Live from CoF: Remittances—The New Way to Alleviate Poverty

People concerned about alleviating poverty in less developed nations focus most of their efforts on well-known programs like foreign aid, microfinance, foreign direct investment, and the like. But there is another source of money flowing from the developed world to the less developed world that dwarfs these traditional forms of aid and is arguably more effective, but is not well known or understood.

That source of money is remittance—money earned by immigrant workers living in developed nations, like the U.S. or Germany, who send it back home to family members in developing nations, like El Salvador or Azerbaijan, to pay for food, housing, education, new businesses, savings, and other purposes.

In 2006, an estimated $60 billion was sent to Latin American nations by maids, car washers, carpenters, cooks, and other immigrant workers. About $45 billion of that money came from the U.S., another $10 billion from Europe, between $3 and $4 billion from Japan, and the rest from Canada, Australia, and other countries.

To put that number in perspective, the total amount of foreign direct investment (e.g. GM building an auto plant) in Latin America in 2006 was $45 billion, and the total amount of official development assistance (e.g. USAID money) was $6 billion.

About 57 percent of the remittance sent to Latin America is used for basic needs—things like food and rent. The other 43 percent of the money, close to $20 billion, goes for the following: 29 percent for education; 25 percent to start a business; 22 percent for savings; 11 percent to buy or build a home; 5 percent to buy health or life insurance; and 8 percent other.

And it’s not just a Latin American phenomenon. About 21 percent of the population of Moldova, for example, receives remittances on a regular basis. About 200 million immigrants around the world send remittances back home. Those remittances are distributed to an estimated 600 million family members. Altogether, about 800 million people send or receive remittance money, or about one out of every 10 people living on the planet. That’s a huge number, far larger than are directly impacted by microfinance, which gets far more hoopla and attention from the philanthropic and nonprofit communities.

The key difference between remittances and other forms of aid is that remittances are controlled directly by the people affected by poverty. The money doesn’t flow through a government agency, or a foundation, or an NGO. It goes directly from those who earn it to the people who need it and know best how to spend it. The only overhead is the transaction costs imposed by the money changers, such as Western Union. Because of this, remittance is certainly the most grassroots poverty reduction program there is, and arguably the most cost effective as well.

(Note: Thanks to Sergio Bendixen, president of Bendixen and Associates, and Donald Terry, manager of Multilateral Investment Fund, Inter-American Development Bank, for these statistics. Both spoke on a panel yesterday at the Council on Foundations annual conference in Seattle. The panel was called, appropriately enough, “Bottoms Up Philanthropy: How Remittances Transform Communities and Families.”)

Eric Nee is the managing editor of Stanford Social Innovation Review.

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