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Fri. December 09, 2022
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Around the World, Across the Political Spectrum

Time to Create a Global Effort to Reduce Remittance Costs

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By Eliel Stenstrom

Recently I walked through one of Stockholm's wealthier suburbs as a Red Cross recruiter, discussing global aid with a colleague. The question we discussed, as is often the case when walking door to door asking for donations, is why humanitarian NGO's are needed; why official development assistance (ODA) is not sufficient. The answer closest at hand is simply that international aid standards are too low. The spending targets for ODA, such as the common 0.7% of national income, lead to a gap between aid capabilities and needs.

More troublesome, many nations even fail to reach the 0.7% target, which indicates a substantial lack of political will for increasing ODA standards. This is understandable, cost-benefit analyses of government spending has had a growing role in public political discourse, and since these costs and benefits are often measured domestically, ODA is measured as having very high costs for very little benefit.

But if we recognize that raising ODA targets are in the short run improbable, are we limited to a discourse where governmental policies are unable to fill the gap between development capacities and needs? I would argue no, or at the very least there are governmental policies that can be taken to narrow the gap, whilst avoiding the politically contentious issue of increasing spending on ODA: through the lowering of the comparatively large interest-rates on remittance.

Remittance, that is the peer-to-peer transfers of funds across borders, is an enormous business. Migrant laborers across the world send money from abroad to families at home, often becoming an economically significant, sometimes vital, income for these families to survive. The global remittance cash flow is significant, measuring more than 600 billion U.S. dollars a year and rising yearly. To put that in perspective: ODA is roughly at 140 billion U.S. dollars a year, which means the size of global remittance cash-flows is more than four times larger than then the size of global ODA.

There is, obviously, a strong tendency for remittances to be sent from more economically developed countries to less economically developed countries, replicating the cash directions of traditional ODA. But remittance flows from individual to individual, rather than government to government, thus often avoiding governmental inefficiencies and corruption prevalent in LEDC's and directly raising household income, which helps a country escape both the low-growth and poverty traps. Thus one could argue that raising remittance income is also a more efficient type of input for nations wanting to escape poverty than traditional ODA income,.

Which makes the following fact both absurd and ripe for reform: the market price for remittance transfers are currently at 7.53%. For every dollar sent, more than 7 cents do not arrive, but go to the banks conducting the transfer. Compared to normal bank transfers which in the age of electronics and multinational banks are a fraction of a percent if any, this rate seems strange.

An argument raised against lowering remittance rates is that it would remove the incentive for corporations to offer these transfer service, yet considering that transfer services domestically can function with a small fraction of the remittance rate, and modern transfers are electronic so the distance of a recipient in the country or on the other side of the planet are similar, this argument sounds hollow. Yet even if lowering remittance rates would not remove the incentive to provide such services, it is clear that the major corporations have no financial incentive to actively pursue such regulations.

This is where governments return to the equation. Whilst there might be little political will to raise ODA, lowering remittance rates through regulations is a way to achieve similar aims without a single penny more of government spending. As an international community, we have tackled similar regulative challenges before, for example the current coordinated effort to regulate tax havens. There is nothing stopping us from doing the same thing with remittance. This is a project that could hypothetically increase the money being transferred from the richer parts of the world to the poorer, by a sum equivalent to more than a 20% increase in global Official Development Assistance, without costing a penny more of government spending. In other words, let us push for an international effort to lower remittance rates.

Eliel Stenstrom is a student at Stockholm University. He also works for the European Union (Secretariat of the European Parliament).  Previously, he worked at the Red Cross and as an intern at the Dag Hammarskjöld Foundation. Mr. Stenstrom has published articles in the newspaper Aktuellt I Politiken (Swedish for Currently in politics) and the Stockholm Journal of International Affairs.

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