Mr. Chairman, members of the committee, thank you for providing this opportunity to testify at this hearing on worker remittances. During the past decades, remittances have grown significantly in scale and impact. The 1999 International Monetary Fund’s Balance of Payments report shows that countries in the Western Hemisphere received more than $16 billion per year from workers residing abroad. Worldwide, the flow of remittances exceeds $100 billion per year, with more than 60 percent going to developing countries. Having stated these statistics, it is worth noting the weaknesses of existing data on remittances. These numbers likely under-represent the scale of remittances by billions of dollars since many countries have inadequate processes for estimating or reporting on the funds remitted by foreign workers. Correcting for under-reporting, the Inter-American Development Bank (IDB) estimates that total remittances in the Western Hemisphere now likely exceed $23 billion per year.
Remittances will likely continue to grow in size as international migration continues to grow. During the past 35 years, the number of international migrants has doubled from 76 million to more than 150 million worldwide. The Western Hemisphere has seen a comparable increase in the number of international migrants living and working abroad, growing to about 40 million across the whole hemisphere. Almost three-quarters reside in the United States. Of these more than half come from other countries in the Americas.
There are a number of reasons that international migration is likely to continue to grow in the future, and with this growth, will come continued growth in remittance flows. Under classic theory, immigration occurs when there is a combination of push/supply and pull/demand factors, as well as networks to link the supply of migrants with the demand of employers and families in receiving countries. Economic globalization and integration is fueling all parts of this equation. On the demand side, businesses, particularly but not exclusively multinational corporations, press for access to a global labor market for their recruitment of personnel. This pertains to both skilled and unskilled labor. On the supply side, when rising expectations for economic advancement are not met quickly enough, migration is tempting for workers who can earn far more in wealthier countries. Generally, those most likely to migrate have some resources to invest in the move.
A second, related factor stimulating increased migration involves the transportation and communications revolution that makes it easier to move and keep contact with one’s home community. Increasingly, trans-nationalism is becoming a reality for today’s migrants. Although circular migration has always been present, with migrants living sequentially in the source and receiving country, migrants can now live at one and the same time in two different countries. Even those who permanently relocate are able to keep in touch with family members at home far longer and more easily than in the past. Not only do such contacts reinforce the networks that produce future migration, but they also mean that many migrants will continue to send remittances to parents, siblings and other community members even after they permanently resettle themselves.
Increased immigration generally means increased remittances, to return more directly to the topic of this hearing. Until relatively recently, researchers and policy makers tended to dismiss the importance of remittances or emphasize only their negative aspects. They often argued that money sent back by foreign workers were largely spent on consumer items, pointing out they seldom were invested in productive activities that would grow the economies of the developing countries. They also feared that those receiving remittances would become dependent upon them, reducing incentives to invest in their own income-generating activities. Moreover, what was considered to be excessive consumerism, they argued, would lead to inequities, with remittance-dependent households exceeding the standard of living available to those without family members working abroad. Often, government attempts to encourage or require investment of remittances were heavy-handed and led to few economic improvements. Over time, the critics pointed out, remittances would diminish as the foreign workers settled in their new communities and lost contact with their home communities. Sometimes, wives and children would be left behind, with the all-important remittances no longer contributing to their livelihood.
Many of these problems still exist, but recent work on remittances show a far more complex and promising picture. Perhaps because the scale of remittances has grown so substantially in recent years—it quadrupled in the Western Hemisphere during the past decade—experts now recognize that remittances have far greater positive impact on communities in developing countries than previously acknowledged. Such experts as Edward Taylor at the University of California at Davis argue that even consumer use of remittances stimulates economic activity, particularly when households spend their remittances locally. The multiplier effects of remittances can be substantial, with each dollar producing additional dollars in economic growth for the businesses that produce and supply the products bought with these resources.
The micro-economic effects of remittances can also be important. Important contributors are the hometown associations (HTAs) of migrants abroad who send communal resources to the villages from which they emigrated. Collected through a variety of means, these resources have helped villages improve roads, water and sanitation systems, health clinics, schools and other community infrastructure. The HTAs often start with small resources but they have the potential to grow to significant size. According to one study: "Consider the Salvadoran ‘United Community of Chinameca’: their first largesse was $5,000 to build a school, and then they built a septic tank worth $10,000. Later they constructed a Red Cross clinic at a cost of $43,000, and bought an ambulance worth $32,000." Some state and local governments match the resources from HTAs in order to magnify their impact. There has been a recent trend towards encouraging the HTAs to invest in small businesses and manufacturing activities, in order to produce new jobs for villagers. These are truly grassroots initiatives that involve community-to-community development.
With the new recognition of the importance of remittances has also come greater understanding of the challenges brought by the large-scale transfer of money. HTAs and their home communities may not have the technical expertise to determine the best ways to invest in community development. The strength of a grassroots initiative can become its weakness if HTAs and local villages disagree about the best use of the remittances or if they invest the funds poorly. There are some initiatives underway to provide technical assistance and training in this regard. For example, the Inter-American Foundation funds such assistance through the Fundacion para la Productividad del Campo, also known as APOYO, in several Mexican states. The Inter-American Development Bank has held several conferences and regional workshops to stimulate discussion of mechanisms to increase the development payoff of remittances.
Also, remittances are often used to help families address emergency needs that could, perhaps, be better addressed through other means—or prevented altogether. For example, many households use some portion of their remittances to deal with emergency health care needs because they lack access to routine health care and do not have insurance coverage. The Mexican Migration Project asks respondents how their family members use remittances. According to one research study, "the largest single reported use of remitted or saved funds was health care expenses for family members. Among those who remitted (approximately 60 percent of respondents) fully three-quarters reported that some share of the funds were used for health care expenses." At the same time, many migrants do not take advantage of an initiative by the Mexican government that enables them to purchase health insurance for families in Mexico for a very low rate per month. Such cross-border health coverage, purchased in the United States for relatives at home, could be a more effective use of remittances than the funding of emergency care. Since many migrants return periodically to their home communities, such cross-border programs could also provide the largely uninsured US residents with a source of health care as well.
The cost of transferring remittances is another issue that needs to be addressed. These transfer costs can be exceedingly high. One study found that many Mexican migrants lose as much as 25 percent of the value of their remittances through fees and poor exchange rates. In some cases, one or a few wire transfer companies have a lock on distribution points for purchasing or receiving money orders. The market appears to be responding to this situation, with greater competition leading to lower transfer costs, but more needs to be done in this area. In particular, it is essential to regulate the new companies to ensure that they have the capacity and resources to transfer the funds. In this regard, it is also necessary to monitor the companies to guard against fraud and the use of legitimate remittance transfers for money laundering purposes.
Immigrants often mention that they use a few well-established companies because of their greater reliance. To date, though, the business is dominated by wire transfer companies rather than financial institutions that offer a wider range of services to customers. The greater entry of banks and credit unions could help reduce costs and abuses even further. To the extent that credit unions, for example, reinvest transfer fees in the remittance receiving communities, the development potential could be increased still further. There are new initiatives in this area. The Inter American Development Bank’s Multilateral Investment Fund supports programs to enable the transmission of remittances through financial institutions that work with low-income clients, such as credit unions and micro-finance institutions.
Greater financial literacy among remitters, as well as clearer information about the actual costs of transferring funds, would also reduce abuses in this area. Financial literacy programs have many benefits for both immigrants and financial institutions. A particularly useful initiative was pioneered in Rogers, Arkansas. The curriculum covers such issues as basic banking services, how to write checks, how to establish a credit history, how to buy a house, and retirement planning. The training program is offered by a local bank, in cooperation with corporations in the area. With greater financial literacy, the largely immigrant workforce has become more savvy consumers who are less likely to be victims of abusive and predatory financial practices, while the bank that has offered the courses has significantly increased its customer base for a number of bank products—a win-win situation for both.
It is well to remember that it is often the poorest residents of the US and other wealthy countries that are sending remittances abroad. Latin American migrants tend to have low incomes, often living in poverty, yet they remit billions of dollars to their home countries. While beneficial to the families and societies at home, it is well to ask if the remittances come at a cost to those settling abroad. What trade-offs are they making to save sufficient resources to remit? Are they unable to make investments in education and skills upgrading, for example, in order to send the billions home? Are there ways, perhaps through community-investment programs supported by remittance transfer companies, to invest some of this lost income in development activities in their new places of residence? Are there programs that could help remitters make better-informed decisions about remittance transfers to reduce the transaction costs they incur?
As these brief remarks show, the growth in remittance flows requires better answers to some fundamental questions: for example, how can governments best estimate the actual flow of remittances; how precisely are remittances used, and are there alternative mechanisms to gain more "bang-for-the-buck"; to what extent can the multiplier effect of remittances be increased by initiatives to encourage local purchase of locally-produced goods; how best can transfer costs be reduced to maximize the level of remittances reaching local communities; and how best can governments and international organizations help HTAs and home villages make the most effective use of the communal remittances for development without impeding local initiative. Given the scale of remittances today, and their potential as a tool for development, these issues are clearly deserving of attention.
While I will not try to make recommendations today about the full range of issues that I have raised, I will offer some suggestions about approaches that Congress could adopt or encourage:
Thank you for providing this opportunity to testify. I am pleased to answer any questions you have.
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