G8 seeks to cut remittance fees for migrant workers

World Bank
Global Policy Forum
June 10, 2004

The Group of Eight leaders joined hands Wednesday in helping lower remittance charges for migrant workers as part of their efforts to eradicate poverty, reports Kyodo (Japan). Remittances can play an increasing role in the economic development of poor countries because income earned by migrant workers enables their families back home to receive needed capital for education, housing and business start-ups, the G8 leaders said in an action plan on eradicating poverty issued after their second-day meeting on Sea Island, Georgia. But the cost of sending such remittances "can be high – as much as 10 to 15 percent even for flows to large, urban markets," the statement said.

The action plan the G-8 countries are considering includes promoting competition, using innovative payment instruments and enhancing access to formal financial systems in sending and receiving countries, the statement said. The flow of remittances across international borders is growing rapidly with migrant workers sending roughly $100 billion a year from developed countries to their families and friends back home. The leaders of Britain, Canada, France, Germany, Italy, Japan, Russia and the United States were committed to working closely with international organizations, including the World Bank and IMF, to update data on remittance flows and develop standards for data collection in sending and receiving countries. The leaders said the proposed action plans are designed to encourage cooperation between banks in advanced countries offering remittance services to migrant workers and financial institutions in their home countries.

The Associated Press adds proponents of the [plan] say it will pour billions of dollars into Third World economies, while drying up conduits of funding to terror groups. The leaders provided few details on how they plan to persuade financial institutions to cut remittance rates, but some officials and economic experts suggest governments could use tax incentives or reduce paperwork for wiring money. Another way to dramatically bring down remittance rates is for G8 governments to cooperate with Third World countries to create more institutions, such as post offices, where family members can collect funds. Diplomats speaking on condition of anonymity said France is particularly interested in building up a network of credit unions in former colonies in North Africa. That would allow remittances to go into investments, rather than simply be spent.

Agence France Presse further adds that in addition to facilitating the transfer of remittances, the action plan also aims at improving the business climate for businesses and investors. G8 leaders encouraged developing countries to cut red tape, blamed for stifling attempts to start new businesses or invest. Developing local financial markets, such as local bond markets, to support housing and clean water supplies, as well as encouraging more small loans for people in developing countries, were also cited as means to fight poverty. Lawrence Solomon, executive director of Urban Renaissance Institute, a Toronto-based think-tank, comments in The National Post (Canada) that in many developing countries foreign aid is either negligible or entirely absent. Remittances, in contrast, have been life-savers. In Latin America and the Caribbean, remittances represent 50 to 80 percent of the recipients’ household income, depending on the country. A World Bank study last year of 74 low- and middle-income countries found remitters reduce the proportion of people living in poverty in a Third World country by about 1.2 percent for every 10 percent increase in the country’s remittances. Other studies estimate that every dollar of remittance injected into a local economy leads to an increase in local GDP of $2 to $3, as recipients spend the money buying local goods and services and meeting their basic needs. Yesterday, the Indian Overseas Bank showed the G8 how to do it: It launched "e-Cash Home," an Internet-based online remittance service that will allow Indians abroad to remit money back home – to any bank account in India – for as little as $4. Rather than the 40- to 60-day wait that is now customary, Indian recipients will now receive their remittances in just four days.

The Financial Times further writes that while most media attention is focused on debt forgiveness and official aid, remittances to developing countries are far larger than both put together. Workers in developed economies sent $93 billion to their home countries last year through official channels, and an estimated 20 to 50 percent more by unofficial means. This dwarfs the $58 billion the world’s richest economies gave in government aid. Research by the World Bank has suggested that money sent home has a favorable effect on long-term economic growth, and may be used to finance education and health. "Even when they are used for consumption, remittances generate a multiplier effect, especially in poor countries with high unemployment," says Dilip Rapha, a senior economist at the World Bank. Another benefit of remittances is that they tend to go up during hard times when other forms of private capital inflow often flee a country.

Les Echos (France) meanwhile reports that G8 countries have not yet agreed on the means to provide development aid to poor countries. French President Jacques Chirac has been pushing his idea of an international tax on capital: in a letter to sixty of his counterparts, he advocated for a three-way approach with fiscal incentives to encourage companies to contribute to development aid, fight against tax evasion and introduce an international tax to help fund public development aid. A wrap-up report on the French initiative will be made public during the IMF/World Bank annual meetings next Fall. France also backs the development of wide-scale microcredit programs, which allow poor individuals and women to have access to loans. The US is willing to improve the investment climate in developing countries, make business creation easier and promote loans to small and medium-sized firms, following the model of the EBRD, which allowed for 500,000 loans to small and medium-sized firms in the last decade.



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