Empowering families to finance development with remittances and diaspora savings

We all know it: there is no one magic formula when it comes to financing for development. The solution is a mix: public and private funds, domestic and international resources, and innovative financing. But we should not overlook that people from developing countries can also fund their own development. However, we need to empower them to do so.

As world leaders gather in Ethiopia in July for the Third International Conference on Financing for Development (FfD) to discuss the mix of resources necessary to make the vision of a sustainable future a reality, we need to ensure that remittances and savings by diasporas are not ignored. Remittances—the money migrant workers send back home to their families—hold strong promise for development and so too do the enormous savings of diaspora communities. But today too many barriers still prevent these private funds from meeting their development potential.

Remittance flows are significant. In 2014, remittances amounted to $436 billion and support 750 million people in the world. This global figure has been steadily increasing for years and could soon reach $500 billion a year. In Europe alone, remittances amounted to $109 billion last year, according to a recent report “Sending Money Home: European flows and markets” released by the International Fund for Agricultural Development (IFAD)

Global remittances exceed official development assistance (ODA) by at least three times and even surpass foreign direct investments in many countries. In small countries, remittances can be larger than or equal to foreign exchange reserves; they also often represent a substantial share of GDP.

The majority of remittances received are used for basic goods such as food, clothing, shelter, medicine, and education. However, studies indicate that globally about $80 billion—about 20 percent of remittances—could be available for investments if migrant workers and receiving families were given more options to use their funds. Of that amount, about $34 billion would be available in rural areas.

IFAD’s 40 years of experience show that investing in rural people is a viable business proposition and delivers direct and immediate income, employment, and environmental and social benefits.

Directing funds to agricultural development is fundamental: about 78 percent of the world’s poor people live in rural areas and rely on agriculture for a living.

Many barriers still exist preventing the productive use of remittances in rural areas. We need to support rural families to use their money to build better lives for themselves.

Costs are a first barrier to the full potential of remittances for development. The average cost of sending money home has come down to below 8 percent from 15 percent over the last five years. But this is still too high, particularly in parts of Africa where costs can be above 12 percent. Reducing these costs to 3 percent would put more than $20 billion annually in the pockets of migrants and their relatives.

Receiving remittances in remote and rural areas can be particularly challenging, with people having to walk miles to reach the closest receiving point and travelling back with significant amounts of money with them. Mobile and online technologies are fundamental to reach this “last mile.”

But the most formidable barrier is lack of access to basic financial services that would give families more options on how to use these funds. Access to savings and credit is key if families want to invest. In rural areas, only about 10 percent of poor rural people have access to the most basic financial services. This is now changing. In the last three years, over 700 million people gained access to a bank account, according to the World Bank’s FINDEX survey.

Governments can also make sure family farms are connected to markets, with roads, power, cold storage, and access to seeds and fertilizers. If they are, remittances can be used for investments that raise small farm productivity. Money is not the problem. The lack of good opportunities and enabling investment mechanisms are.

Remittances and diaspora savings are not a magic formula by themselves. And they are not a substitute for ODA or other private sources of funding for development. Indeed, it will be the right mix of resources and the quality of those investments on which success will depend. But whatever the formula we agree on in Ethiopia, the most important aspect will be ensuring that investments respond to the needs of rural people in their own local context. Remittances are an additional resource in the hands of millions of families who would like to be given the opportunity to build better lives for themselves and their communities.

IFAD will co-host the FfD side event “Realizing the Vision: Investing in Rural People for Inclusive and Sustainable Transformation” with the Republic of Ireland, Kingdom of the Netherlands, and the Republic of Rwanda on July 14. 
The event will be moderated by Homi Kharas, co-editor of the Future Development blog and senior fellow and deputy director of the global economy and development program at the Brookings Institution.