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Sending Billions Home

How immigrant workers’ remittance payments reshape the world

Doug Saunders

After traversing kilometres of muddy pathways through flooded rice paddies to enter a village in the most remote northeastern corner of Bangladesh, then dodging oxcarts and hand-pulled rickshaws along earthen streets, I walked through a set of glass doors to find myself facing what might be the world’s most pointless escalator.

In a place where a good percentage of families were getting by on less than a dollar a day, where almost all transportation was provided by human or animal muscle, and where digging mud by hand from the ground to make bricks was considered a good job, the escalator had just been built as the centrepiece of another otherworldly incongruity, a two-storey shopping mall with plate-glass windows and bright halogen lighting. A few dozen people had made their way up the betel-encrusted sidewalk to visit this mall, a good many of them families who had come only to examine, and perhaps take a ride upon, the first escalator they had ever encountered. The handful of populated shops sold cellphone accessories, plumbing fixtures and a surprising range of expensive brand-name running shoes. The shop clerks, local young men in European sunglasses, spent their time talking to other such young men, and I saw little evidence that anyone had recently bought anything.

The escalator gained some context (although not much sense) if you looked out beyond the village to see the rice paddies studded with a handful of wedding-cake mansions, built on ornate estates in an ostentatious Arabic style. These monster houses were, almost without exception, unoccupied and rather barren inside. But their outbuildings had attracted dozens of people, living in shack encampments around them, who were paid small sums to keep them serviced and secured in their owners’ absence. The giant houses marked this place as a “Londoni village”—a town in the largely rural region of Sylhet from which some families had managed to migrate to “London” (a broad term that could refer to Birmingham or Glasgow as much as East London) to seek work. The “Londonis” had found employment in Britain as office cleaners or minicab drivers or, very often, curryhouse cooks, and would send back monthly packets of money—tiny sums by British standards, but life-transforming for an Asian peasant—to support relatives back in Sylhet, and to bolster their family’s status there. These packets far exceeded any income that could be earned from agriculture, so favoured sons and nephews turned to small business—occasionally with entrepreneurial intelligence, but often with showy and status-seeking ambitions far removed from the needs of the village. And the Londonis themselves would save thousands of pounds to build these huge houses. On their visits to Bangladesh—at first once or twice a year, then less frequently—these former rice farmers would live like feudal lords, doling out money and living in servant-filled homes that bore no resemblance to their musty London apartments. The flood of payments was producing big houses, expensive shops and pointless escalators, but also an employment and agriculture boom in the village. Former peasant farmers were enlarging their land holdings, starting to grow market crops and hiring others to work their fields. These remittances from migrants in the United Kingdom were producing a local migration boom of their own, as hundreds of people moved here from poorer non-Londoni villages to grab a piece of the action, living in improvised shack towns for the harvest season.

Celia Krampien

Multiply this effect by millions of people, and you start to see the buried financial plumbing of the global migrant economy. The weekly and monthly packets of money—that is, remittances—sent home by the 450,000 Bangladeshis and their descendants living in Britain (almost all of whom come from remote Sylhet) adds up to $11 billion a year, an amount similar to the revenues of the entire Bangladeshi textile industry, the world’s second largest. Likewise, Filipinos working as hotel staff and cruise-ship workers and domestic servants in the West send back $25 billion a year, more money than the Philippines takes in from its sizable electronics industry; in Lesotho, remittances are considerably more lucrative than the diamond industry. In more than a dozen countries, remittances are by far the largest single source of foreign income; in Tajikistan, they account for more than half the country’s entire economy; Haiti and Armenia and Nepal would not have much economic activity at all without remittances. Immigrants and their descendants in Canada sent approximately $14.7 billion back to their home countries in 2010–11, according to estimates by the Canadian International Development Platform—an amount almost five times the size of Canada’s foreign aid budget. The largest recipients of Canadian remittances, according to the World Bank, are China, India and the Philippines. And that is just international remittances: money sent from relatives working in the city back to their rural villages is increasingly the main source of rural income. In China, remittances from urban-employed relatives now exceed all farm and agricultural earnings as the country’s largest source of rural income.

For decades, this blizzard of Western Union transactions and cash-filled envelopes took place under the radar, showing up in the current account balances of developing countries but escaping little wider notice. Around the turn of the 21st century, officials in western governments and major financial agencies began to take notice, as it became apparent just how large the remittance economy had become. Much of the immigrant economy had escaped notice, but after the attacks of September 11, 2001, governments began monitoring small international flows of currency in an effort to detect terrorist financing—and discovered, quite by accident, a subaltern economy of truly global proportions.

And the sums, it turned out, are truly astonishing. The World Bank predicts that in 2015, remittances sent from workers in the West to relatives in developing countries will reach $454 billion annually—an amount that, if you exclude China, is larger than all foreign investment in the businesses of developing countries and, even more significantly, is more than three times the size of all foreign aid spending. This latter fact, once it was brought to the attention of western authorities, had a revolutionary effect on foreign affairs thinking and foreign aid policy: it became popular, for a decade, to remark not just that remittances had outstripped foreign aid, but that they ought to replace it. By 2003, an influential essay in the journal Foreign Affairs (written by Carol Adelman, a former official with the U.S. Agency for International Development and then a member of the right-wing Hudson Institute) was able to argue that the harnessing and liberalizing of immigrant money flows could constitute “the privatization of foreign aid” and suggested that remittance policy could replace aid policy. Two years later, the Washington Post was reporting that the George W. Bush administration “now emphasizes trade and remittances by foreign workers in the United States back to their home countries as more important [than] development aid.” The assumption that remittances would become a substitute for aid led many governments to restructure their aid programs and foreign affairs bureaucracies; when Canada’s Conservative government abolished the Canadian International Development Agency in 2013 and folded its rump functions into the Department of Foreign Affairs, Trade and Development, the move was explained by senior Foreign Affairs officials in part as a reflection of the new remittance-led approach to international development.

This sudden shift in priorities was taking place because the discovery of the remittance-economy bonanza was occurring at the same time as another major discovery: that foreign aid, as a way of using western spending to bring economic growth and improved living standards to the former colonies of the global South and East, was failing. The 2000s saw a shift to more empirical, results-based approaches to foreign aid, and the findings were not encouraging. Development economists such as Dani Rodrik, Lant Pritchett, William Easterly, Raghuram Rajan and Arvind Subramanian studied the relationship between foreign aid spending and economic growth in recipient countries, and found none (in fact, some economists found that aid could, if anything, hamper economic growth, by driving up currencies and creating economic dependency on aid money). Another group of economists, led by Esther Duflo and Abhijit Banerjee at MIT, looked at the effects of specific aid policies on global poverty, and found that very few programs had had any effect (this research culminated in Banerjee’s and Duflo’s important 2011 book Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty). The Bill and Melinda Gates Foundation, the world’s largest non-government aid body, set itself up during this period on the concept of research-based, rigorously results-tested programs, and discovered that only a limited range of interventions, most of them in medicine and public health, had any measurable effect. And looming above all this research was an undeniable and embarrassing fact: the world had just seen the largest reduction in absolute poverty in human history—from almost 40 percent of the world’s people living on family incomes below a dollar a day to fewer than 25 percent—and almost none of it had anything to do with foreign aid (the lion’s share of this shift took place in China, which had not received much aid). The post-war decades had seen impressive economic growth and poverty reduction in the developing world, and it had seen large-scale western spending on foreign aid—but the two, it turned out, had been unrelated phenomena, macroeconomic ships passing in the night barely aware of one another’s presence. The entire project of aid had come into question, and the 2000s were marked by widely read books deflating the entire post-war edifice known as development.

It was in this aid-policy vacuum that the remittance revolution exploded, and for the better part of a decade it was the dominant topic of foreign development discussion in many capitals. Rather than raising foreign aid spending to 1 percent of gross domestic product, would it not be easier to reduce the cost of international wire transfers by immigrants so they could more easily send money home? Was migration itself, which western countries needed in any case, perhaps a better way to end poverty? Could foreign spending be cut, because diaspora communities were doing their own, more efficiently allocated spending?

This was a welcome message for western governments during the straitened years after the 2008 financial crisis, and many began to act upon it. And then, as a new decade began, the remittance train abruptly fell off the rails. Near the end of 2009, the International Monetary Fund published a research paper, by five economists, titled “Do Workers’ Remittances Promote Economic Growth?” The answer was a decisive no: after examining all available data in developing countries, the authors found that “we cannot find a robust and significant positive impact of remittances on long-term growth, and often find a negative relationship between remittances and growth.” In other words, “decades of private income transfers—remittances—have contributed little to economic growth in remittance-receiving economies and may have even retarded growth in some.”

Not only that, but the authors pointed to “the lack of a single example of a remittances success story: a country in which remittances-led growth contributed significantly to its development.” Those countries in which remittances amounted to more than 10 percent of the economy did not tend to be economic development success stories, and in those that had experienced growth, there were well-documented causes that were not rooted in migrants’ remittances.

The IMF study received a partial rebuttal in 2014, when two development economists, David McKenzie of the World Bank and Michael Clemens of the Washington-based Centre for Global Development, took a closer look at the underlying numbers. They had noticed, when working with Mexican remittance figures, that the total remittances from migrants, in official figures, had nearly doubled between 1990 and 2010—but, on closer examination, they found that almost all of that doubling had occurred in the 2001–02 fiscal year. This happened to be the year in which money-transfer companies had been compelled, in a post-September 11 Mexican law, to report all transactions, no matter how small, to the central bank. McKenzie and Clemens then looked at the figures in other major developing countries that had the same curve: a straight or slightly rising line suddenly turning almost vertically upward in 2001–02 before straightening again. In other words, when economists reported that global remittances had soared from $300 million a year in 1990 to nearly $500 million today, most of that apparent increase (about 80 percent of it, by their analysis) was caused by this change in reporting requirements. It was the reporting that had increased, not the remittances. This explained, in part, why the sharp rise in remittance spending had not produced a similar rise in economic growth: remittances had not actually risen so much.By the time this paper began attracting notice, the IMF’s fellow organization, the World Bank, had already devoted a significant part of its research and policy resources to the subject of remittances, and a number of governments had made them central to their policies. The implication was that the money sent home by workers, despite being more intimately tied to the local economy, was subject to the same failings as foreign aid spending: that is, it was not transforming economies in lasting ways.

But the two economists also looked more closely at the real macroeconomic effects of remittances, and their conclusions were hardly more optimistic than the IMF’s. Macroeconomic growth across an entire country’s economy, they wrote, was unlikely to be an effect of remittances, even when they accounted for a large share of the economy. This was partly because the gains from any emigrant’s remittances, on a national level, were balanced out by the loss of skilled labour caused by that migrant’s departure. Any economic gains from remittances, then, would take place at the local level and would depend on how those remittances were being spent; GDP growth was not a useful way to gauge their effect. Their impact was felt in the villages and cities where the remittances arrived, and they would not always contribute to larger economic effects, at least at first.

This did not come as a surprise to people who had been observing the effects of remittances on the ground. When I visited that village in northeastern Bangladesh, I had been following the work of the British anthropologist Katy Gardner, who, beginning in the 1990s, had documented the emergence of these Londoni villages in Sylhet—and had noted, in her 1995 book Global Migrants, Local Lives: Travel and Transformation in Rural Bangladesh, that the large flows of remittance money to this part of Bangladesh were often creating lavish tribute-based economies and displays of conspicuous consumption (the giant houses, the escalators) rather than investments in productive economic activity. This echoed a view of remittances popular before the 1990s, when many observers saw them being spent on status symbols, festivals, marriage dowries and other ostensibly wasteful excesses rather than on productive uses.

By the time I got to Sylhet in the late 2000s (and as Gardner noted in her later field studies), this had changed somewhat: the Londonis were not visiting as often, or sending quite as much money, so the local relatives were spending the money a bit more wisely, often using it to create agricultural and small-business opportunities that attempted to create local financial returns. The flamboyant houses were still being maintained, but you could see the money starting to have more productive effects. The same pattern could be seen taking place in other established diaspora-linked districts, from Morocco to Mexico. And, as Clemens and McKenzie noted, migrants were often using their earnings to purchase property in their home country—an act that was having a transformative effect on rural economies.

If it was a mistake to think that remittances were going to turn poor countries into well-off countries, it is equally a mistake to think that remittances are a squandered waste. Quite the contrary. For the regions that send migrants to the big cities of the West and the Persian Gulf (and it tends to be specific regions and clusters of villages, not entire countries, that send emigrants), the money plays a crucial part in breaking the economy of subsistence agriculture and chronic food and land-tenure insecurity that are at the root of most of the world’s absolute poverty and malnourishment. And the money is only part of it: remittances may form the core action (and often chief motivating factor) of international migration, but migration has a range of beneficial effects on the sending country that are often worth much more than remittance earnings: the transfer of knowledge and “cultural capital” from better-off places, the educational and entrepreneurial advantages that move back and forth, the sharp reductions in political extremism and population growth that take place in regions where significant numbers of people have migrated to the wealthy world. As French demographers Youssef Courbage and Emmanuel Todd noted in their 2011 book, A Convergence of Civilizations: The Transformation of Muslim Societies Around the World, it is no coincidence that Tunisia, for example, which sends many migrants to and from Europe, has seen a rise in democratic stability since its revolution, whereas Egypt, which does not send many migrants across the Mediterranean (Egyptians tend to emigrate southward), has not.

The remittance money, even if it is not carefully invested (which is inevitable: how many people spend their private incomes in fully rational ways?) nevertheless changes lives and builds much-needed security (and thus tolerance of risk and opportunity), forming a core component in the life-improving migrant network, even when it does not immediately transform entire economies and probably is not a substitute for foreign aid. And that means that it is still worth making remittances easier to send. When western migrant workers send money back home to sub-Saharan Africa—arguably the region most in need of remittance-based networks—they pay an average fee of 12 percent, and often much more; the global average is 7.2 percent. This, as Britain’s Overseas Development Institute concluded recently, comprises a crippling “remittance supertax.” Whatever the precise effects of remittances, it is worth ending these discriminatory costs. In November 2014, the G20 members vowed to impose regulations to restrict the cost of sending remittances to a maximum of 5 percent. Previously such promises have failed to be implemented.The problem with both the “remittance miracle” thinking of the 2000s and the “remittance failure” thinking of the early 2010s is that both views were rooted in an over-simplistic and naive view of the role played by international migration. The old way of thinking about migration saw it as simple addition and subtraction: the sending country lost one unit of labour, but gained x dollars in remittances. A more sophisticated understanding is emerging, though. Emigration is not just someone leaving; it involves the formation of networks of connected people at the sending and receiving ends, linked to other similar networks of the country’s diaspora, with individuals moving back and forth often multiple times between networks; these networks engage in mutual exchanges of knowledge, credit, investment, formation of social and financial capital, technology transfer and education, as well as the facilitation of further migration. As Clemens, with his colleagues Çağlar Özden and Hillel Rapoport, noted in a recent paper, each individual’s migration story “implies a very different effect of migration on migrants, people back home, and people at the destination. Each story is caused by, and in turn affects, the development process.”

Perhaps, this time, we ought to stop arguing about whether the half-trillion dollars in remittances are a nation-transforming panacea or merely a life-saving convenience, and just make it easier to keep the money moving. An escalator surrounded by rice paddies might not be the sort of upward mobility dreamed of by aid agencies, but it represents a far larger human experience, one that our own ancestors once underwent: the shift from isolation and deprivation to connection and stability. The journey from one to the other is never direct, easy or uncomplicated, so we should do whatever we can not to stand in the way.

Doug Saunders is the international affairs columnist for The Globe and Mail and author of Arrival City: The Final Migration and Our Next World and The Myth of the Muslim Tide.

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Judy Duncan Toronto, Ontario