Poverty Reduction and Economic Management 247 February 2005 Findings reports on ongoing operational, economic, and sector work carried out by the World Bank and its member governments in the Africa Region. It is published periodically by the Knowledge and Learning Center on behalf of the Region. The views expressed in Findings are those of the author/s and should not be attributed to the World Bank Group. Migrant Labor Remittances in Africa: Reducing Obstacles to Developmental Contributions Cersten Sander amd Samuel Munzele Mainbo Migrants have received height- stimulate and inform discussions ened international recognition of the role remittances play in from the development community African economies and to help in recent times. New World Bank stakeholders design appropriate estimates on the volume of policy interventions. By exploring remittances show that docu- the actual and potential links mented remittance flows con- between remittances and devel- tinue to increase at a rapid rate, opment, the study identifies putting global annual flows at obstacles that limit the potential US$88 billion for 2002 (revised up for greater contributions. from earlier estimates of US$80 The study reports that Africa billion reported in the 2003 World received some $12 billion in Bank Global Development Report) officially recorded workers' and projecting $90 billion for remittances in 2002, about 15 2003, based on trends in the first percent of global remittance flows half of the year. Actual figures to developing countries in 2002. are generally accepted to be Split regionally, Sub-Saharan much higher. This means that Africa received $4 billion, or 5 remittance flows constitute the percent of the global total, largest source of financial flows whereas the Middle East and to developing countries after North Africa together received Foreign Direct Investment (FDI), $14 billion (18 percent). North and indeed in many countries Africa alone accounted for about exceed FDI flows. They are also $8 billion (10 percent). The more stable than other capital authors make the following key flows such as FDI, ODA and observations: capital market flows. Whereas remittances to devel- A recent World Bank study by oping countries have more than Cerstin Sander and Samuel doubled over the last decade, Maimbo examines how Africa has remittances to Africa have grown fared in this growing financial little and, as a result, have Findings phenomenon. This preliminary declined in relative share. Total study of migrant remittances in remittance receipts to Africa over Africa is based on a review of the past decade peaked in 1992 widely dispersed data and docu- (at $10.7 billion) and were at mentation. Its purpose is to their lowest in 2000 ($7.8 billion). For Sub-Saharan Africa, the however, unrecorded flows appear In reaching these conclusions, share of global workers' remit- to be exceptionally high, espe- the authors acknowledge that the tances to developing countries cially in certain countries. In connections between financial dropped from some 8 percent in Sudan, for example, informal service policies and the volume 1980 to 5 percent in 2002 (Ratha remittances are estimated to and channels of remittances are 2003; Gammeltoft 2002). This account for 85 percent of total only partially understood. To date, reflects the growth of flows to remittance receipts. Overall, the those connections have been other regions rather than any weakness or absence of financial explored primarily in the context absolute reduction in flows. systems on the continent and the of foreign exchange controls, The strong and consistent flow high proportion of intraregional taxation, and state monopolies in of remittances to North Africa migration suggest that informal financial services. Regulations reflects patterns of migration to remittances are likely to be a directed at money transfer Europe and the Middle East. Most substantial share of total remit- operators and transfer services remittances to Africa over the tances. What is certain is that in both sending and receiving past decade were received in the official figures grossly under- countries have received scant North Africa (72 percent), followed report remittance levels. attention, despite their clear by East Africa (13 percent), and In analyzing these trends, the impact on the availability and Southern and West Africa (7 and authors argue that throughout viability of services. The mea- 5 percent, respectively). Central Africa, financial and monetary sures promoted by the Financial Africa records less than one policies and regulations have Action Task Force are one source percentage point in remittances. created barriers to the flow of of such regulations, as are The most pronounced change remittances and their effective conservative regulatory perspec- in Sub-Saharan Africa over this investment. A few governments, tives that tend to limit financial period is that remittances to recognizing the valuable contri- services to a very narrow band of West Africa have decreased butions of remittances, have providers (primarily banks), to relative to total flows to the facilitated foreign exchange the exclusion of newer models of continent, whereas remittances transactions or provided invest- non-bank financial services and to East Africa have increased. ment incentives such as match- innovations in service delivery. This change could be due partly ing grants. More could be done, to liberalization of the financial however, especially in the con- To facilitate remittances and sector, as in Uganda; to in- text of the regulation of the amplify their developmental creased refugee flows into East financial industry. Restrictive effects by improving policy and Africa; and to the expansion of licensing of money transfer regulatory environments, govern- money transfer operators in the services, for example, limits ments, the authors argue, need East African market since the access to remittances and re- to consider reforms in the follow- mid-1990s. Only a thorough stricts the potential impact of ing areas: analysis of changes in both remittances in many areas. regions--one that included Other regulations and policies · Licensing ­ Current licens- unrecorded flows, changes in create unattractive environ- ing regulations for money trans- data-collection definitions, and ments for investment and block fer services center on foreign changes in available services-- improvements in financial exchange trading. For smaller could offer a persuasive interpre- services. Removing those ob- money transfer operators and tation. stacles--and broadening and informal services they often are No estimate of unrecorded flows adapting relevant financial opaque and hard to access; (formal or informal) is available products and services, such as compliance may be unaffordable. specifically for Africa. If one were savings and investment options-- To be in a better position to to extrapolate from global esti- would boost remittance flows and review and enhance the regula- mates, total flows would be 2.5 raise their impact on develop- tory frameworks used in Africa, times the official data. In Africa, ment. we must improve our under- standing not only of African This is unfortunate, because Brazil's sovereign foreign cur- remittance markets, but also of related services and products, rency rating BB­ at the time. the business models that make such as savings, loans, mort- Other countries, such as El non-bank transfer services gages, and other investment Salvador, Mexico, Panama, and attractive to various client products could, if cross-sold with Turkey, have also used future segments elsewhere in the world, transfers, be attractive to remit- workers' remittance-backed and of how those models are tance senders and receivers. securities to raise external licensed and regulated. A facilita- Possibly the most effective step, financing. Rutten and others tive framework in which licens- given that the vast majority of (2003) have suggested that ing requirements were adjusted remitters and recipients are remittance flows could be to reflect actual needs for trans- small-time savers rather than securitized to provide financing parency and for managing foreign potential investors or venture for African agriculture. Similar exchange exposure could greatly capitalists, would be to improve financing deals are becoming enhance the availability and financial systems and services to popular in emerging markets outreach of basic financial allow for saving in connection such as Mexico, the Philippines, services, including money trans- with remittances. Saving would and Turkey. Thus treated, remit- fers. enhance the income smoothing tance flows may contribute to effect of remittances as well as overcoming "information asym- · Regulation ­ In the context of their contribution to domestic metries in inefficient domestic transfer fees there may be room savings and capital formation. financial markets and thereby for facilitative regulatory inter- Although some governments improve the quality of invest- ventions. An in-network bank have recognized the benefits of ment in developing countries" transfer within South Africa consolidating small remittances (Buch and others 2002). costs much less than the same by allowing foreign-exchange- in-network transfer across the denominated accounts and This study is one of a very few border to Lesotho (Genesis issuing special bonds, the capital comprehensive financial sector 2003)--a situation common potential of remittances does not studies of remittances and the throughout Africa. Yet, except for seem to have been explored only focusing on the Africa foreign exchange gains and much beyond that, particularly by region. In undertaking this losses, the systems used and the commercial financial and invest- study, Sander and Maimbo make costs incurred are the same. ment services. a valuable contribution to the Could banking networks be growing literature on remit- persuaded to make their transfer · Securitization ­ At the level tances in Africa and their effect fees "border blind"? A common of international financial flows, on economic development. Most currency simplifies the problem: remittances have begun to make studies of remittances in Africa in July 2003 fees dropped for Euro a mark. In Brazil, for example, to date have been done from the transfers within the European remittance flows contribute perspective of anthropologists and Union. The European model positively to the country's credit migration experts. While provid- should be explored for markets ratings. For example, in August ing valuable insights, such such as West Africa, with the 2001 Banco do Brasil issued $300 studies, in aggregate, are dis- CFA, and for countries whose million worth of bonds (with five persed, snapshot surveys of currency is pegged to the South year maturity) using as collateral migrant groups, countries, or African Rand. future yen remittances from subregions. Sander and Maimbo Brazilian workers in Japan. The synthesize many of their findings · Ancillary financial products terms of these bonds were sig- and, through a focus on the ­ Because money transfer is the nificantly more generous than financial infrastructure, contrib- pivotal service for remittances, those available on sovereign ute to a growing set of studies on ancillary financial services and issues. Rated BBB+ by Standard remittances in the context of products tend to be overlooked. and Poors, these securities were financial services which reflect several notches higher than and respond to the recent public debate on remittances (Cross 2003; Genesis 2003; Omer 2002; Sander and others 2001; Sander 2003). These studies illuminate the global remittance debate and begin to fill the void on Africa but they have not yet attained the levels of documentation and analysis shown in studies of remittances in Latin America (MIF 2003; Orozco 2003) and at the global level. Much more, the authors argue, could be done to collect and analyze remittance data and to translate the findings into actions by bringing together key stakeholders from policymaking and regulatory bodies, financial service provid- ers, and diaspora groups. This article was written by Cerstin Sander and Samuel Munzele Maimbo and is based on their Working Paper No. 64, Africa Region Working Paper series, "Migrant Labor Remit- tances in Africa : Reducing Ob- stacles to Developmental Contri- butions", November 2003, World Bank. For more information, please e-mailcerstin-sander@bannock.co.uk or smaimbo@worldbank.org.