Vices and Virtues of Remittances

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In “Migration’s New Payoff”, Kapur and McHale argue that remittances are the most reliable source of foreign money flowing to poor countries. Described as “mother’s milk for poor nations” by one Asian paper, Kapur and McHale claim that last year’s remittances outstripped foreign aid (49). Following a boom in the 1990’s, remittances have lifted entire countries out of poverty by creating new financial channels (49). Last year, 20 million Mexican immigrants sent home 10 million in remittances, twice the value of Mexico’s agricultural exports (50). The recent surge in remittances is the product of increased migration as well as developing countries being under the tutelage of the IMF as of recent, leading to relaxed exchange controls, reduced black market for foreign exchange, and eased restriction on banks and other financial intermediaries (51). The Inter-American Development Bank is also helping by investigating strategies to help Latin American workers send remittances home. Additionally, compared to the outmoded Informal Value Transfer System, burgeoning infrastructure including Western Union (with 151,000 agent locations globally), commercial banks, and ATM’s has also helped ease the movement of money across borders. Today more than 800 U.S. police departments and 400 U.S. cities recognize the “matricula”, Mexican government issued ID card as a valid ID. Thirteen states even accept it as a valid driver’s license [1]

Virtues of remittances as a source of foreign aid

Kapur and McHale contend that remittances should be considered a “third way” approach to development because they are a stable source of income flowing to developing countries, devoid of the whims of donating governments or conditions imposed by multilateral lending institutions (50). Remittances are also insulated from the behavior of private investors and money managers and in a way are a free lunch, as they bear no cost on the country receiving them. On the sending side, remittances need no costly government bureaucracy, and on the receiving side are unlikely to be siphoned off by corrupt government officials. In the case of failed states and stateless people, remittances are key for family survival and household consumption, as well as to finance militant causes. Remittances don’t directly add to a government’s budgetary resources but they raise the level of national savings and access to foreign exchange. Although the degree to which remittances create jobs is unclear, there is the idea of pooling remittances in order to channel them for public purposes such as financing for work projects and businesses [2]

Vices of remittances as a source of foreign aid

Despite the fact that remittances are a positive facet of increased migration, the idea of immigrants as the biggest provider of foreign assistance heightens the debate over migration. For one, because remittances are so valuable to some countries, many developing nations are being forced to embrace dual citizenship, enabling their citizens to get better jobs abroad and send more money home (51). Additionally, controls on remittances can also be a form of economic warfare as in Palestine in 2000 when Israel drastically reduced the number of work permits for Palestinians leading to a 30% decline in Palestinian GDP, and a three-fold increase in remittance outflow from Israel as a result of the new influx East Asia and African workers (55). Another apprehension about the idea of remittances being used as a reliable source of foreign aid in poor countries is the fear that money is being funneled to groups that are a threat to U.S. national security such as al Qaeda. However, the West is currently monitoring suspicious transactions through the Financial Action Task Force as well as Money Laundering in order to monitor remittance flow while ensuring that those who need the money most are still able to get it. Finally, there is the fear that developing countries are bartering their most precious human capital in exchange for foreign aid [3] Such an arrangement does not promote sustainable development in poor states dependent on remittances as they are focused externally on remittances rather than internally on development.

  1. Kapur, Devesh and John McHale, “Migration’s New Payoff,” Foreign Policy (November/December 2003): 49-57.
  2. Kapur, Devesh and John McHale, “Migration’s New Payoff,” Foreign Policy (November/December 2003): 49-57.
  3. Kapur, Devesh and John McHale, “Migration’s New Payoff,” Foreign Policy (November/December 2003): 49-57.