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March 29, 2011

Migration and Remittances Underpin African Economy

by Joe DeCapua

About 30 million Africans live outside their home countries, and the money they send home – called remittances – plays a major role in local and national economies. But a new World Bank report says African governments could do more to harness their full economic benefits.

“It seems like not a big deal in some ways because 30 million people is only about three percent of Africa’s population. But in terms of impact, it is huge because it generates in tangible terms about (US)$40 billion in remittances alone to Africa,” says Dilip Ratha, lead economist for the bank and the main author of Leveraging Migration for Africa: Remittances, Skills and Investments.

He says that’s comparable to the size of [foreign] aid going to the continent.

“Remittances provide a lifeline to people. And migration offers an opportunity to escape poverty…drought and famines…conflict and wars and death and diseases, as well,” he says.

The World Bank report says each migrant may help anywhere from 10 to 100 people through remittances. The money sent back home can have a profound effect on living standards and the quality of life.

Porous borders

“It is safe to say that without migration and without the benefits that come from migration Africa would be a lot poorer,” says Ratha. “And life in Africa would be a lot more difficult for a lot of people.”

 

The informal migration system on the continent has both benefits and burdens.

“There are a number of areas where migration has been working very well,” he says, “and sometimes it is simply because nobody is doing anything about it. In Africa, we have this problem that it’s a continent with a population lower than that of India and yet it has 54 countries.”

Borders, often artificial ones created during colonialism, have divided families, ethic and linguistic groups and labor markets.

“The fact that the borders are there and they’re not being enforced very tightly has resulted in some…benefits for migrants because they do migrate most of the time to seek employment in other countries and that has helped a lot of people,” Ratha says.

On the other hand, “A lot of people coming into the country fall outside all kinds of rules and regulations and also that [includes] the protection of the law. So they become vulnerable to all sorts of exploitation by employers,” including the trafficking of women.

“So, migration is working, but it could work better if countries were to realize that this is a potent force for development,” he says.

Diaspora bonds and phone apps

The World Bank report says money from the Diaspora could be handled more efficiently and put to greater use.

“The African Diaspora probably has a savings of over $50 billion a year. Most of this money is parked in foreign countries. If private sector players or governments in African countries, who need a lot of funding for infrastructure projects or development projects, were able to tap the wealth of their Diaspora they could actually benefit a lot,” he says.

One way to tap those funds would be to sell Diaspora bonds.

“We estimate that African countries could raise…$5 billion to $10 billion a year by issuing Diaspora bonds,” he says. Interest rates on the bonds would not be so high as to make it difficult for a country or company to repay them.

What’s more, Ratha says, remittances are often “counter cyclical” in difficult times.

“When a country has an economic crisis or political crisis or earthquakes, natural disasters, drought and famines, that’s when remittances tend to go up. That’s also the time when private capital flows actually recede,” he says.

The report recommends making it easier to transfer remittances back home by reducing bureaucracy and fees.

Ratha says, “The cost of sending money to Africa is the highest among all the regions in the world,” says Ratha. “So we are encouraging countries to think about encouraging competition in remittance markets. Also we are encouraging [the use of] mobile phone technology…to provide remittance services at a very low cost.”

Post offices, savings and credit cooperatives, rural banks and microfinance institutions with large branch networks could also be used to improve money transfers.

He says if the bank’s recommendations are implemented it could mean an extra $4 billion dollars a year in remittances for Africa.