Globalization is one of those words that can generate strong emotions in both proponents and opponents. Opponents of globalization often claim to be the voice of those too poor to speak for themselves. The irony is that globalization has given some of the poor a voice [see my post Relief, Development, and the Digital Divide] and has given some them access to capital that they would not otherwise have [see my post Financing the Poor]. Globalization (which includes the movement of people, resources, and capital) has also facilitated the transfer of significant amounts of money from immigrants living abroad to families remaining at home. Just how significant the amount was last year was the focus of a William J. Kole article in the Washington Times [“Remittances aid families of immigrants,” 4 September 2007].
“One sweaty wad of bills or $200 Western Union wire transfer at a time, millions of immigrants around the world form what could be called Immigration Inc. — one of the biggest businesses on the planet. Globally, remittances — the cash that immigrants send home — totaled nearly $276 billion in 2006, according to the World Bank. Remittances have more than doubled since 2000, and with globalization increasing the number of people on the move, there’s no end in sight. If these workers incorporated as a company, their migrant multinational would rank third on the Fortune 500 list, trailing only Wal-Mart and Exxon Mobil in annual revenue. Analysts tracking the phenomenon said they have gotten a much clearer picture since the September 11, 2001, terrorist attacks, when authorities trying to cut the flow of cash to jihadists began taking a harder look at how immigrants move their money around. Mass migration, they say, has spawned an underground economy of staggering proportions.”
To see how these remittances impact those receiving them, Kole traveled to Albania.
“Take Josif Poro in Albania. He pats his new sofa, points with pride to his carpets and runs a wrinkled hand over a gleaming white refrigerator. He and his wife barely scrape by on their $220 monthly pension. They would have to do without many of the items in their cramped apartment if their son, a factory worker in Greece, didn’t faithfully send home part of his earnings. ‘We call him our golden boy,’ said Mr. Poro, 83, a retired textile-mill worker.”
I’ve written before about the importance of foreign direct investment in helping establish the conditions necessary to sustain an emerging market economy. Increasingly, remittances from overseas have an impact almost as great as FDI.
“Remittances ‘are larger than direct foreign investment in Mexico, tea exports in Sri Lanka, tourism revenue in Morocco, and revenue from the Suez Canal in Egypt,’ World Bank economist Dilip Ratha said in a recent report.”
There is one big difference, however. FDI flows into a country when conditions look good and a return on investment seems like a good bet. Remittances from abroad flow in good times and bad.
“Unlike the conventional economy, more cash tends to change hands in an economic downturn, political crisis, natural disaster, famine or war.”
Kole sees these remittances in terms of losses and gains, with the developed world losing money and the developing world gaining money — but much of that money was earned by hardworking people who provided good value for their pay and not of it is remitted overseas. Nevertheless, Kole’s assessment is:
“The U.S. lost $41.1 billion in 2005, according to the World Bank, while Switzerland watched $13.2 billion trickle out of the country that year.”
There are legitimate concerns about these remittances.
“Counterterrorism officials say al Qaeda and other groups are financed in part through informal money-transfer networks called hawalas. Governments and the International Monetary Fund have been working to regulate those. There are other downsides: fears of brain drains and a vast permanent army of economic exiles, and the untaxed earnings flowing out of host nations.”
These downsides, however, need to be weighed against the upsides taking place around the world.
“[F]rom Poland to the Philippines, remittances are throwing lifelines to families combating poverty and helping keep some national economies afloat: Across Latin America, remittances hit $62 billion last year and are projected to top $100 billion by 2010, the Inter-American Development Bank says. Mexicans wire home the most cash — nearly $22 billion — most of it earned in the U.S. India is the world leader in remittances, taking in $23.7 billion in 2005 and an estimated $26.9 billion last year, the World Bank says. Western Union, traditionally one of the most frequently tapped money-transfer companies, says its share of Indian transactions has grown at least 90 percent over each of the past six quarters. Immigrants from Albania, one of Europe’s poorest countries, will send more than $1.3 billion back to their homeland this year. That’s 13 percent of Albania’s GDP and enough to finance half the trade deficit. … In impoverished Tajikistan, the National Bank says migrant laborers sent home $1.1 billion last year — more than the country’s GDP. Filipinos working overseas sent home a record $13.6 billion in 2005. So much cash is flowing that mobile-phone operators make it possible to transfer money over a cell phone.”
Remittances go directly to those who need them with no middleman and only the transfer charge reducing the amount remitted. Remittances permit the recipient to best determine how the money is to be used. This consumerism spurs local economies and helps achieve what billions in official development aid rarely does because ODA is often spent on necessary infrastructure projects. While some overseas workers never plan on returning to their land of origin, Kole notes that many others do plan on returning.
“[S]ome, underscoring a trend also emerging in other countries — Latvia and Mexico, for example — are coming back to buy homes and open businesses. Nearly one in three Albanian real estate transactions involves an expatriate buying property back home. … Nazmi Ajazi, 52, spent a few years working in Greece and returned to set up an Internet cafe and a small grocery store on the dusty outskirts of Tirana, the capital.”
Kole ends his article noting that immigration has raised real concerns in many of the countries that have benefited from remittances about their reliance on “exporting” human capital. Leaders in those countries worry that their best, brightest, and most ambitious young people are leaving for the greener pastures of the developed world. But like the bank robber Willie Sutton, who famously (and probably falsely) answered a reporter’s question about why he robbed banks by saying, “because that’s where the money is,” ambitious people will always go where opportunities exist. Those opportunities have generated a new source of capital for many struggling economies (I’ll write another post about how remittances have become a major source of income for some areas later). This triangle of FDI, ODA, and remittances provides a pool of resources that can be used to help emerging economies develop.