Remittances & Moral Hazard

Yasser Abdih, Ralph Chami,Jihad Dagher, and Peter Montiel in an IMF working paper(PDF):

Conclude that despite their nature as household-to-household private income transfers,remittance inflows may have adverse effects on domestic institutional quality – specifically,on the quality of domestic governance – that are similar to those of large resource flows. In our analytical model, this effect arises because when households receive remittances, the government finds it less costly to free ride on the households and their emigrant relatives and divert resources for its own purposes. In other words, because access to remittance income makes government corruption less costly for domestic households to bear, the government engages in more corruption. Remittances, by acting as a buffer between the government and its citizens, give rise to a moral hazard problem; these flows allow households to purchase the public good rather than rely solely on the government to provide that good, which reduces the household’s incentive to hold the government accountable.

via Foreign Policy

Reframing Remittances

The NYTimes reports on how Dilip Ratha reframed the remittances debate:

Mr. Ratha has argued that the importance of the money exceeds its sheer size. Unlike foreign aid, it cannot be skimmed by potentates. Unlike investors who flee crises, migrants increase their giving during hard times. The money is directed to the needy. And Mr. Ratha contends it is well-monitored, too, by intimates on the sending end. “It comes with a lot of goodwill, advice, knowledge and punishment if necessary — keeping in mind the welfare of the recipient,” he said.

Looking at Africa through a different Prism

Drake Bennett writes in the Boston Globe about the anxiety related to the diversionary Aid conversation:

Africa analysts say that they have a broader concern: that the all-consuming discussion of aid has obscured - and perhaps even impeded - the recent positive developments on the continent. According to development economists, multinational corporations routinely overestimate the risks of doing business in Africa. Investment is the fuel of a free- market economy, and yet fear may be depriving many African countries of opportunities.

And the importance of the diaspora:

Africa's diaspora has been quicker to spot the opportunities. For years, economists have credited the remittances that African expatriates send home as a major source of income for African countries. Now, analysts say, the more open political and economic climate has meant that expats are increasingly providing more valuable resources: their brainpower and enthusiasm.

Can Greed Save Africa?

Roben Farzad writes in Businessweek:

In many ways, Africa's economic situation seems hopeless. While $625 billion in foreign aid has poured in since 1960, there has been no rise in the region's per capita gross domestic product, notes William R. Easterly, economics professor at New York University. What's more, from 1976 to 2000, Africa's share of global trade dropped to 1%, from an already negligible 3%. The U.N.'s scale of human development, which considers health, education, and economic well-being, ranks 34 African nations among the world's 40 lowest. Thus far, foreign aid hasn't made a dent.
Greed, however, might. Thanks to the global commodities boom of the past few years, sub-Saharan Africa's economies, after decades of stagnation, are expanding by an average of 6% annually—twice the U.S. pace. And like bees to honey, investors are swarming into the region in search of the enormous returns that ultra-early-stage investments can bring. Blue Financial, for example, has already netted its early private equity backers a ninefold gain thanks to the 385% rise in its stock since its October, 2006, initial public offering in Johannesburg. Emerging Capital Partners has bought all or part of 42 African companies this decade and cashed out of 18, with gains on their investments averaging 300%. "The money we can make is matchless," says Emerging Capital Partners CEO Thomas R. Gibian, a former Goldman Sachs (GS) banker.

"Africa’s capital markets are opening up"

In an interview with the African Banker, Tutu Agyare stated:

“The capital markets in Africa are beginning to open up and open up significantly. That has surprised many bankers. For example who would have forecast 12 months ago that, by this time this year, Nigeria’s markets would see $3bn worth of new issuances? Countries like Nigeria, Ghana, Kenya, even Zimbabwe are all offering investment opportunities.
“Nigeria’s market has made average returns of over 30% this year and Zimbabwe’s returned over 100% this year even after adjusting for inflation, so there’s a lot of interest, a lot of investment. Yes, there is strife and there are problems in Africa; problems in Côte d’Ivoire, in DR Congo, in Guinea, in Sudan, in Eritrea, in Somalia, but the risk/potential balance is right in many countries.

Updating Foreign Aid

Carol Adelman writes:

Remittances now exceed official aid from all donor countries to developing nations combined — they are a global social security system that works. Studies show they reduce poverty and boost health and literacy. Private banks, setting up accounts for immigrants in America to send money back home to families and villages, help poor people earn interest, and establish credit worthiness for loans. Remittances also play a crucial role in strengthening poor countries' balance of payments, which improves credit ratings, allowing them to tap into international financial markets on better terms.

The Meaning of Wealth

Mutumwa Mawere recently addressed the Nigerian diaspora he stated:

...There are countless examples of African entrepreneurs and professionals who have substantial amounts of money in Africa but it is evident that the prosperity has not been democratized to the extent of creating an African ownership class able to take the continent’s majority into a new and dynamically positive direction underpinned by new values of work, combined with saving, investment and an ownership mentality. It is also important to underscore that there is a distinction between being “rich” and being “wealthy”.
Yes, some Africans have made money but because financial literacy and “platinum rights” was not stressed as much as a sense of public justice and civil rights were by our founding fathers and we did not keep it (the money) and we certainly we did not grow it.
Many have made money but no one has really taught us how to keep it in our communities.
Imagine, after 13 years of South Africa’s democratic dispensation, we still do not have a new mutual for blacks? No one taught us about financial literacy and the basic tenets of a free enterprise system that appears universally to capture the imagination of many progressive and successful nations.
The challenge of understanding the free-enterprise system and making it work for the majority of Africans has to become a core part of any conversation among Africans concerned about wealth creation and creating sustainable wealth addresses for Africans. Most of our wealth addresses are not assignable and transferable let alone from one African generation to the next.
Any successful nation building enterprise must necessarily be sustained by a healthy, robust and growing tax base and not foreign aid. Africa’s post colonial budgets still remain principally funded by bilateral and multilateral sources of finance.
Africa must create its own dominant class of very successful entrepreneurs, at all levels. We should have our own wealth builders and not become a continent specialized in distributing other people’s wealth.
As we approach the 47th birthday of Nigeria, we must focus on converting ourselves from cash economy customers into banking (our own banks), tenants into homeowners, small business dreamers into small, medium and large scale business owners, minimum wage workers into living wage workers, economically illiterate into economically empowered citizens.
Many of us are consumed with directionless conversations that are primarily focused on what governments can do for us and not what we can go for ourselves. We tend to be good at being against something and not for something.
Literacy can be a sustainable instrument for poverty eradication. They often say that when you know better, you tend to do better.
Any when Africans know better, I have no doubt that we can transform ourselves from islands of affluence to oceans of hope and prosperity. We have not invested much in literacy and integrated the literacy challenge in our post colonial agendas.

Any nation is as good as the interests that inform it. The only power we have as Africans in any field on endeavor whether it is in politics or the wealth game is the power to organize ourselves. One hand cannot clap but two hands can surely make a noise.
Why then is it the case that we have not been able to use our collective spent to our advantage? Many of our African governments have benefited from the financial illiteracy of Africa’s intellectuals. Africa has invested in human capital and yet such investment has not been able to provide any leadership on the bread and butter issues.
Surely, it is evident to all of us that any consolidation of our pain and opportunities can create a critical mass that is missing in action. Imagine if all Nigerians resident in South Africa could consolidate their mobile phone expenses into one pool, how much impact would they have in the South African economy.
Equally, if all Zimbabweans resident in South Africa chose to use one bank, how much would that bank be worth? Even the obvious things that Africa needs to do are not so obvious to our leaders.
I think it is self evident that the poor need the rich in as much as the rich need the poor. Can you imagine a nation of only poor people with the same means and possibilities? On the key ideological questions, we have heard many people argue that a free enterprise system is not suited for Africa and many of our governments in Africa have perfected the skill of creating ideological and theoretical entrepreneurs/bureaucrats without asking the question whether in fact if all the rich people were eliminated, Africa would be any better.
The post colonial experience has confused many of us to the extent that we are now looking for intelligent leaders to govern us when leadership may have little to do with intelligence. Even in a family, it would not be normal for all the children to be the same. Those who do well in one generation inspire the next generation to do better.

Is Africa’s future safe with a system where the state thinks for its citizens or where the citizens think for themselves and act in their own self interest? Many believe that governments (created by the same citizens) can and should be expected to lead the anti-poverty crusade and yet human history has not given us any good examples of governments acting in the interests of citizens who are not in government.

We must take ownership of our destinies and we must be the change that we want to see in the continent. No one else is going to do it for us. We must sell ourselves as worthy of investment and we must change our attitudes because in the final analysis, our attitude to wealth determines our altitude.

Anyone can make money in a growing economy than can be stolen in a decaying and dysfunctional system. If we look at Africa’s unmet needs, then we can appreciate the possibilities that exist in the continent and yet we think and act in a fragmented and confused manner. Those who should ordinarily lead appear to be visionless preferring to focus on yesterday (which is gone) and not on actions that create a better Africa.
Before we can think of creating an African pool of wealth, we need to understand the meaning of wealth. Wealth has come to mean an abundance of items of economic vale or the state of controlling or possessing such items and encompasses money, real estate and any personal property.
In many countries wealth is also measured by reference to access to essential services such as health care or the possession of crops or livestock. Accordingly, an individual who has accumulated wealth relative to others is often described as wealthy.
Therefore, wealth refers to some accumulation of resources. In light of the above, Africa is not recognized as a wealthy continent because of the inferior relationship between the majority of us and items of economic value. We are generally challenged in the resource accumulation enterprise...

photo courtesy of ZimDaily

Card-Based Remittances

Payment News reports on a paper (PDF) which outlines the promise of card based remittances:

The robust and increasing demand for person-to-person cross-border remittance services coincides with the increasing dominance of electronic transactions and the rise of prepaid cards.These two activities, though independent of one another, share important characteristics and opportunities. Remitters are more likely to have limited financial access because of their immigrant status. Prepaid cards are increasingly seen as a tool to provide the un- and underbanked with broader access, and many providers are marketing their products specifically to immigrants...though significant gaps exist between the demand side and supply side of cardbased
remittance solutions, there is potential to capitalize on a product set that offers value for underbanked remitters given the right product design. Rather than simply putting card products to market, companies that carefully consider the entire financial picture of remittance senders can begin to develop the marketing, distribution, consumer education and pricing models needed to allow card-based transfers to compete with traditional money transfer companies and other options, such as mobile and Internet remittances.

MFIs and the Remittances Business

A recent publication of the Foundation for Development Cooperation states:

Migrant workers and their families need financial products which make it easier to send, receive and manage international money transfers, and to save and invest their income. Microfinance is well-suited for remittance-linked financial services, particularly among poor and geographically isolated populations. Because they are poor, many remittance recipients fall outside typical bank client profiles, but are well within the market segment targeted by microfinance agencies. By extending remittance-linked services to the ‘unbanked’, microfinance has the potential to promote broad-based development while vastly expanding the volume of remittance flows mediated through financial institutions.

via NextBillion

"Productized" Remittances

Co-Founder of Thamel.com Bal K. Joshi writes:

"Productized" remittances deliver greater economic impact than traditional cash remittances for several reasons. The cost to the sender for the money-transfer element of the transaction is lower, thus increasing the buying power of the remittance. The remittance sender maintains more control over the use of the remittance, thus lowering waste and misuse of the money. The productized remittance platform offers the sender more options for investment, including financial services like bank-based savings accounts, loan-based purchases, and access to capital.

via NextBillion

Remittance Flows

Sharda Naidoo reports on remittances:

Remittance flows into Africa have grown exponentially over the past two years, more than $11-billion in 2005 via formal and informal channels.World Bank researchers further believe that remittances have helped reduce poverty and that they offer a lifeline to struggling economies. They have also helped to stabilise irregular incomes and build human and social capital. In Uganda, remittances have cut the share of poor people by 11% and in Ghana by 5%. In Lesotho, remittances now account for more than one-third of gross domestic product (GDP), and more than 50% in Ghana.

Remittances:Driving force of African economies?

Allan Brian Ssenyonga writes

The African immigration phenomenon has had different outcomes but one of the most significant yet overlooked is the aspect of remittances. This refers to the money sent back home by the immigrants. For sometime now, remittances have become an important aspect as far as the development of Africa and other poorer nations is concerned. Many Africans living and working in Europe and USA are working hard to maintain their families back home. On receiving their pay cheque, many send almost 60 % of their earnings back home to help foot medical bills of aging parents, pay school dues for school going siblings and relatives as well as establishing income generating projects...although Africa is losing so much in terms of skilled labour, it is also gaining a lot from the huge sums of money sent back home that are directly pumped into the local economy and therefore lead to economic development.

Diasporas & Remittances

Writing about remittances De Montclos, M.A.P. states (PDF)

Contemporary migrants are very much in touch with their homeland, to which they often remit money on a regular basis. They have an economic and political role to play in the countries of departure as well as arrival. In the homeland, they can contribute to development and democracy, especially in enclaves, island micro-states and war-torn countries which record disproportionate emigration flows. Yet the governments of developing countries are not fully aware of the opportunities that these migrant communities offer.

Diaspora's Increasing Importance

Africa Diaspora Investment writes "...The Africans in the Diaspora merit increasing attention they are a source of investment funding, expertise and a confidence building measure of great importance.Financial flows from the Diaspora on average contribute 5-10% of some African countries Gross Domestic Product and in a few cases over 20%. In a year alone it is estimated that the Diaspora invest over US$ 450 million, this excludes the estimated US$ 12 billion remittances sent by the Diaspora annually..."

Remittance Inefficiencies

A paper by Uche Nworah on the Nigerian Diaspora highlights amongst other things, inefficiencies in the allocation of remittance revenues. "...the issue of foreign remittances back to Africa has become a subject of interest in the international community. According to a recent report (Migrations and Development) by the International Development Select Committee (UK), over $300 Billion was sent from developed to developing countries in 2003 by diasporas living in the developed countries. Global remittance, the report maintains is growing faster than official development assistance from the developed countries, also global remittance is the second largest source of external funding for developing countries, behind Foreign Direct Investment (FDI), and also accounts for as much as 27% of the GDP for some African countries. The report also says that global remittance accounts for 5% of GDP in Nigeria, this figure is predicted to increase in the coming years. A U.S government official recently claimed that Nigerian diasporas remit back to Nigeria the sum of $12 billion annually, while other sources claim that Nigerians send a total of $3Billion annually through the official channels of the Western Union and other financial institutions. While there appears to be different conflicting figures with regards to the exact amount of such capital outflows or global remittances back to Africa and Nigeria in particular, the fact remains that it is a phenomenon that is on the increase and also one that is good for the continent, sadly though, such remittances have not been channeled effectively by the recipients to areas that will yield long term benefits and sustainable growth..."
Via Global Politician

Remittances outpace Foreign Direct Investment in Africa

The UN's OSAA office reports that "...Remittances from Africans working abroad in the period 2000-2003 averaged about US$17 billion per annum virtually overtaking Foreign Direct Investment flows which averaged about $15 billion per annum during the same period...workers remittances boost disposable incomes, produce multiplier effects, and make education more affordable Private transfers are large and stable sources of foreign exchange for poor countries and are more likely to reach poor households than other capital flows. The average per capita remittance by migrants in developed countries is around US$ 200 per month. In the light of this it is becoming imperative that the cost of transmitting remittances needs to be reduced to allow African countries receive larger private capital flows..."
Via NextBillion

Accountability, Africa & her Diaspora

Chukwu-Emeka Chikezie writes "...Today the authority and legitimacy of public officials in Africa must be negotiated with a rich texture of regional, communal and social associations; rapid progress in communications technology is providing Africans with new opportunities for networking and enterprise; and, perhaps above all, increasing numbers of Africans in the diaspora are reconnecting to their home countries in imaginative new ways involving creative “peer-to-peer” development strategies.All these transformations are fuelling changes in the ways Africans nurture the relationships of accountability – embodying practices of obligation, respect, responsibility and mutuality – that underpin their connection to each other...With the rise and rise of remittance flows over the last few years, Africans in the diaspora are Africa’s biggest aid donors and investors. They are, in effect, Africa’s biggest taxpayers, hit by a double whammy. First, they contribute to the overseas aid budget through their tax contributions to their new home government. Second, they make direct contributions via their individual and collective remittances(PDF). The latter far outstrip the former in terms of absolute volumes...African governments are far more accountable and responsive to their bilateral and multilateral aid donors than they are to African taxpayers at home or abroad...Africans have developed fairly sophisticated strategies for avoiding a state that seems hell-bent on obstructing their lives. Income from informal economic activity and remittances; healthcare and education provided by modern-day missionaries (as well as many new Pentecostal churches and their charismatic pastors); law provided by sharia courts and imams; protection provided by vigilante groups and their magic potions. All this and more happens with little state involvement. Africans weave together the fabric of their lives far from the state’s purview..."
Via OpenDemocracy