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IDB's Multilateral Investment Fund's pioneering work spotlights costs and impact of money sent home by migrant workers

Latin American and Caribbean workers living abroad sent some $40 billion in remittances back to their homelands in 2003, up from $32 billion the previous year, according to the Inter-American Development Bank’s Multilateral Investment Fund.

The volume of these money transfers has grown dramatically over the past few years, to the point where remittances surpassed foreign direct investment by about 50 percent in 2003, the MIF said. Their volume was estimated to be four times larger than the flow of overseas aid to the region.

The MIF’s groundbreaking conferences, research and projects on remittances have helped raise their political profile. At a special meeting of the Summit of the Americas held in Monterrey, Mexico in January, heads of state and government of the Western Hemisphere agreed to work to halve the costs of money transfers by the year 2008.

The MIF was drawn to the issue of remittances due to their enormous economic and social impact in Latin American and the Caribbean. In several countries in the region, migrants’ money transfers represent more than 10 percent of the gross domestic product. Remittances usually benefit poor people in economically depressed areas. They also constitute a bridge between millions of families in developing countries and their relatives working in industrialized nations.

According to MIF estimates, nearly three-quarters of the remittances to Latin America and the Caribbean originate in the United States. Japan, Spain and Canada are also important sources of these flows.

Mexico has long been the largest recipient of remittances in the region, receiving around $14.5 billion last year. That amount exceeded the foreign income generated by the tourism industry. Other countries with significant income from remittances are El Salvador, Dominican Republic, Guatemala, Peru, Ecuador and Haiti.

The MIF holds that even if the volume of remittances were to grow at more moderate rates in coming years, the total inflow to the region could top $400 billion for the current decade.

Spotlight on remittances

The MIF, an autonomous fund administered by the IDB, started to analyze remittances in the year 2000 with the principal goal of documenting their increasing importance for the region. Since then it has organized 14 conferences in nine countries and commissioned 12 studies and six polls involving remittance senders in two continents and beneficiaries in five Latin American countries.

The research brought to light how various factors have kept the cost of sending money to Latin American and Caribbean countries at relatively high levels, compared to the costs of transfers to other parts of the world. According to MIF estimates, the total costs associated with remittances to this region exceed $4 billion a year.

As part of its activities to promote private sector development and more efficient markets, the MIF began to finance programs designed to foster more competition by encouraging formal financial institutions to enter the remittances business, which has long been dominated by non-financial companies.

The MIF has focused on Latin American and Caribbean credit unions and microfinance institutions, helping them acquire the technical wherewithal to link up with counterparts in industrialized nations and participate as remittances distributors.

Among other deals, the MIF brokered agreements between leading Spanish credit unions and microfinance institutions in Ecuador and Colombia, whose services have led to a huge drop in the cost of sending money from Spain to those two South American countries.

In Mexico, the MIF supported a program to enable hundreds of savings and loans institutions to distribute remittances by using a modern technological platform run by the second-tier bank BANSEFI.

The purpose of these efforts is not only to make remittances cheaper but to steer an increasing portion of these flows through formal financial institutions, which can offer a range of services to the families that receive money transfers, including savings accounts, ATM cards and loans – services that are usually available only to wealthy clients in many Latin American countries.

The business of distributing remittances also provides credit unions and microfinance institutions an alternative source of revenue to expand their lending to low-income families and micro, small and medium-size companies, particularly in poor and isolated communities.

Studies commissioned by the MIF and academic papers presented at its conferences have covered aspects such as the profile of the remittances industry, the comparative costs of sending money internationally, demographic factors influencing migration from Latin America and the Caribbean to industrialized nations and the impact of U.S. laws and regulations against money laundering.

Together with organizations like the Washington-based Inter-American Dialogue and the Pew Hispanic Center and the polling firm Bendixen & Associates, the MIF carried out unprecedented surveys in the United States, Spain and Latin America to analyze how immigrants send money back to their families and how those resources are spent, saved and invested.

The research revealed, among other findings:

  • The cost of sending money to Latin America and the Caribbean from industrialized nations is higher than in other regions of the world.

  • Latin American immigrants resort mostly to money transfer companies, whose services tend to be more expensive than those of formal financial institutions.

  • While competition and new technologies drive down remittance costs, consumers still need more information to improve their financial literacy and make optimal choices.

  • Demographic trends in many Latin American and industrialized countries suggest that the volume of remittances will continue to mount in coming years.

  • Among remitters, young, poor and recently arrived foreign workers tend to send more money than older and more established immigrants.

  • Although most of the money is spent on basic needs such as housing, health and food, some beneficiaries invest modest sums in education, family businesses and farms.

The MIF plans to publish a book on its research on remittances later this year. It is also drafting a set of principles to promote best practices in the remittance market, as well as provide governments with recommendations. These principles, which will be presented at the IDB’s annual meeting in Lima this year, are aimed at facilitating remittances flows and increasing their development impact in the Latin American and Caribbean region.

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