The importance of remittance flows to low and middle income countries is the subject of an important recent tweet from William Easterly @bill_easterly. His tweet includes this amazing chart:
What is most striking about the chart is the sharp increase in remittance flows around 2002 and 2003. But why? This was the time that there was a huge new emphasis on the potential importance of these flows. It was also a time when a special policy effort was made to keep the flow of remittances going and increase them with the new proposals and initiatives. Could there have been a connection? It is also important to remember that some efforts were made to counter pressures to combat the flows because of concerns about the funds going to terrorists.
I was Under Secretary of Treasury for International Affairs at the time. We noticed that the flows of legitimate funds from immigrants in developed countries to developing countries were growing and starting to rival in size the official flows of development assistance from rich to poor countries. These remittances were frequently sent through the informal financial networks known as “hawalas,” in which funds could be sent to other counties without detectable movement of funds taking place. We encouraged the use of the formal banking system rather than wire transfers or informal networks for two reasons. First, it lowered the costs of remittances, and, second, it made it harder for terrorists to avoid detection, which has a high priority in the period. The Bush Administration’s early work on remittances in 2002 and 2003 eventually grew into a Global Remittance Initiative which President Bush presented at the G8 Summit in Sea Island in July 2004.
I talked about the efforts in these years in a speech “Remittance Corridors and Economic Development: A Progress Report on a Bush Administration Initiative”. The speech was presented at the Payments in the Americas Conference at the Federal Reserve Bank of Atlanta on October 8, 2004. It is item 6 on this list of talks which I gave back then. The speech describes the remittance initiatives and relates then to an overall development agenda. It outlines the new initiatives and argues that remittances have advantages over other forms of assistance, including grants and loans from government and international financial institutions. A very important question is: “Did the policy initiatives discussed in that talk help cause the improvement shown in Bill Easterly’s chart.” As one who has done a lot of causality tests over the years, I think the answer to the question is “yes.”
Many more technological advances are happening now, including, the widely discussed Libra proposals. And at the same time many are questioning immigration itself. And of course, COVID-19 is a truly global pandemic which is straining government budgets everywhere. In this context, it is more important than ever not to forget about such flows of funds to those struggling in developing countries. My guess is that the pandemic will lead to creative public and private sector solutions which should be beneficial in the end. But we are not there yet.