Help the Poor Help Themselves

One early result of today's global recession is that many donor governments are trimming their foreign aid programmes. Before taking office, President Barack Obama had promised a doubling of American foreign assistance, from $25 billion to $50 billion, but since then Vice-President Joe Biden has warned that this commitment will probably be achieved more slowly because of the downturn.

Here in Finland, our aid decreased by 62 per cent in the early 1990s, a period that Finns still call "The Depression". Japan's overseas aid declined by 44 per cent when that country hit hard times. The current worldwide slump could bring a cut in official development assistance (ODA) of 30 per cent.

It is also easy to predict that donor governments will be looking carefully at the ever-growing expenditure on the United Nations' 14 peacekeeping operations around the world. The total bill for all UN operations in the 12 months to mid-2008 reached $6.7 billion, about twice the level 15 years ago.

One can only imagine the grave consequences if operations that are already spread thin are cut. Recall that the Rwandan genocide was preceded by a similar lack of enthusiasm for financing the UN mission there. Recent events in Congo and elsewhere suggest that there is no room for complacency.

But by far the biggest transfer of assets from rich countries to the developing world takes place through migrant workers' remittances. Few decision-makers seem aware of this. In 2006, around 150 million migrants sent roughly $300 billion to their families in developing countries. The number of transactions is huge, estimated at 1.5 billion remittances annually. Most are for sums of only $100-$300, and they normally go towards immediate household consumption.

The value of all ODA in 2006 was $126 billion, less than half the value of private remittances, even though it includes assistance from OECD and non-OECD countries, as well as from China. If the recession costs migrants their jobs in richer host countries and forces them to return home to their countries of origin, millions of already poor people will be thrown into greater poverty.

The possible impact can be gauged by looking at where the $300 billion in remittances are distributed. In 2006, poorer European countries received about $50 billion, Africa got $38 billion, Latin America and the Caribbean $68 billion, the Middle East $24 billion. Asia is the major beneficiary, receiving $113 billion.

In all, an estimated 10 per cent of the world's population is estimated to benefit from remittances, with 57 countries each receiving $1 billion or more annually. Indeed, some countries are dependent on this income flow. Cape Verde received 34 per cent of its GDP from remittances, Eritrea 38 per cent and Burundi 23 per cent. In Asia, the figures were 30 per cent for Afghanistan and 38 per cent for Tajikistan, while in Europe Moldova received 31 per cent of its GDP from external sources.

Some of these countries are either in conflict or are fragile states, so a diminishing flow of remittances will aggravate their instability, and perhaps increase the flow of migration to other countries. Governments in Europe and elsewhere should therefore consider carefully what other forces will be at work if and when migrant workers are sent home.

These governments already spend tax money on direct foreign aid. So they should weigh tax breaks that might entice employers to keep migrant workers on the payrolls, as this would probably be a much more efficient way to support these poor countries.

Moreover, given that transaction costs often take a big slice of remittances, aid mechanisms could be used to create safe and cheap channels for financial flows, especially where private money cannot easily reach remote rural areas, as is often the case in Africa or Asia.

Anti-terrorism laws are a problem here, because the demand for more effective control mechanisms on international financial transfers places an extra burden on remittance operators. These new rules have certainly pushed transaction costs higher. But the fight against terror and its financing means that governments and financial institutions have extensive data on the cross-border flow of money, which should be used to help people send money to their relatives more easily.

Sending money to some countries is now allowed only through formal banking channels, and this has created virtual monopolies while also preventing remittance money from reaching rural areas where banks don't operate.

In West Africa, a simple money transfer operator now handles 70 per cent of official payments and also imposes exclusivity on banks. Allowing more informal financial institutions to channel foreign payments would ease the money flow to remote regions. Co-operatives, credit unions, and new forms of micro-financing could form networks that would ensure greater accessibility.

Restrictive legal rules in some countries exclude migrants from using official banking systems unless they have the necessary legal status. Other countries, however, have taken steps to make remittance transfers possible via mobile phones.

The sheer size of these remittances, and their importance in keeping many millions of people above the poverty line, suggests that rich-country governments should take a careful look at the existing system. An improved system could help alleviate the burden imposed on innocent victims of the financial and economic downturn.

Such a review of remittances should look into restrictive practices that could be abolished, and ask whether official assistance should be adapted to the needs of this informal yet crucially important aid network.