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Remittances Can Help Economies of Poorest Countries Grow

  • Lisa Schlein

A boy carries a goat along a road near the town of Sake, about 27 kilometers west of Goma, DRC, November 27, 2012.

A boy carries a goat along a road near the town of Sake, about 27 kilometers west of Goma, DRC, November 27, 2012.

A new United Nations report argues that the world’s poorest countries could lift their populations out of poverty if they used remittances to improve their productive capacities. The Least Developed Countries Report 2012 published by the United Nations Conference on Trade and Development (UNCTAD) also explores ways to reverse the so-called “brain drain.”

Remittances mean big money. The U.N. Conference on Trade and Development reports citizens of the world’s poorest countries working abroad sent home some $27 billion in 2011. The report says that in the last decade, remittances have outstripped inflows of foreign direct investment to the least developed countries (LDCs).

Research shows that most of the money sent home is spent directly by families on vital needs, such as food and housing. Although such expenditures are essential, U.N. economists argue it would be beneficial if more of the remittances could be channeled into local infrastructure development, vocational training projects and the like.

Reducing transfer costs

The report recommends these significant flows of money be used to improve the productive capacities in LDCs, to enable their economies to produce greater varieties of goods and services and more sophisticated goods, for domestic use and export.

UNCTAD Secretary-General Supachai Panitchpakdi said a major reason why remittances are not widely used for investments in home countries is because the transfer costs are exceptionally high.

“The average is around 20 percent. It ranges from four to 25 percent and that is why it is forcing people to send it informally," said Supachai. "So, the purpose of this exercise is to advise these countries that if it goes informally, you are not benefiting much. The individuals may receive it, and of course, the families use it for consumption. But, if you somehow create the situation where people are sending it formally, than the country at large will benefit because that will be foreign exchange available through the bank for the government to use for import technology and other things.”

High return on investment

UNCTAD estimates in 2010, remittances sent to sub-Saharan Africa could have generated an additional $6 billion for recipients, if the costs of transferring money had matched the global average of about nine percent.

The report says post offices, savings and credit cooperatives, as well as microfinance institutions can play an important role in expanding access, especially for rural populations, to remittances and financial services in LDCs.

A major downside associated with remittances is the so-called brain drain. UNCTAD reports that more than 2 million educated and highly qualified people have emigrated abroad.

The report finds an average of 18.4 percent of LDCs' highly skilled people leave home in search of more lucrative work in foreign countries. U.N. economists argue the adverse effects of these high levels on the poorest countries can outweigh the benefits from remittances.

Retaining skilled workers

Taffere Tesfachew is director of UNCTAD’s Division for Africa, LDCs and Special Programs. He said UNCTAD is attempting to persuade LDCs to establish new international measures to help reverse this brain drain and turn it into a brain gain.

“So, we have a little initiative that we are proposing, based on a tried and tested scheme from other countries, which is that there are a lot of highly skilled, knowledgeable individuals from LDCs that are willing to go back and initiate knowledge-based activities," said Tesfachew. "But, the problem, apart from the fact that the local policy environment may not be that conducive - there is also another problem. The problem is taking a risk is usually a problem. They have knowledge. They have ideas, but resources are a difficulty.”

Tesfachew said UNCTAD is proposing a scheme of public-private partnership to encourage professionals abroad to return back home.

He said such a scheme might provide these people with preferential access to seed money for investments back home. It also would make financing available at preferential interest rates.

He added that the knowledge transferred by homecoming nationals would be useful for the country as a whole.

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