Migrant Worker Remittances – A New Source of Microfinance Capital ? Jonathan Brooks, UNDP Regional Centre for Europe and the CIS Almaty, 2005

Why Remittances ? 2003 G8 Summit (Georgia) identified migrant worker remittances as a major potential source of development finance Remittances constitute the second largest capital flow to many developing and transition countries.10% of the World’s population are sending or receiving remittances Remittance flows are increasing: 2003 $116 billion 2004 $126 billion 2005 $165 billion (est.) International organizations are now starting to mobilize around remittance issues

Remittances in Europe and the CIS (1) Country 2003 Value ($ million) 2003 % GDP (approx) Albania77813 BiH87012 Kyrgyzstan1006 Tajikistan14611 Moldova14623

Remittances in Europe and the CIS (2) Country 2003 Value ($ million) 2003 % GDP (approx) Armenia1636 Azerbaijan1542 Croatia7873 Georgia2426 Macedonia1433 Poland19511 Turkey23211

Benefits of Remittances Remittances are transfers from rich to poorer countries, are relatively stable over time (compared to FDI flows) and may be countercyclical Since remittances are largely intra-family transfers they do not entail debt and repayment obligations Evidence from many countries suggests that remittances often flow to the poorest and most vulnerable (female headed) households Arguably, remittances constitute a social safety net for the poor, reducing the vulnerability of households to external shocks

Uses of Remittances Household surveys suggest that in most countries, remittances are mainly used to meet ‘daily’ consumption needs, plus investment in health and education Smaller proportions are channeled into: savings, real estate investments, livestock and consumer durables ‘Productive investments’ e.g. income and employment generating activities, constitute smallest category of remittance investment in most countries Approximately 1% of global remittance flows take the form of collective remittances for community development investments

Costs of Remittances Remittances are inextricably linked to issues in labour migration: large outflows of economically active population may cause severe labour shortages in essential sectors of ‘exporting’ countries High levels of labour out-migration also have negative social impacts In some countries, high remittance inflows are associated with ‘Dutch Disease’ Some analysts point to ‘moral hazard’ problems – altruistically motivated remittance transfers may reduce incentives to find employment, reduce work effort and / increase the risk adversity of potential investors

Policy Responses Most analysts conclude that labour migration and remittance transfer yield net benefits for ‘exporting’ countries Public policy and international donor interventions can assist in maximizing the benefits of remittance transfers in three main ways: -Lowering transactions costs of international transfers -Lowering transactions costs and increasing the outreach of local transfers -Channeling remittance income into local investment projects

1. Lowering transactions costs of international remittance transfers Reducing the cost of international remittance transfers ensures that a high proportion of remittance capital flows to poor households Governments in (predominantly OECD) ‘sending’ countries can assist this process by promoting competition in remittance transfer services and ensuring greater transparency in pricing and product design The financial services sector can assist by adopting new transfer technologies which provide for greater efficiency, lower costs and extended outreach Donors can assist through brokerage and advocacy activities e.g. UNDP Growing Sustainable Business

2. Lowering transactions costs and increasing the outreach of local transfers Reduced transmission costs are likely to be ineffective unless measures are also taken to extend access to financial services for poor communities in ‘recipient’ countries Donors can assist in reducing the cost of local transfers by brokering partnerships between money transfer companies, commercial banks etc, with local microfinance organizations, credit unions and rural post offices As a fee based product, local money transfers have considerable potential to strengthen microfinance institutions, directly and through opportunities for cross-selling (e.g. micro-insurance, savings etc)

3. Channeling remittance income into local investment projects In principle, channeling remittance income into public infrastructure and job creation investments has the potential to promote local economic development and thus contribute to sustainable poverty reduction This is the most contentious area for government and donor intervention however. Remittances are voluntary transfers, typically between family members, and arguably should not be seen as an alternative source of development capital Notable exception is donor support for diaspora groups wishing to invest collective resources. Donor support should be limited to building the capacity of such groups in areas such as fund-raising, project identification and implementation

Key Questions 1. What is the scope for UNDP RBEC engagement in remittances ? Is this a worthwhile area for us ? 2. If ‘yes’, where are the most appropriate entry points (e.g. brokering international and local partnerships, building the capacity of MFIs, strengthening diaspora organizations etc) 3. What resources are required in terms of funds and internal capacity ? 4. Are there benefits to be achieved by approaching remittance interventions at a regional (as well as national) level ? If so how should RBEC / BRC be involved ?