The Middle East and North Africa have been hit hard by the global recession. Several of the oil-rich Gulf states are in the midst of an economic contraction, with their famed sovereign wealth funds having lost 27 percent of their value in 2008. The Gulf states, along with the European Union, buy most of the non-oil exports of the Middle East and North Africa, so recessions in the importing countries mean depressed trade throughout the region. According to the World Bank, the average growth rate for the middle-income states of Egypt, Jordan, Lebanon, Morocco and Tunisia, which have little or no oil, is projected to fall to 3.9 percent in 2009, far below the levels of the 2001-2008 boom.
There is, however, a silver lining in the cloudy economic forecast for these middle-income countries. Remittances, the funds that emigrants to the Gulf states, Europe and elsewhere send back to household members who stay behind, are projected to remain strong. These transfers are a key source of hard currency. In every one of these countries except Lebanon, the yearly dollar amount of remittances exceeds foreign aid, international loans and foreign direct investment. In Jordan, remittances almost offset the trade deficit. In Egypt and Morocco, their contribution to the gross domestic product rivals that of tourism. Since 1980, over 10 percent of GDP in Egypt, Jordan and Lebanon has come from workers in the Gulf states alone.
In 2008, foreign direct investment in these five middle-income countries decreased to $22.5 billion, but workers’ remittances continued to climb, to $328 billion. The World Bank projects a slight 6 percent decline in the dollar amount of remittances throughout the region in 2009, but they should increase again in 2010 and 2011. Even if the dollar amount of remittances falls, the purchasing power of these funds in the receiving countries is higher than in the recent past, because food and fuel prices have dropped along with the downturn.
Studies published by the International Monetary Fund have revealed that, at moments of economic crisis, remittances are both stable and counter-cyclical. Crisis in the workers’ country of origin predictably pushes remittances up, because their families’ need is greater, but also because the exchange rates into the local currency are more favorable. Crisis in the host country, as in the Gulf states, Europe and the United States at present, can push remittances down, but not always. On occasion workers have sent more money home, because investment there is a better bet than in their country of residence. The reasons why workers send money home are complex and it is unknown whether current trends will be sustained. For some workers, the impetus may be portfolio diversification, the desire to spread investments across two economies. For others, it may be a simple obligation to family that must be met even at times of hardship. Since remittance amounts can be quite small, temporary economic downturns do not necessarily disrupt them. All but the most destitute workers usually manage to keep up the payments.
The ministers of finance in Egypt, Jordan, Lebanon, Morocco and Tunisia are likely lamenting the drop in foreign direct investment, but for various reasons the hard currency that comes from expatriate labor is often more directly beneficial to the population. Studies show that receiving households use the bulk of the money for consumption rather than production—meaning that remittances rescue numerous families from falling back into poverty. The families first meet their basic needs of food, clothing and shelter, and then pay for health care and education. Nutrition, public health and literacy levels all improve as a result.
Remittances are also an important driver of local economic activity. The food that emigrants’ families purchase comes from domestic producers. Families sometimes also use remittances to build a new house, finance a small business or pay off a mortgage. The construction of new houses and shops creates jobs for unskilled and semi-skilled laborers and stimulates demand for building materials. In one study of a Mexican village, economists calculated that $1 of remittances generated an additional $1.78 of village income, because of the expenditures of the receiving household.
Besides these basic economic functions, remittances could, if captured and channeled, bankroll localized forms of development in the receiving countries. Persistent underdevelopment remains a key problem in the labor-exporting countries. The heavily courted foreign direct investor seeks financial return alone — often the highest return possible — as do local commercial banks. This predilection leads to development projects that offer fewer direct benefits to local communities. Remittance investors, by contrast, may be willing to invest in low-yield projects in return for the social and emotional return of seeing positive developments in their home region. In Catalonia and Marseilles, Moroccan emigrants have done just that, establishing associations to pool their funds and channel them into infrastructure and development projects in Morocco. These associations have built dams, irrigation systems and roads in such places as al-Hoceima in the north, Oujda near the Algerian border and Tarouddant in the south. The European Investment Bank reports that Moroccans living abroad increasingly transfer their capital to Morocco, with 84 percent of investments in real estate, 7.5 percent in agriculture and the remainder in the tourism, industry and retail sectors.
A new task force established among nine banks in the Euro-Mediterranean region, and supported by the European Investment Bank and the French government development agency, will help to facilitate this process. Launched in July 2008, this task force will work to develop products and services for emigrants in Europe that can help meet remittance, savings and investment needs, including supporting medium- to long-term investments (such as infrastructure projects) in southern Mediterranean countries. Through such ventures, remitters may increasingly become investors in fledgling stock exchanges and corporate debt markets.
Seeing remitters as consumers of financial products and services could become the key to augmenting the development potential of remittance flows. Currently, remittances travel by routes both formal and informal — but are usually transferred in the form of cash. Emigrants often have more familiarity with informal channels, particularly if they are low-income, less educated or rural in origin, and need the services of people who speak their language and operate close to their homes (in the host country) and to their families (in the receiving country). The recipients may live in rural areas that lack banks or be too poor to have accounts. So emigrants may carry the cash themselves or ask a friend to do it for them. Or businessmen and traders who have a need for foreign currency serve as informal moneychangers and transmission agents. A third route goes through formal and informal money transfer agencies, including the customary hawalas. Following the September 11, 2001 attacks, and the campaign in the West to track “terrorist financing” in money transfers to the Middle East, commercial banks and other regulated entities have left the money transfer business or begun charging high prices for their services. So the informal channels have become increasingly important to emigrants and their families.
Indeed, the major barrier to taking remittances out of cash-to-cash channels and developing remittance-based financial products and services is regulation. Both sending and receiving countries seek to monitor remittance flows, in part to detect bad actors like terrorists and smugglers. Furthermore, receiving countries have restrictive licensing regimes and rigid foreign exchange controls. These policies lead to a higher cost of services in the formal transmission channels. Additionally, financial regulators often lack tolerance for the small-scale, semi-formal providers of financial services that dominate in receiving communities. These local financial services providers, however, may be the very key to leveraging remittances.
Here we see the repetition of a common problem in national development policy. Historically, governments have failed to recognize that portions of the population remain poorly integrated into the mainstream economy. Some communities — poor, less educated, separated by geography, culture or both from the capitalist centers of the country — lack the ability to gain access to large-scale, formal-sector institutions. These tighter-knit communities often operate through personal ties, which seem to them (and often are) more trustworthy, reliable and accessible than banks and other formal institutions. Local and small-scale institutions that become remittance intermediaries have the virtues of trust, reliability and accessibility in the eyes of the local community. Policymakers should allow for segmentation of the remittance industry — both because the customers demand it and because of the development possibilities. Remittances and the emigrants who send or bring them home may thereby be able to bridge the gap between these underserved communities and the lofty development goals of middle-income states.
At the most modest level, if the channel could be shifted from cash to an account, recipient families might be better able to save the money rather than spend it immediately. Additionally, the depository institution could use the funds to extend credit to others. More ambitiously, financial products could be tied directly to the transfer channel; for instance, a money remitter could offer insurance for a construction project that would serve the public good. If such financial products offered an attractive alternative to residential real estate investment, then emigrants would funnel their dollars into those vehicles. Strategic partnerships between financial institutions and local NGOs could also serve this goal. In order for such innovations to take root, however, policymakers in the middle-income states of the Middle East and North Africa need to develop a new tolerance for small-scale, non-traditional providers of financial services in order to capitalize on the promise of remittances and promote economic growth for all their citizens.