Human Movements and Immigration (HMI) World Congress, 2-5 September 2004, Barcelona, Spain. Track: Economics and Development

Transcription

1 Human Movements and Immigration (HMI) World Congress, 2-5 September 2004, Barcelona, Spain Track: Economics and Development Dialogue Session on Remittances and Development Title: Connecting People on the Move: The role of postal networks in facilitating remittance flows and increasing their impact on development Author: : Thomas E. Leavey, Director General of the International Bureau of the Universal Postal Union Key ideas The transfer of remittance funds to relatives and friends back home from workers who have migrated to other countries has increased significantly during the past five years. When this international economic flow of funds first started to grow, little was known concerning the volume of these remittances or their impact on receiving countries. However, recent research has shown that for many developing countries, the capital resource and foreign exchange gained through inbound remittances is greater than the amounts provided through official development assistance or foreign direct investment. Furthermore, the unique nature of worker remittances, namely their relative immunity to financial downturns, their ability to reach low-income segments in receiving countries, and their potential for investment in micro-enterprises and other family- and communitybased businesses, is now being mapped; the significance of worker remittances has risen above the radar. For multilateral development institutions and other stakeholders, the future challenge is to determine how best to facilitate the growth of this economic flow while increasing its positive impact on development in receiving countries. Three areas of improvements are receiving particular attention: increasing access to channels for sending and receiving remittances; reducing the high costs currently associated with their transmission; and incorporating more remittance users into formal financial channels to increase support for savings mobilization and economic growth. One strategy for achieving these goals is to increase the flow of remittances through existing communications infrastructures such as the international postal network. This comprehensive network has the largest number of retail outlets (650,000) available throughout the world, many in

2 rural and remote areas not served by other communication services. Postal services also have a long history in the funds transfer business and offer competitive and transparent pricing. Finally, through their own financial services and partnerships with leading banks, many postal services offer customers a direct portal to formal financial networks. Expanding the flow of international remittances through the postal network is not without some technological challenges. However, this goal is increasingly being incorporated into the postal industry s drive to simultaneously adapt to and take advantage of the opportunities afforded by the Age of Digital Communications. Connecting People on the Move: The role of postal networks in facilitating remittance flows and increasing their impact on development Growth of migration in a globalized economy As we progress into the 21st Century, migration has become one of the most powerful forces shaping the global economy. Currently, 175 million people have relocated from their country of origin to either a transit or a destination country; a significant portion of these people on the move has moved to find better economic opportunities. There is no clearer demonstration of the integration of the world s economies than this drive to relocate where employment and resources are more accessible. In many cases, individuals have left their immediate family members in their countries of origin. In others, even though the nuclear family has moved, it retains strong ties to parents, siblings, and other family members at home. The rise of such transnational families has created a growing need to build viable networks to keep them connected both culturally and economically. The nature of this challenge is not new, however, the scale of the flow of information, goods, and resources; and the opportunities it presents for enhancing the positive impacts of globalization are unprecedented. Parallel growth of remittances The flow of remittances sent home by migrants to their countries of origin is perhaps the most significant recent example of the challenges and opportunities inherent in keeping transnational families connected. The economic impact of this flow has only recently been discovered, at least in part due to the informal channels through which it has typically traveled. More importantly, however, the explosive growth in the volume and value of remittances is raising them above the radar screen. In 1996, the total value of remittance flows to Latin America and the Caribbean was $10 Billion USD. By 2003, this number had climbed to $38 billion USD, representing 150 million individual transactions reaching 15 million households in recipient countries. 1 While this is the fastest growing and largest value market for remittances, other regions are experiencing very positive growth; by 2002 the worldwide value of worker remittances to developing countries 1Inter-American Development Bank-Multilateral Investment Fund, Remittances to Latin America and the Caribbean: Goals and Recommendations; Washington, May,

3 totaled $80 billion USD. 2 Migration and remittances go hand in hand and as the Inter-American Development Bank (IDB) recently characterized these parallel flows People move North by the millions, and money flows South by the Billions. 3 Impact of remittances on development The positive impact that remittances have on development in recipient countries is also becoming apparent. In fact, remittances are rapidly becoming the most important capital resource and source of foreign exchange in many countries; in some regions they represent a larger resource inflow than official development assistance (ODA) or foreign direct investment (FDI). And while larger developing countries (e.g., India, Mexico, the Philippines) receive the largest value of remittances in absolute terms, these transfers represent a very substantial portion of Gross Domestic Product (GDP) for many smaller countries. In Lesotho, for example, remittances represented 26.5% of GDP in 2001, while in Jordan they represented 22.8%, in Albania 17%, and in Nicaragua 16.2%. 4 Remittances represent a stable flow of financial resources. A recent survey 5 showed that over 60% of Latin American immigrants in the United States send money home (at an average of approximately $240 per transaction) on a regular basis. While this represents approximately 10% of the salaries of such immigrants, it may make up 50-80% of the household income of recipients. Furthermore remittances seem immune to (and are possibly even counter-cyclical) to economic downturns. Remittance flows had strong growth during recent worldwide economic recessions, regional economic crises, and decreases in ODA and FDI. This constant source of development resources also does not create future liabilities or obligations like some forms of ODA and FDI. Remittances also are person-to-person and family-to-family transfers, so they have great potential for directly benefiting the low-income individuals in developing countries without first passing through formal bureaucratic channels. While these resources are often used to purchase basic needs such as food, clothing, and utilities, they are also increasingly invested in micro-enterprise creation and expansion. And, since remittances are typically sent to developing countries, they may help address unequal income distribution and help mitigate some of the pressure to migrate. Facilitating remittance flows and increasing their impact Along with a growing awareness of the importance of remittances, there has also been a growing consensus on how to increase both their level and their positive impact, particularly in three key areas. 2 Ratha, Dilip (2003), Workers Remittances: An Important and Stable Source of External Development Finance, in Global Development 2003: Striving for Stability in Development Finance; World Bank, Washington, DC, chapter 7, pp Remittances to Latin America and the Caribbean 4Ratha, p.165. According to some sources, in 2002, the percentage of GDP in Nicaragua rose to 30% and in Haiti 25% (All in the Family: Latin America s Most important International Financial Flow-Report of the Inter-American Dialogue Task Force on Remittances; Washington; January, 2004). 5 Inter-American Dialogue Task Force, the Pew Hispanic Center, and Bendixen and Associates, State by State Survey of Remittance Senders: U.S. to Latin America; Washington. -3-

4 First, there is a great need to increase access to remittance services. In many developing countries, it can take several days and a number of separate (and costly) transactions to receive remittance funds. One of the keys to achieving this progress will be to utilize all viable communication channels, particularly where these offer universal coverage to ensure that there are as many access points as possible for both senders and receivers. Another will be to find innovative approaches, such as the use of debit cards (some of which do not require bank accounts for recipients) to effect transfers. Next, despite some recent progress due to growing competition among financial intermediaries and improving technology, there is still a strong need to further reduce the cost of sending remittances. Transaction costs remain significantly higher than analogous costs for corporate financial transactions and represent a significant burden for low-wage earners transferring funds on a monthly or more frequent basis. Furthermore, in a largely informal financial environment, there is a lack of transparency concerning commissions, exchange fees, transit times and very little comparative price data to facilitate informed choice by consumers. Further increases in competition and in the amount of information available to consumers can help drive down costs. Finally, the development impact of remittances can be greatly enhanced by channeling these flows through formal financial institutions. Today, the majority of remittances are sent through money transfer companies. 6 This means that they are treated as individual transactions unrelated to more comprehensive financial activities. If these remittances were used as an entrée to a bank account in both the sending and receiving countries, they could help mobilize savings while opening the door to credit and other financial investment products. Realizing this opportunity to bank the unbanked would provide a sense of economic citizenship not unlike the sense of identity provided by obtaining an address. 7 How postal networks can be utilized to accomplish these goals 8 Connecting people on the move is not a new challenge in the postal world. In fact, the Universal Postal Union (UPU), the UN specialized agency for postal matters and its 190 member countries have been working for over a century to facilitate the worldwide transmission of information, goods, and money. As concerns the sending and receiving of remittances, the worldwide postal network is well positioned to help achieve the goals that have been established for this important development tool. Increase access. With over 650,000 offices, the worldwide postal network has the most extensive retail outlet network in the world; in many countries it provides the only access to rural and remote areas. Furthermore, with their universal service coverage, postal networks are structured for person to person and family to family communication. 160 UPU administrations offer funds transfer services which handle over 10 billion money orders and financial system transfers yearly. 6 The survey cited above estimates that 78% of remittances sent to Latin America are handled by money transfer companies; 11% are transmitted by travelers. 7Estimates are that only 10% of all citizens in Latin American countries have bank accounts. 8 The IDB has established the following goals for the Year 2010: reduce by 50% the average cost of LAC remittance market transactions by promoting increased competition; increase by 50% the number of families receiving remittances through financial transactions (Remittances to Latin America). -4-

5 Finally, many families transferring funds on a regular (e.g., monthly) basis do not require instant funds transfers. A less expensive postal option based on next day or even two- or three-day transmission creates an attractive niche for such transfers. Reduce costs. Postal money transfer systems provide the type of competitive and transparent pricing that can help reduce transaction costs. Some postal operators offer an extremely competitive flat fee (around $7 USD) while others offer very low percentage fees for funds transfers. This provides a cheaper alternative to multiple, high cost (sometimes as high as 15-20%) transfers of smaller amounts. The postal alternative also offers the advantage of being a trusted, secure, and permanent channel for cash transfers. While the number of paper-based international money orders still represents a significant amount of traffic (15.2 million items in 2002), postal services are also increasingly moving towards cheaper and more secure electronic funds transfer systems. In fact, more than 85% of international exchanges in industrialized countries are sent via electronic networks. This had led some industrialized countries to abolish paper-based money orders in favor of electronic transfers that provide time-guaranteed service and account-based transfer capabilities. 9 Channel remittances. 85 postal administrations offer their own account-based financial services or have established partnerships with private banks, micro-credit institutions, and money transfer companies. There have been instances of cash transfer companies requesting exclusivity clauses in their partnership agreements, but postal operators typically declined to accept these requirements. Such requirements could inhibit competition and opportunities for reducing the cost of cash transfers. Increased use of the postal financial structure for remittances could add valuable support, and strengthen micro- and small enterprises by channeling remittance funds to small entrepreneurs who would otherwise not have access to credit. The potential role of the postal infrastructure in exploiting such possibilities to generate employment and productive capacity and thereby reduce poverty is only now beginning to be understood. However, it is clear that connecting sources of investment revenue from remittances to existing and potential businesses in developing countries can accelerate the process. Postal banks and other postal financial institutions also offer strength and security to depositors; over $3 trillion USD is deposited in postal banks worldwide covering over 700 million account holders. These institutions represent a significant level of capital reserves in some industrialized (e.g., Japan) and developing countries where significant portions of savings by low-income citizens are deposited in postal affiliated banks. Postal banks are account-based operations that can provide a structured entrance into the formal financial systems. Many also provide giro services which allow cash transfers to pre-established accounts for utility companies and other bill producers. Therefore, choosing a postal cash transfer system might also lead users towards less accessible financial services such as loans, insurance, and investment products. This could have a 9 Source: UPU -5-

6 positive effect not only on promoting access to such services, but also on savings mobilization aimed at capturing the wide base of small savers that are too frequently forgotten. Postal networks and financial systems are uniquely positioned to accomplish these goals because they are trusted by the community and reach many low-income and isolated neighborhoods that are not attractive to commercial banks. Many developing countries, including least developed countries, offer postal financial services that can be found in the most remote and economically disadvantaged corners of the country. If the services available are limited, they can be expanded through connections with the wider formal financial network. As stated in a recent World Bank Group report, One promising approach is to establish partnerships between leading banks and the government post office network in countries that do not have banks with extensive branch networks in rural areas. 10 Postal networks are also increasingly connected to digital communications systems that provide access to e-commerce, e-government and other value-added services. The public postal operator in Brazil has done a lot of ground-breaking work in this regard, particularly in the areas of offering a wide variety of new banking, investment, and Internet services through its retail outlet network. Challenges facing posts in facilitating remittances All of this is not to say that there are not challenges in fully utilizing the postal network for remittance transactions. First there is a need to modernize postal money transfer platforms and processes. The global move to a cashless society requires advanced IT systems and strong cash delivery infrastructures. These systems also provide the security that paper money orders cannot, and that is why there is a general move in the postal world from paper to electronic funds transfers. Unfortunately, postal operators in some developing countries have not reached this stage of technological development. Also, postal administrations in some industrialized countries have not invested sufficiently in incorporating modern money transfer capabilities into their retail networks, preferring to leave this very lucrative market to private money transfer companies. Today, more than 50 UPU postal administrations have some form of electronic money transfer capabilities; the challenge is to expand this network to include more administrations particularly in those developing countries that receive high volumes of remittance traffic. Finally like all industries involved in the transfer of funds, postal operators must adapt to the restrictions put in place through the Bank Secrecy Act and other measures enacted to restrict cash flows that could support terrorism, money laundering, or other illegal activities. The postal response to these challenges The UPU and its member countries are responding to these challenges with numerous initiatives. The first is by expanding the use of the International Financial System (IFS) among postal administrations. IFS allows the rapid and secure transfer of money orders and inter-bank transfers over a private, secure UPU network and has expanded its reach through partnerships with other 10 Ratha, p

7 funds transfer systems (e.g., Eurogiro) and banks. IFS installation is inexpensive and the system user interface can be localized into any language. It also eliminates many of the problems associated with paper-based money orders (security and speed) and provides enhanced information management and quality control capability. It significantly reduces the time needed to transfer cash while still keeping the competitive advantage of a low price and comprehensive access. The range of products available through IFS is also being expanded to include pension distribution and other premium services such as express (urgent) wire transfers. Furthermore, postal services central location and trusted third party status as a hub of three critical business flows (cash, goods, and information) opens up a new world of small business and consumer possibilities. There is also a move to strengthen postal financial services where they already operate and to initiate new services where they have not previously existed (e.g., Brazil and New Zealand). This provides an excellent platform for strengthening funds transfer capabilities and strengthens the post s ability to connect remittance users to comprehensive financial systems. Partnerships with private service providers are a particularly useful strategy here since they allow postal services to provide access to their retail networks in exchange for the capital, expertise, systems, and equipment needed to initiate modern money transfer systems. Finally, there is a global postal drive to respond to emerging customer demands for new services such as expanded money transfer systems while simultaneously improving access to and delivery of core postal products. Conclusion Remittance flows will continue to grow and will continue to provide positive support for economic growth in developing countries. The challenge for institutions seeking to increase both the size and impact of these flows will be to make them easier and less expensive to use while increasingly incorporating the remittance process into formal and comprehensive financial systems. Utilizing and strengthening existing communications systems that provide such benefits is a good strategy for achieving these goals. -7-