Crossborder Remittances and International Development Finance
Crossborder remittance payments by immigrant workers to their relatives back home are an increasingly important capital movement in the world, especially among poor people. The United States, for example, has sometimes treated remittance payments as part of its calculations of international aid public and private. It has only recently started to receive academic attention, however. My colleague Ezra Rosser has just published a new paper on the subject, Immigrant Remittances, in the Connecticut Law Review, up on SSRN.
Ezra concludes, among other things, that remittances flows should be regarded as an important income support measure among poor populations, but not as something by itself fosters economic development. On the basis of my years of development finance, observing things in places like Guatemala or El Salvador, that conclusion seems to me correct, if only anecdotally. What I have customarily seen in those places and others is that remittance payments provide important income support – indeed, some of the rural zones in Salvador in which large numbers of people had fled during the 80s civil war to the US, and which a generation later saw large flows from remittance payments tended to be, again in my anecdotal experience, the places most saturated among poor households with consumer electronics and such goods. But that source of consumption did not seem, in my experience of those places, to translate to development in the sense of the growth of enterprises or jobs creation. The form of demand did not produce an income generating supply of economic enterprises.
Another colleague of mine, Heather Hughes, has produced a very interesting article on the securitization of remittance flows. Securitization is a suspect category these days, for obvious reasons, but at some point and in some suitably chastened form it will make a comeback. The question is whether such flows as remittances make sense. Heather points out that some developing country banks have already done securitizations of such flows – I don’t know where such financings stand in the current crisis, however.
More broadly and on a related topic, for a long time I have been involved in policy and charitable foundation discussions on the question of creating various kinds of securitization facilities to tap capital markets in order to obtain funds for development in such areas as microfinance and such development finance. In various ways, I’ve had extensive discussions with folks about, for example, creating a nonprofit organization to take on, via standby letters of credit and so on, credit or partial credit guarantees of development finance or microfinance pass through certificates. We’ve tossed around lots of ideas – and yet so far they don’t really go anywhere.
The reason, I’ve gradually concluded, is that despite much talk about the need to tap capital markets, in fact the nonprofit capital market has concluded that it can obtain sufficient funds for what it does using donated or super highly subsidized funds, and that the cost of capital required by the capital markets is not justified by the sheer lack of funds, let alone the ability to find projects that could actually repay such funds plus capital costs. The development sector as a development sector needs donated funds; and actual economic development for the long haul is a consequence of foreign investment in places that provide favorable governance that enables such investment.
This situation might change someday, I suppose, and accessing capital markets might become a smart thing to do, but I’m no longer surprised, the way I used to be, that nonprofit agencies do not press far harder to find ways to tap capital markets in search of development funds.