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Migrants' remittances or development aid?

Ludger Schadomsky
May 18, 2017

For many countries in Africa, money transfers from citizens living abroad are an extremely important source of income - sometimes even more so than development aid. But there are drawbacks, says DW's Ludger Schadomsky.

A woman holding a bunch of banknotesd in front of a Moneygram sign
Image: Getty Images

School fees, weddings, funerals, a house for elderly parents, or the Sugar Feast at the end of Ramadan - there are countless reasons for people in the diaspora to send money back home to their families. Often they have to send it quickly, and that's where Western Union and MoneyGram come in.

For countries like India and Nigeria, which are among the largest recipients, overseas transfers are the most important source of capital. In 2016, $440 billion (395 billion euros) was transferred worldwide, according to official records. Additionally, about half of that sum was also moved via unofficial paths, for example, by traveling family members, or the hawala system, which is a popular and informal method of transferring money in Muslim countries. Africans living in Germany alone wire an estimated 1.2 billion euros per year to relatives and friends in their homeland. That's about 20 percent of total economic output in countries such as The Gambia, Lesotho and Comoros.

Charity versus migrant cash

The flow of money from migrants to their native countries is therefore three times as high as global development aid. That's one reason why economists have been arguing for years that remittances from family and friends abroad are far better than charitable aid from the Global North. When money is sent between two private parties, they say, it's usually received by those who need it and then used for a specific purpose.

It's a valid argument, not least because the so-called "overheads" of development projects alone - administrative costs, for example - can guzzle as much as 70 percent and often flow back to the donor countries. Experts also point out that the amount of private-to-private money transfers doesn't fluctuate as much as payments from government agencies or large investors, and that can be an important point of stability in target countries. Overseas transfers are expected to keep increasing in 2017 - by 3.3 percent in sub-Saharan Africa alone.

Kenya: Mshwari Money transfer system

Sounds good, right? Not always. Often a large chunk of hard earned wages is eaten up by transfer fees slapped on by financial institutions. So a citizen from Namibia working in neighboring Angola has to pay a 27-euro fee to send 100 euros to loved ones back home. In other African countries, the standard charge is 21 euros. Even market giants like Western Union or MoneyGram charge 10 percent or more, depending on the region.     

G20 countries and the World Bank want to cap these exorbitant fees at three percent by the year 2030. The impact would be enormous: with transfers amounting to $440 billion, migrant workers would theoretically save around $20 billion a year.

With that in mind, wouldn't it then make sense to get rid of development aid altogether? Well, it's not that simple. While these private transfers often pay for school fees, building homes or heathcare, they don't go towards the construction and maintenance of roads, schools and hospitals. And there's a political dimension to all of this: development aid can also be tied to conditions such as good governance or upholding human rights.  

Filling the coffers of authoritarian regimes?

Increasingly, the issue of remittances is being viewed against the backdrop of growing migration from Africa. Several repressive governments on the continent appear to be exporting employable young men into exile with the expectation they'll then send cash back home. One such country scores of people have been leaving is Eritrea in East Africa. It's a plan that is just as cynical as it is economically polished - because at the same time governments like Germany's are sending more funds to those same countries in an attempt curb migration. And the villains reap double the profit.

There's another problem: money launderers, and especially global terrorist networks, are increasingly using money transfer companies to carry out their dirty business. Safety measures to counter this trend push up training and admin costs for financial institutions - and those are then passed on to the customer.

More German investment on the African continent

Lower transfer fees

So is there a solution? For starters, countries hosting sizeable migrant communities need to do more to ensure that transfer fees are capped, and that the money goes to places where it will boost the local economy.

Whether development aid is a curse or blessing has long been subject to debate. But if donor countries want to make sure that their payments to the Global South remain socially acceptable, they're going to have to prove - and much more credibly than they've had to in the past - how taxpayers' money is being spent on the ground. They'll also have to explain why, for example, Africa is still struggling, despite receiving billions of dollars in aid.

One pragmatic way to pay lower transfer fees is to do some research at geldtransfair.de, a portal launched by the German government that compares rates offered by dozens of banks. To transfer 500 euros from Germany to Ethiopia, for instance, the fee ranges from 1,50 to 57 euros. That could mean 55,50 euros more for relatives back home. It's development aid made easy.

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