Immigration: the African "remittance super tax"

23/06/2014

A constant theme of this blog is that, if we are effectively to manage the global phenomenon of mass migration, in the national interest, then we need to address the "push" and "pull" factors – those factors which drive would-be migrants from their homes, and those which attract them to this country, allow them entry and enable them to stay.

On the other hand, there is a credible argument that we need to allow in some immigrants, and not only highly-skilled workers. There is a shortage of people prepared to do low-end tasks, for low wages, and this is a gap that is filled by one class of migrant worker.

The ideal in this context is that we are able to attract "guest workers" from developing countries, but have them return to their countries of origin after a number of years, thus minimising the calls on the host country infrastructure. This "return migration" was, to an extent, achieved by Germany which, since the war, attracted 27 million Turkish workers, of which 25 million have returned to Turkey or moved onwards to other countries – so called "secondary migration".

To encourage this flow, and in an attempt to stem the flow of unwanted migration, governments are increasingly focusing their aid programmes to measures directed at keeping indigenous populations at home, to which effect, the UK boasts a huge £11bn aid budget, some of which is directed at that aim.

However, it has long been demonstrated that government-managed aid is notoriously ineffective in securing stated (or any) objectives. In fact, by sustaining corrupt and inefficient regimes, such aid often has effects opposite to that intended.

That is not to say, though, that foreign aid is wholly ineffective in mitigating migrant flows. The important thing is to promote the right sort of aid, encouraging the right sort of transfers, and making sure they reach the places where they can do most good, with minimum formality and cost.

Here, it is now being recognised that one of the most efficient forms of aid to developing countries – if not the most efficient – is "workers' remittances". This is money sent by guest workers to their extended families back home, forming an important source of development aid, that has not always been fully acknowledged.

These remittances – as we remark in our Flexcit plan involve serious money, and very considerable growth over recent years.

A report published in the year 2000 by the ILO noted that between 1965 and 1990, the total number of migrants had increased from 75 to 120 million. This increase was associated with growing flows of remittances, which in some countries exceeded foreign aid. Whereas the total value of official remittances amounted to less than $2 billion in 1970, it had increased to $73 billion per year.

The total value of remittances, including those via informal channels, was thought likely to be at least twice as high as total remittances flows through official channels.

Thus, by 2005, the figure was being reported as $167 billion globally, which then dwarfed all forms of international aid combined. In 2012, the total for the EU27 was estimated at €38.8bn, almost three quarters of which (€28.4bn) went outside the bloc. Global transfers had topped $530bn (£335bn), according to the World Bank.

Inasmuch as they are an effective, targeted form of aid, such remittances perform a valuable role in economic development, narrowing the gap between host and recipient countries.

Thus, even though they are by-product of worker migration, they have the almost perverse effect – potentially at least - of preventing further migration. Even without that effect, though, they play a significant role in stabilising less developed economies, reducing migration pressure. In Senegal, they account for nearly eleven percent of GDP.

Several reports also attest to the role of these remittances in encouraging return migration, with an OECD report setting out the reasons why return migration takes place.

Crucially, the report notes that migrant mobility is greater between countries at a similar level of development. When income disparities are greater, migrants are more likely to stay put. Return rates to OECD countries are on average twice as high as those to developing countries.

Thus, as remittances help to close the gap between host and developing countries, the very people who made this happen then tend to follow their own money, and return home to enjoy the benefits of the prosperity they have helped create.

However, there is a massive caveat. Looking at the profile those who transfer cash abroad, there is good evidence suggesting the obvious: that there are higher remittances if family remains in country of origin. Men between 31 and 40 years old with family left behind and who are attached to their home country are also more likely to remit.

Thus, the ECHR mandated policy of insisting that host countries allow family re-unification is the very antithesis of good policy. This breaks the ties between the country of origin and the migrant, reducing the flow of funds, reducing the likelihood that the migrants will return, and imposing greater numbers of non-economically active migrants on host countries.

Therefore, if one takes the view that "workers' remittances", there should be no pro-active policy of family reunification. In fact, in the interests of both host and developed countries, it is far better if this is not routinely permitted.

That aside, if these remittances are regarded as advantageous, it is essential that transfers are simple to make, and are cheap. However, there is now good evidence of significant market failures in transmitting funds to recipients, ranging from high transactional costs to the lack of banking facilities.

The problem is at its most severe in Africa, and in West Africa, charges on remittance transfers, levied by what amounts to a "duopoly" of money transfer operators, are the highest in the world at around 12.3 percent of sums remitted.

Just two money transfer operators (MTOs): companies – Western Union and MoneyGram – account for 80 per cent of transfers to Africa. Both companies operate exclusivity agreements with their agents and commercial banks, which raises the cost of market entry. They account for $900 million taken from African migrants and their families through excessive charging.

Many MTOs appear to charge an "African fee" that is uniform and unrelated to underlying conditions in the receiving countries. There is also evidence that MTOs are able to manipulate exchange rate variations. In March 2011, Malawians remitting money from the United Kingdom faced a foreign currency conversion fee in excess of five percent.

If what is termed a "remittance super tax" (see graphic above) on Africa was reduced to the global average of 7.8 percent, it could save the region $1.4-2.3bn a year - averaging $1.85bn. If reduced to the G8/G20 suggested level of five percent, the reduction would generate an additional $900 million.

Applied to constructive uses, this could send 14 million children to school, almost half the region's out-of-school population, give eight million people access to improved sanitation, or give 21 million people access to safe water.

Yet, reports have been highlighting the excessive charging and other constraints on transfers for over a decade and despite repeated calls for urgent action, little has been done. Arguably, this represents another failure (in part) of the EU and of the UK as part of the EU system – and an egregious failure of the UK aid system.

Yet there are readily simple ways of by-passing the profiteers. In Kenya, the mobile phone company, Safaricom, 40 percent owned by Vodafone, permits customers to withdraw or transfer cash through one of the 40,000 M-PESA agents operating across the country. The company makes its money by charging a small transaction fee when, but the cost is about half that of other formal domestic remittance services.

Locked into the EU system, where aid priorities are decided by the EEAS and the European Council, the UK has been slow to recognise the need to address this problem. Yet, in tacking directly, the root causes of migration, it is very much in the national interest that better transfer systems are in place.

These – as much as the tightening of any border controls - are the sort of things that need to be part of any rational immigration policy. At relatively modest cost, we can weaken some of the push factors, and indeed create a reverse "pull", attracting migrants back to their countries of origin.

Arguably, this is also another good reason why the UK should leave the EU. An independent UK might be better prepared to recognise and then promote a more effective policy, taking into account known issues such as these, which appear to have fallen through the policy gaps, attracting little attention from the EU.

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