Remittances to Latin America and the Caribbean set a new record high last year, at a total of $65.4 billion, the Inter-American Development Bank revealed Tuesday.
Cuba, in particular, is in the spotlight as new U.S. policies permit an influx of remittances and as U.S. investment in the Caribbean island nation begins to take root. Development actors are watching to see how these capital flows will affect the Cuban economy — and how they might leverage them to maximize development impact.
Donor agencies have a role to play in making sure remittances reach more people at lower costs, according to Dan Runde, director of the project on prosperity and development at the Center for Strategic and International Studies.
Technology, innovations in finance, increases in market competition and changes in financial and regulatory environments and payment systems that facilitate remittances are all appropriate uses of official development assistance dollars in this important area, he told Devex.
“In the past 10 years, the development community has woken up to the power and size of remittances, but given their size haven’t gotten the full attention they deserve. We can still be more strategic,” he said.
The U.S. government’s decision to allow more remittances to move from the U.S. to Cuba — a major part of the administration’s recent effort to thaw a long, fraught relationship with a country less than 100 miles from Florida — has sparked debate about whether such cash transfers might actually introduce greater inequality, undercutting pro-poor interventions on the impoverished island nation and around the world.
A recent report on The New York Times argued that Cuba’s inequality gap is already growing and could further increase due to the higher remittances cap for a simple reason: While some Cubans receive money from connections overseas, others do not. Devex spoke to remittances experts who have a different take on the impact of these overseas capital flows for poverty and development.
They rejected any simple causal connection between remittances and inequality and argued that what’s really needed is a more nuanced understanding of how aid organizations can help channel remittance flows for greater development impact.
Do remittances drive inequality?
“Remittances benefit the bottom of the pyramid, and we have done studies to demonstrate that they don’t skew income distribution,” said Manuel Orozco, senior fellow on migration, remittances and development for the Inter-American Dialogue, who has measured remittance flows to Cuba for more than a decade.
At the World Bank, Dilip Ratha, manager of the migration and remittances unit, said empirical evidence shows that after receiving remittances, income inequality of a society often goes down.
“Remittances coming in reduce poverty and reduce inequality overall. Nobody loses in this process,” Ratha told Devex.
Orozco and Bilboa said nonrecipient households benefit over time from the cash that recipients put into the economy — purchases on food, clothing, housing, entertainment and transport — generate income and employment, and tax revenue the government could use to provide services.
“This is a way to start a business and then employ others, and everyone will benefit as prices go down and job creation goes up,” said Tomas Bilbao, executive director of The Cuba Study Group.
Bilbao, who recently visited Cuba to assess its fledgling markets, told Devex that remittances have an equalizing effect in an economy where access to wealth previously depended on an individual’s level of Communist party loyalty.
While the debate continues, attention is turning to what donors and nongovernmental organizations can do to leverage these financial flows, which often dwarf international aid. As expectations rise ahead of the Financing for Development Summit in Addis Ababa, Ethiopia, in July, development leaders are increasingly bent on finding ways to tap new sources of financing for social good and poverty alleviation.
Here are three ways NGOs can work to tap into these rising money flows to help amplify development goals.
1. Advocate for lower transaction costs.
NGOs can use their political muscle to convince policymakers to lower transaction costs of cash transfers.
Migrants currently pay fees averaging 9 percent of the amount they remit, Ratha said, with prices higher in places of lower transfer volumes. Reducing transaction costs puts more money directly into the hands of migrants who send and receive remittances.
NGOs can encourage policymakers to allow migrants to pay a flat low fee rather than a percentage, and improve retail payment systems by encouraging better use of technologies such as mobile phones.
2. Meet recipients at transaction points — and offer additional services.
NGOs can provide information for recipients to learn the importance of and procedures to formalize their savings by opening bank accounts, and the points of contact between clients and the institutions where they receive remittances presents an opportunity to make that connection.
NGOs can also work to expand access by introducing technologies that offer these direct links between transfers and savings programs. Expanding payout networks in rural areas is also important to increasing access.
Many Cubans do not have bank accounts, and the lack of a microlending culture hampers wealth generation. U.S.-based nonprofits can “help fill that gap,” Ratha said.
Under a well-functioning microfinance system, remittances can be seen as a key factor for credit evaluation, and more recipients should be educated on how to parlay remittances into higher savings capacity, Orozco said.
3. Collect more remittances data to better track flows.
NGOs can assist in better data collection and monitoring by collecting data specifically on remittances.
Attaching numbers to the volume of remittances has helped revolutionize our understanding of — and ability to leverage — the connection between migration and development, Ratha said. Many financial flows continue to travel through informal channels though, and these go largely uncounted.
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