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April 30, 2006

Impact of remittances is Huge in Latin America, says Donald Terry, Inter American Development Bank

“In Latin America remittances are more than all foreign direct investment and overseas development assistance (foreign aid) combined,” said Donald Terry of the Inter-American Development Bank (IADB). His dynamic speech laid out the case for the huge impact of these payments with enlightening examples and behind the scenes insights.

Terry, the manager of the Multilateral Investment Fund at the IADB, argued for the importance of remittances and the systemic impact of migration in a speech at The Fletcher School. He came to Fletcher as part of the “Remittances and Development in Latin America” speakers series.

Despite the major effect remittances are having, they have been largely ignored by both academics and the financial world until recently. “In the IMF and World Bank data tables, remittances were in the “Errors and Omissions” section 5 or 6 years ago,” he pointed out.

The scale of what they were missing was made clear when Terry and the IADB made one of the first investigations into the actual level of remittances. “What we found was astonishing. Everybody knew there was money going back to Mexico, but the people masquerading as experts were off by 400-500%,” he said.

Since then, remittances have gained increasing attention from the academic and policy communities, with the current debate over immigration in the US generating even more interest. “In the past few months, the issue of immigration and remittances has come out the shadows, in a good way I think,” Terry said.

“You can’t understand what’s happening in these economies without understanding remittances,” Terry warned, as he laid out an impressive case for their scale and impact.

Over 500 million people are receiving remittances worldwide, he said, and the money they provide is eclipsing traditional sources of government income. “Remittances bring in more money to the Bolivian economy than the revenues from royalties from natural gas – the same royalties that led to the collapse of several governments in recent years,” he said.

Remittances also are providing a major source of money for human development, he said, pointing out that “In the Dominican Republic more money goes into education from remittances than from the government. Catholic schools have set up accounts so relatives can send school fees directly to them.”

“You can look at it as part of a 100 year trend of moving from rural to urban. But now they aren’t stopping in their own cities where there are no jobs – they keep going across borders to where the jobs are,” he said.

Heavy service fees have been one of the major problems in the flow of remittances, Terry explained,. However, recently service fees have begun to decrease.

“People were outraged – 5 years ago the cost of sending this money was 15-20%. The financial systems of the world weren’t interested in these people. Over the last 5 – 6 years, the hardest working people in the world were paying these rates because no one was interested in giving them a piece of plastic [a bank card]. Economists call this inefficient – the real word is outrageous,” he said.

“The good news is that the rates have come down to 5-6%, and will likely keep coming down,” he added.

These high fees highlight the exclusion of migrants and the home communities, Terry argued. “The financial systems of the world are totally irrelevant to the bulk of the world’s people. But financial institutions in Latin America are being squeezed from above by international competition, and they’re starting to look at these markets,” he said.

While most banks do not effectively serve migrants, there are methods to make sending remittances cheaper and more effective. Terry described a program the IADB set up where transfers from a Spanish bank were made at minimum cost to a microfinance institution in Ecuador. It allowed people to pay mortgages and buy their own houses with the money they previously had to spend on transfer fees.

The question remains, however, whether remittances can help pull countries out of poverty. As Terry asked, “Can you use the money that is going back to these rural areas so the next generation doesn’t have to leave?”

By Charles De Simone, MALD '07

Posted by fletcher at April 30, 2006 11:53 AM