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Economy & Trade

Q&A: Turning Remittances into National Profits in LDCs

Isolda Agazzi interviews SUPACHAI PANITCHPAKDI, secretary-general of the United Nations Conference on Trade and Development (UNCTAD)

GENEVA, Nov 28 2012 (IPS) - Remittances to the world’s poorest countries reached a record 27 billions dollars in 2011, according to a report released Monday by the United Nations Conference on Trade and Development (UNCTAD) in Geneva.

Supachai Panitchpakdi, secretary general of the United Nations Conference on Trade and Development (UNCTAD). Credit: Communications and Information Unit/UNCTAD

Analysing trends in the 48 least developed countries (LDCs), the report noted that remittances – monies sent back home by nationals working abroad – are now second only to official development assistance (ODA), which stood at 42 billion dollars in 2010.

Remittances were almost double the value of foreign direct investment (FDI) inflows to these countries, which amounted to 15 billion dollars last year, making them a much more important source for LDCs than for other country groups.

Indeed, remittances amount to 4.4 percent of gross domestic product (GDP) in the LDC bloc as a whole and 15 percent of exports. These shares are three times higher than in other developing countries.

While these numbers are impressive, experts like UNCTAD Secretary-General Supachai Panitchpakdi believe governments are missing a vital opportunity to mainstream these financial flows into industrialised policies that favour long-term development.

Panitchpakdi sat down with IPS correspondent Isolda Agazzi to discuss how these private transfers, more beneficial to LDCs than trade and investment, can harness the potential of migrant workers to drive sustainable growth in their national economies.

Excerpts from the interview follow.

Q: Why have remittances to LDCs seen this sudden jump in recent years?

Brain Drain into Brain Gain

To turn the brain drain into ‘brain gain’ and to make remittances work for development, irrespective of the level of education of the migrant, UNCTAD recommends lowering the cost of transferring funds, which is exceptionally high in the LDCs – 12 percent on average – thereby forcing people to send money informally, typically through friends.

If countries lowered these costs by creating a competitive environment – in sub-Saharan Africa, for instance, 65 percent of remittances are channeled through Western Union and MoneyGram – foreign exchange would stay in the banks.

A full range of actors could contribute to this diversification, like post offices in rural areas, micro finance institutions, public sector remittances service providers and even mobile phones providers.

Additionally, workers going back home should be allowed to hold an account in foreign currency.
A: At the least developed countries (LDCs) conference in Istanbul last year, we emphasised the principle of less aid dependence. This meant that we had to find alternative means of mobilising funds from abroad. After the economic crisis, remittances have become an important source of income for the poorest countries of the world – they are ‘recession proof’ because they are driven by patriotic motives and originate mainly in other Southern countries.

The primary purpose of these private transfers is to help (migrants’) families back home and very few countries are trying to (turn that money) into profits for the whole economy. Some migrant workers have managed to set up small businesses, but the potential is far from being fully harnessed.

Q: How can UNCTAD help turn a wasted opportunity into a profitable one?

A: UNCTAD has a unique position to deal with the LDCs and persuade governments to adopt specific policies to mainstream remittances into national development strategies. These private flows should be linked to new industrial policies. Development institutions should provide supplementary financing to returning migrant workers to encourage them to use their knowledge and accumulated savings in building productive capacities.

Governments should be able to protect small businesses by sequencing trade liberalisation. Infant industry protection may appear a bit naïve nowadays, but governments still need to support small and medium enterprises in certain areas, though not forever.  Adopting permanent trade distorting policies is not the way. We still believe in free trade.

Q: Given that 80 percent of LDC migrants move to other developing countries, shouldn’t industrialised countries revise their migration policies and open up their border to unskilled labour?

A: While full trade liberalisation would only add one percent to the world’s GDP, full labour liberalisation could (result) in a 100 percent increase since a person’s productivity can double when going abroad. Recently, people have been looking at migration through a different lens. The more mobile labour becomes, the more productivity increases. And there is no crowding out because most of the time migrant workers go into areas of employment where nationals don’t want to work.

Q: Is the emphasis on remittances an acknowledgement of the failure of trade and investment in the LDCs?

A: It is true that FDI and remittances have flowed in reverse correlation. For the weaker countries, FDI goes only into extractive industries that do not (create) jobs. And due to the ‘race to the bottom’ (competition between host countries to attract investment by lowering wages, taxes and standards), these countries have lost revenue.

UNCTAD is also worried by the involvement of transnational corporations. The problem with FDI is that it is tied to conditionalities and driven by gain, whereas remittances are not conditioned by anybody. Therefore, given that one in five people with university-level education from the LDCs lives abroad, mainly in developed countries, improving and mobilising FDI would be one way for LDCs to avoid the brain drain.

Indeed, brain drain is the downside of remittances: two million educated people from the LDCs live abroad. The loss of knowledge and know-how for the home countries in key sectors like health and education – there are more Ethiopian university professors in the United States than in Ethiopia – could outweigh the benefits of remittances. Other adverse effects are the potential distortion of local prices and the increase of the exchange rate.


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