costs. Exclusive partnership agreements between national post offices and major money transfer companies are increasing the market power of the latter and stifling competition from new players. Capital controls are preventing outward remittances from many 24 l www.global -br ief ing.org thi rd quar ter 2013 global 


Global Issue 15
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