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CENTER FOR GLOBAL DEVELOPMENT REMITTANCES AND THE WAR ON GLOBAL POVERTY: PRIVATE SECTOR INNOVATIONS AND PUBLIC POLICY ISSUES Tuesday, October 12, 2004 4:00 p.m. - 5:30 p.m. Peter G. Peterson Conference Center 1750 Massachusetts Avenue, N.W. Washington, D.C. [TRANSCRIPT PREPARED FROM A TAPE RECORDING.] 1

C O N T E N T S A Panel Discussion with ERNESTO President, Grupo Quisqueyana DEVESH University Center for Global Development Author: The Global War for Talent LOIS Office of International Banking, U.S. Department of Treasury CERSTIN Consulting Moderated by Nancy Birdsall 2

P R O C E E D I N G S MS. BIRDSALL: --session on something that's become a hot topic, Remittances and the War on Global Poverty: Private Sector Innovations and Public Policy Issues. I'm the president of the Center for Global Development, and I'm delighted to be cosponsoring this event with colleagues at DAI, Development Alternatives Inc., and to have the support and help of the Society for International Development in bringing all of you here. I'm very interested to see the large number of people that are curious or knowledgeable, or both, about remittances. I wanted to start with a word of why, from the point of view of the Center for Global Development, this is an important topic and an interesting topic. As many of you will know, the Center is concerned with the impact of rich country policies and of global institutions on developing countries and on their prospects for growth and on the poor within those countries. So the issue of how remittances--well, the new facts about the increases and the large volume of remittances have brought to us the question of what is the development impact of these remittance flows. It's relevant to us in particular for our Index, which measures the commitment to development of rich countries, in which we have a component that looks at migration policies across the 3

21 rich countries. And in the context of that component we have learned more about and become more interested in the remittance issue. We're also very concerned with the impact that public policy can have in harnessing market mechanisms to ensure that remittances can move at low cost to the senders and can be used to foster development on the part of the recipients. And you'll be hearing lots about that today. Many of you will know, it says in the program that there's $80 billion reported in remittances. I heard John Taylor, who's the under secretary of Treasury, say in a public forum about a month ago that the number is more like $150 billion a year that goes in remittances, which would be almost three times the volume of annual flows of foreign aid to developing countries--although that's apples and oranges; shouldn't really be compared. And it's certainly an amount that's comparable in gains to the potential benefits to developing countries, of rich countries liberalizing their trade, as my colleague Phil Kline [ph] pointed out in a recent book that we published by him. But on the other hand, remittances are highly concentrated in a few countries, and we really--I'm not sure we know that much about their specific development impact. We know they raise welfare of their recipients, but do they make a difference in fostering long-term, sustainable, and equitable growth? 4

So let us go straight away to each of our panelists, each of whom has something to say, I think, that brings a somewhat different perspective. And together I expect to learn a lot from this session. We'll begin with Ernesto Armenteros, who is the president of Grupo Quisqueyana. Well, it says--yes, he's the president. And he's going to tell you more about what that group does. Since he left school in 1985 in Montreal, he's been, as he describes it--he didn't put it this way, but he's been in the banking business. And he's found a niche that is really quite interesting. His group serves a half a million customers in 31 countries. I'll introduce people one at a time. So Ernesto, you have the microphone. MR. ARMENTEROS: Okay, thank you. A couple of corrections. I'm CEO, not president. And it was '88 I came out of school. MS. BIRDSALL: You're still young. No problem. MR. ARMENTEROS: I've been doing this for 18 years now, remittances. That's all I've done. And I'm going to start by describing what I think is a perfect remittance. A perfect remittance is one that is transacted over the Internet, whose fees are paid with a credit or a debit card, that is complemented with offers for basic financial services like savings and checking accounts, mortgages, car financing, et cetera, on both the send and 5

receive side, that is processed through though controls and neutralize the risk of money laundering and/or fraud, that is delivered on plastic--and by "plastic," I mean it's delivered on a debit or a credit card through a completely automatic process, and that that plastic is usable in a wide network of merchants, ATMs, and financial institutions. A perfect remittance to me also is well complemented with incentive for investment in development of the hometown of the sender and the recipient, which is usually the same. And it costs less than $5 to send, process, and deliver. Now, I going to risk making a fool of myself, but I'm going to make a prediction. It's going to take between 10 and 20 years for, I'd say, over 70, 80 percent of remittances to be processed and delivered this way. And it's going to take about that long for about 15 percent of the total flow to be optimized, or maximized, its impact on development. I can guess that it's not going to be the U.S. on the send side, the first one to get there. I believe it's going to be Spain, a country like Spain--at that stage of development--and on the receive side it's going to be a small, highly wired country like the Dominican Republic. I would say the Dominican Republic, not because I'm Dominican but this is--I'll explain to you why in a little while. Now, what qualifies me to say that? When I started in '88, 95 percent of my volume, which totals half a 6

million dollars a year, seven employees, was sent by clients of a savings and loan we bought the company from to their families, through the savings and loan, to pay for mortgages, to savings, et cetera, et cetera. I spent the first four years of my working life trying to figure out how to grow. It took me awhile to realize that about 90 percent of the total remittances are actually meant to be consumed right away. They're meant for day-to-day needs--food, rent, housing, things that need to be spent right away. And only when I figured out that if we developed a capability to deliver quickly, person-to-person, we could grow outside of that. For the following five years, we actually had people in our branches trying to open accounts in the savings and loans and buying mortgages, et cetera, until the banking superintendent in New York told us it looked too much like a bank and if we wanted to do that, we should get a license. So we had to dislodge it and separate. I've also spent--we also started about five or six years ago experimenting with the Internet as a tool to get remittances and plastic--an alliance with Visa International, Bank of Italy and Mexico, and Banco Mercantile in the Dominican Republic to try deliver in plastic. And we spent all that time tinkering with the pricing and what works, what doesn't, and see how much it takes. We have branches in the U.S., in Europe, in Puerto 7

Rico; agents. We've tried a lot of different things. We've tried maybe 50 different services out of which 21 have actually taken. Now, these are the specific hurdles that I see to getting to a perfect remittance and why I say this is going to take that long. There's a limited penetration of the Internet as a commercial outlet amongst first-generation immigrants. Although the Internet has 80 percent adoption level in the U.S. and Europe, in the immigrant communities it has--I've seen anything from 25 to 50 percent. So it's a limited penetration of the Internet which needs to be substituted by actually--by bricks and mortar outlets to deliver the service. There's a limited penetration of plastic as a preferred method of payment amongst first-generation immigrants. It's still a cash economy on the send side, on the community, and on the receive side there's about 20 percent penetration of plastic as a substitute of cash. So people, to operate, need to get cash. Plastic is in many cases useless. Limited and mismatched footprint of financial institutions in immigrant communities, on the send and receive side. Banks up to now have catered to the middle income, higher-income level, so their footprint is actually in the neighborhoods where they live. That applies to the U.S., Europe, Japan--the senders--and in the receive side 8

also. So you have that in New York, for example, there's 10 remittance outlets for every one bank. And north of 125th Street in Manhattan, there's a hundred banks, there's a thousand remittance agencies. That's the ratio, more or less. And they're not only too few--you have to walk or drive long ways to get there, for the immigrant to go there -but they're in the wrong neighborhoods. There are prohibiting barriers to entry into banks for first-generation immigrants, specifically in the U.S. It's become an immigration issue. A first-generation immigrant that doesn't have papers can't walk into a bank and open an account. He can in Spain. So the door is open there, so there's a better chance that person will be brought into the financial mainstream. Here it's become a huge problem. So they're marginalized by that wall. There's a ceiling to the percentage of remittances, senders and receivers, earmarked for investment. Like I said, it's south of 15 percent. Limited penetration of plastic as a substitute of cash for commerce in the recipient country. There's a weak effort by development organizations in reaching first-generation immigrants and their families. And regulators and legislators and banks are doing things, many times with good intentions, that drive costs up instead of down. Now, how to overcome these hurdles to get to the perfect remittance. 9

There needs to be heavy investment and increasing penetration of Internet amongst first-generation immigrants. There needs to be investment in increasing the adoption of plastic as a substitute for cash amongst first generation immigrants and their recipients. There has to be alliances with financial outfits, like cooperatives and ONGs that have better footprints than banks--they're represented in the right neighborhoods. Lower the barriers for entering the financial mainstream for first-generation immigrants and their recipients. Foster alliances between specialized remitters and development organizations and financial institutions to increase reach. Be realistic about what percentage of the flow actually has potential as investment and savings. Fend off over-regulation or taxing of remittance flow to decrease costs. And attack the hurdles, not the companies that bridge those deficiencies while the rest of the market catches up. That's basically a summary of it. MS. BIRDSALL: Thank you very much, Ernesto, and thank you for being so good about your allotted 10 minutes. We turn next to Cerstin Sander, who is a senior consultant with Bannock Consulting, which is related to DAI. 10

She's spent 15 years working on international development issues, including at the International Development Research Center, IDRC, in Canada and with the Austrian Development Corporation. She has had assignments in Africa, Asia, the Caribbean, Latin America, parts of the former Soviet Union, covering issues of microfinance, micro and small enterprise development, performance, and evaluation, and so on. She is the editor of Migrant Remittances, a quarterly newsletter offering a forum to share information about this subject. Cerstin? MS. SANDER: Thanks very much, Nancy. Nancy's a ruthless time manager, so I'll try to stick within the timeframe as well. But thanks very much to the organizers and to Nancy for the opportunity to be here today and for being invited as an expert. At the same time, I'm very conscious that amongst the audience I suspect there are many experts. Some of them I know, and others maybe don't know themselves that they're experts, because most migrants are actually experts at this topic themselves. So if I took a poll, I'm sure there would be many of the experts among you. That's also part of the reason why I look forward to a very good discussion later on. What I wanted to touch on today are two key messages. One of the areas that Nancy touched on is the whole question of the impact of remittances on development. 11

And I think overall there is agreement that remittances contribute much to poverty reduction and they do so outside of structured initiatives. There is also agreement that they could do so more if they were better understood, attractive to the formal financial channels, and policy and regulatory frameworks and financial services and instruments took them into account better. The second key message is, really, to appreciate remittances as a private flow of capital. It's not a substitute or a lever for overseas development assistance. So the message is don't tax it, don't channel it, don't control it. The key is to provide the right environment as well as attractive products, services, and investment opportunities. So use the business opportunity of remittances for better and sustainable access to financial services of a large segment of the population. It's about financial inclusion and integration. As many of you know, remittances have long been discussed in the context of migration and livelihood debates. Only very recently there has also been recognition of the magnitude and scope of these flows, and that has come to broader attention. And that's in the context also of diminishing flows of aid, fickle foreign direct investment, and global initiatives on anti-money laundering and anti terrorist financing. 12

Now, depending on which interests prevail, perspective on remittances range in the extremes from being the latest panacea for lifting people out of poverty or come under severe suspicion of financing terrorist activities, either directly or indirectly, by being part of laundering money from illegal exports. On the spectrum as well, though, are those who seek to leverage remittances for the better communal good. And there also those who just want to see solid, affordable, and accessible financial services offered to the broadest possible segment. In very basic terms, however, from a development perspective, remittances are first and foremost a welfare system and satisfy consumption needs, as Ernesto pointed out as well. And those include human as well as capital investment--financing better food, health and education, but also savings, loans, businesses, and assets such as livestock and property. In a nutshell really, then, remittances are about income smoothing, welfare provision, but also about mutual insurance. They do have effects at the macro level, especially on things like foreign exchange reserves and import levels. And contributions to growth, while disputed at the moment and often dismissed by analysts, are really based on a very weak picture of data--which makes me always 13

wonder how can we assess whether there is a contribution to growth when we don't have good data to start with. From a development finance perspective, they constitute an opportunity to integrate an un- or under serviced client segment into the financial system, thereby allowing the system to leverage or use the funds as they do with savings, for instance, thereby also allowing the client to access other financial services in building their client profile--for instance, for access to credit. A related hope and increasingly a reality as well is that remittances are the opportunity for financial service providers to discover and serve a new client segment with profitable business volumes in what were previously shunned locations--in terms of the market opportunity, at least--and thereby reaching further into the rural areas and covering more of the last miles. So the use of the opportunity for financial inclusion is really happening to an increasing extent, some of them with home-grown and very limited methods, such as, you know, using checks or using the financial institution's account, but also with--and Ernesto pointed to these- technologies such as ATMs, debit cards, mobile phones, and the Internet. But the latter are still limited to markets where telecommunications infrastructure and market size are sufficient to offer such services. 14

More important, however, I think, might be the recognition by the financial industry of remittance senders and receivers as a client segment. Some banks, such as in Italy, Spain, and the U.S., for instance, have clearly recognized that banking this segment makes sense. In Italy, for instance, the term "migrant banking" is a strong and growing concept among regional savings and cooperative banks. Similarly, in Ecuador, Morocco, Portugal, Turkey, and some other receiving countries, a few banks have made this a focus for some of their products and services, such as mortgages. And you will notice that this list contains some countries which have had extensive migration, especially in the 1950s and '60s. So people really need financial services, transfer and other services, with a good outreach to go about their lives and business and to facilitate accumulation and building of assets. Facilitating and enabling requirements are the better ways to do this, as controlling and clamping down have the adverse effects of making remittance services move underground. Money transfer generally, and not just for remittances, is an excellent entry point for access to services and integrated financial services. And if you do surveys of low-income populations, you will find out that money transfer is actually the second most important 15

service, after savings, for them. And credit tends to be on rank 3. The technology solutions in this context are far from the hardest part, really. Enabling regulation and awareness among regulators, financial service providers, and migrants themselves as to the services available and also additional services or improvements can still go a long way in contributing to facilitating the role of remittances in reducing poverty and creating an opportunity for better access to financial services and investments. So while I've made part of the argument that remittances contribute much to poverty reduction outside of structured initiatives and could do more so if they were better understood, attractive to the formal channels, and the regulatory frameworks were better, and financial instruments as well, there are quite a few constraints that impede this. And I've just picked out a few in the context of what I call three dynamics. One is between potential actual clients and the industry themselves. There are information symmetries on both sides. For clients, they don't quite often know what the available services are. Migrants will typically go with the service that they know. They don't look for other services. And on the financial sector side, they quite often don't understand migrants or remittance receivers as a client segment. There is also a factor of familiarity--I go 16

with what I know--or a lack of a drive to change the way you do things both amongst the clients and the financial institutions. Another dynamic is between regulators and the financial industry, the money-transfer industry. For the regulator, from a very understandable perspective, there is a focus on protection. It's about consumer protection, it's about anti-money laundering, it's about protecting the financial system from exposure to, for instance, foreign exchange risks. There is also often--and this relates more to developing countries, maybe, but not exclusively--a lack of capacity to design and implement simple but modular regulations which have as their core values the appropriateness of services and the minimization of adverse effects. One of the examples, and Ernesto referred to this as well, is that with the anti-money laundering request to have Know Your Customer rules, there's been a big burden put in the industry in terms of identifying their customers, keeping those records as well. And it has led in many parts, actually, to much harder access and exclusion of population segments that can no longer open bank accounts or use certain services for financial products. A third dynamic is between the governments and industry more broadly. Just one example is the state borrowing with treasury bills and the market setting fairly 17

high rates tends to distort and deplete the market as well as giving returns to banks which providing other or better services often can't rival. And this, again, relates to a lot of developing country scenarios. So coming back to appreciating remittances as a private flow of capital, it's essential that we have an understanding of remittances in that way, that it's typically hard-earned money which distributes wealth within a kinship relationship. The right services and financial products can attract these funds to a mixture of consumption, savings, loan guarantees, insurance, investment, and so on. Much has happened in this context in many regions for greater outreach and effect on both the financial industry and remittance senders and receivers as clients. The industries, regulators, and governments need to work together to understand the flow, the client segment, and the business opportunity within an enabling and a regulatory framework which protects the client, but not at the cost of exclusion. MS. BIRDSALL: Thank you very much, Cerstin. We turn now to Lois Quinn, who is the deputy director of the U.S. Treasury's Office of International Banking and Securities Markets. She heads the Global Policy Division, which is responsible for a lot of things--the Basel II Accord to international accounting standards. Where was the rest of the list? Before that, she worked on 18

terrorist financing. She has been in Hong Kong as the Treasury's representative, and prior to that was in the private sector for many years. I hope that she's going to address, at least indirectly if not directly, some of the issues that were brought up already by our first two panelists regarding what can be a difficult tradeoff between making transactions costs lower for senders of remittances and issues such as anti-money laundering and the terrorist questions, security issues. Lois, thank you very much for being here. MS. QUINN: Thank you for this opportunity. There are going to be a lot of things that I had planned to say that Cerstin has already said, so we are sort of like on the same page. So I'll attempt not to make too many repetitions. But before I start, there are four caveats that I want to offer and I want you to bear in mind as I speak. One is the data on remittances is extremely poor. Even the G7 countries don't know how to monitor and collect this data and there are huge inconsistencies even in the data that they report for their balance of payments on remittances. The research is incomplete. There are some surveys on behavior, choice of remittance vehicles, characteristics of remittance senders and recipients, and the use of funds. But not enough research has been done for us to say for certain that this is the way it is. However, 19

there has been enough research and experience that we can draw upon to make informed judgments on where to begin, what the policy issues are, and what approaches might work. Third, the market is segmented. What matters to the sender and the recipient is availability of remittance services where they live, where the sender lives and where the recipient lives. It doesn't matter to them if there are great services from a big city in the country where they live to another big city in the country where the recipient lives. It has to be in the areas that they live and work. Finally, it's an extremely complex area for policy. There's no silver bullet. There's now a lot of interest in the issue and it's rightly seen as a win-win issue, but it's not easy to get there from here. It will take real financial resources, as Cerstin indicated, in developing the financial markets and access to the recipients and the senders, and it would take real changes in policy. These four caveats combine to create a particularly difficult policy-making environment. Policy decisions have to be based on far-from-perfect information. A policy action plan that works in one remittance corridor may not be the appropriate one for another remittance corridor. And policy has to be carefully balanced to meet conflicting objectives. 20

For example, credit cooperatives or credit unions offer the promise to provide remittance services to isolated communities. But historically, credit cooperatives have been vulnerable to mismanagement and corruption and they have been extremely poorly supervised. In many countries, credit cooperatives are barred from offering remittance services. So the policy question would be should these laws be changed, and if so, what type of supervision is necessary to prevent mismanagement, given that remittances could create a huge jump in the flow of funds through such institutions? Briefly, what do we know about remittances? We know they're huge. We don't know exactly what the order of magnitude is, but according to the World Bank, remittance flows last year were $93 billion--and that's just recorded flows. Unrecorded flows are also huge, and there are estimates that they're at least half the size of recorded flows and maybe actually equal in magnitude to recorded flows. And these unrecorded flows reflect, in part, problems with data collection, but they also reflect the widespread use of informal underground channels to send remittance flows. We know that remittances are extremely important. Recorded remittances alone are 3.5 times official financing flows to developing countries. They are a significant proportion of GDP for many developing countries. In Latin 21

America alone, there are six countries where remittance flows are equivalent to 10 percent of GDP or more. Remittances are a unique cross-border flow. They are generally, although not exclusively, from the poor and to the poor. There's no middle man making the decision on how to deploy these funds or second-guessing the sender and recipient on how best to meet their needs. It's extremely important that we remain mindful of this, particularly when we consider how to enhance the development potential of these remittance flows. In order to preserve the unique character of remittance flows, the focus should be on providing more options to the senders and the recipients. We should avoid the temptation to create vehicles that take the decision-making power out of the hands of the sender or the recipient. Remittances are not volatile. Unlike other private financial flows, they do not appear to be cyclical, and in several instances they have been shown to be counter cyclical. In some countries in Asia, they were a significant factor in preventing a worse situation during the Asian financial crisis. Remittances offer the potential to break the grip of poverty. Some studies indicate that recipients are more likely to have access to health care and to start small businesses, and their children are more likely to reach higher levels of educational attainment. But on this, the 22

jury is still out--and it should remain so until the data is better and the recipients have more options, including access to financial services that facilitate savings and investment. Finally, remittances are a potential catalyst for financial market deepening by drawing senders and recipients into the financial community and by providing a lure to private financial institutions to develop the capacity to serve this segment of the population, and by providing a compelling reason for governments to review and change financial sector policies which may be facilitating uncompetitive practices or providing a disincentive for innovation. The U.S. administration, and Treasury in particular, started working on this issue from two different angles. One was the counterterrorism financing angle and the other was from the development perspective. But it quickly became apparent that the issue was much bigger and that it was of relevance to many of our core areas of responsibility as well as those of other U.S. government agencies, and that work on this issue required a coordinate strategy. Given our role in financial policy, we at Treasury have focused most closely on two aspects of the remittance issue. One is financial market failure and the other is financial deepening. 23

The latter is part of the solution and the outcome of addressing remittance issues. Financial deepening is important because it is a critical factor in building financial stability and as a means to unleash the growth and development potential of an economy. On financial market failure: If estimates of the size of unrecorded flows are even close to correct, then one-third to one-half of all remittances are sent through informal or underground channels. That means that banks, credit unions, microfinance companies, wire services, and other formal financial institutions are not meeting the financial needs of remittance senders and recipients. The latter are believed to constitute a huge proportion of the global population. The Multilateral Investment Fund of the Inter-American Development Bank estimates that one out of 10 people in the world rely on remittances. Why aren't formal financial institutions meeting the needs of this market? The reasons can be grouped into three broad categories: Cost, inaccessibility, and the fear of or discomfort with formal financial institutions. Briefly on each of these three categories: Formal channels are typically very expensive. In this day and age, when we can withdraw funds from our D.C. checking accounts at virtually any ATM anywhere in the world for $2, give or take 50 cents, it's stunning that it costs so much--around $30--to send money to a friend or relative 24

overseas via formal channels. While the technology obviously exists to execute cross-border transactions cheaply, as in the ATM example, for the most part it hasn't been deployed to handle remittances. In some cases, financial institutions have deemed it too expensive to adopt these technologies. In others, regulatory barriers will only allow certain types of financial institutions to offer remittance services. And in still other cases, a lack of competition has limited incentives to launch new and innovative products and limited pressure to keep prices low. Until very recently, financial institutions--in particular commercial banks--have not been interested in serving this market, first, because they were unaware of the size of the market; second, because they thought remittances were one-time transactions rather than a series of periodic transactions sent by the same person generally to the same person, and they're at a loss as to how to reach the relevant segment of the population; finally, senders and recipients are often reluctant to use formal financial institutions for a variety of reasons, including that they may be unfamiliar with banks and financial institutions, they may not trust banks, the institution's hours may not work for them, and they may lack the necessary documentation, or think that they lack the necessary documentation. 25

Against this background, the U.S. administration has embarked upon a multi-faceted global remittance strategy to enhance the environment for the provision of remittance services. Drawing upon experience--ours with Mexico and the Multilateral Investment Fund's work in Latin America--we are focusing our efforts on six broad areas virtually simultaneously in order to address the factors which contribute to the high cost, lack of access, and reluctance to use remittance services, and the limited financial options for the use of remittance receipts in most markets. We are promoting competition through outreach with the private sector to underscore the potential of this market, identify regulatory impediments to the provision of remittance services, and eliminate anticompetitive practices. We are working to enhance the quality in cross country comparability of remittance data by encouraging the formation of an experts working group to develop refined guidance for countries on how to gather and report information on remittance flows. We are working to minimize the regulatory barriers and create a level playing field for financial service providers by calling upon the international standards setters to develop prudential guidelines for the regulation of remittance service providers. Our hope is that these will be minimum standards rather than high-bar standards. 26

We are encouraging the strengthening of the financial infrastructure for the electronic transmission of remittances by working with bilateral and multilateral partners to improve financial institutions, build strong domestic payment systems, and lay the groundwork for eventual cross-border links of these domestic payment systems. We are working to raise the level of comfort with remittance with remittance senders and recipients with formal financial institutions through outreach to the un banked and by encouraging financial institutions and others to launch financial literacy programs. Finally, we are working to minimize the risk of abuse of remittance channels by criminals or terrorists by working with our counterparts to enhance compliance with anti-money laundering and counterterrorism financing standards and working with our FATF counterparts on standards for wires that are not overly restrictive. These efforts are being carried out via a series of bilateral and multilateral initiatives, including the U.S.-Mexico Partnership for Prosperity; the APEC Remittance Initiative, which is focused on economic and institutional factors that contribute to the use of informal rather than formal channels for remittances; the G8 Sea Island Initiative, which is committed to working towards enhancing 27

the environment for the provision of remittance services; and the Summit Americas Initiative. Let me conclude by emphasizing the importance we subscribe to these issues and the importance of preserving the unique character of remittance flows from the poor directly to the poor as we seek to enhance the development impact of these funds. We believe that the emphasis of policy makers should be on enhancing the range of options faced by remittance senders and recipients, options on the services to use to send the funds, and options on how to deploy, save, and invest the funds. MS. BIRDSALL: Thank you very much, Lois. Finally, we turn to Devesh Kapur, who is an associate professor of government at Harvard University and a nonresident fellow of the Center for Global Development. We're very pleased that we will soon be publishing a new book of his entitled, The War for Global Talent: What It Means for Developing Countries. Devesh, I first met him many years ago--well, maybe not so many--when he was writing the book on the World Bank, its first half-century, which was published in 1997 by the Brookings Institution. He now brings a lot of creative thought to a number of big issues, including the role of public institutions in India and the impact of international human capital flows on developing countries. Maybe he's going to finally turn to the question 28

of whether these remittances make a difference within countries for development. points. MR. KAPUR: Thank you, Nancy. I think the point about the many sort of virtues of remittances have been made. So I'll just make four One, I think there are few cases where there's been as much hype about an issue with as little accurate data. The data on remittances which we've been looking at, it cannot be compared either across countries or over time. And there is certainly the case that in several countries there is considerable sort of round-tripping and money laundering. I realized this. I was doing a project with India's Central Bank on remittances--and India is the largest recipient. And as we began to cross-check the data, it was clear that what the bank was reporting was absolutely wrong. So it did what any good bureaucracy did--it canceled the research project. [Laughter.] MR. KAPUR: But it just gives you a sense of the many problems fraught. The second point is I think we recognize the contribution of the remittances to consumption and its virtues as a safety net and the insurance role which it plays both at the macro level and for households. But I want to emphasize that we have absolutely no evidence that 29

the remittances either improve growth or strengthen institutions. This is not surprising. Any country which has substantial remittances, they can only take place if you have a large degree of migration. And a large degree of migration is, in turn, usually a signal of deep institutional and economic failures rather than a signal of future success. Let me put it in a different way. In virtually all cases when you see remittances, it's a case that young people are leaving. And do we really believe that countries and societies will develop when they lack the most dynamic element of a labor force? I would argue that in almost every case where we see remittances which are on the order of 10 percent of GDP, that the long-term development prospects of that country, that those countries are not going to be the future Koreas or Taiwans. The third point I'd like to make is that the biggest contribution of remittances is in the case of weak or failed states, because of course there is no other source of financial flows. And I think this point has been made, is that there is a tension between trying to get these flows to the weaker countries, but also the need for having transparency because of security-related reasons. Somalia is a very good case. It's estimated that there remittances are between a third and 40 percent of GDP. We, of course, have no real sense. And then after September 11th, the U.S. 30

cracked down on the key form because of suspicions that it might be sort of part of terrorism financing. Now, whatever the actual reality, I think in the case of these countries, we need to be more creative and think about creating a public infrastructure rather than only thinking about the private funds. So you can think of a combination of the UNDP and Interpol, because of course in failed states you don't have the multilateral banks because, of course, there is no state. But the UNDP usually has its offices in most of these places. And if you have some way in which you can reassure the G7 that the money that's going through, that there is a degree of transparency and their security agencies can have access to that data, it's possible, at least, that they might be supportive of a multilateral and public infrastructure. The final point which I want to make is that, you know, when we think of remittances, we always, I think, think of it as the flow of finance. And I think the history of foreign aid, we recognize that, yes, money matters, but ideas also matter. And I think we underestimate the importance and value of what I call social remittances. Demographers, when they were looking at Egypt and Morocco, they projected that dialect fertility declines in Egypt would be much more rapid than in the case of Morocco. And that was for standards or reasons of higher rates of females for literacy and higher levels of income. Twenty years 31

later, we find that the opposite happened. And when they tried to understand why, they found that the key mechanism was that migration from Morocco was going to France, whereas migration from Egypt was going to Saudi Arabia and the Gulf countries. Now, as a result of that, the migrating families had smaller families because they took all the ideas of optimal family size from the societies where they were going, but also those ideas of the optimal family size began to filter back to the networks and the households that they were part of in the country of origin. And that's what I mean by the flow of ideas. My guess is that more than financial remittances, if you think of long-term development, it's going to be social remittances, the flow of ideas, that's going to really matter. MS. BIRDSALL: Thank you, Devesh, for bringing a little bit of cold water to a hot topic, let's say. Well, I'm sure that many of you in the audience have contributions, comments, and questions. So the floor will be open. What you should do is, if you'd like to raise an issue or ask someone a question, please identify yourself and then pose the question. While we wait for that to happen, I thought of four questions, very quick ones, in the style that I hope others will follow. 32

First, and working backwards a little, to Devesh. You made the point that there's a lot of hype now about remittances. I wonder if you, or anyone, would like to comment, after we've heard other questions, about why now? What happened? After all, we knew about remittances, and they were probably large in proportion to recipient economies 10, 20, and 30 years ago. I'd like to ask Ernesto at some point to tell us why the Dominican Republic is where he thinks that there will be the fastest trajectory to perfect remittances on the recipient side, particularly given Devesh's remark about weak states. I think the Dominican Republic is not in that category. It certainly has pretty sophisticated financial institutions, sophisticated enough to have big problems recently. Lois, maybe you could comment on whether policy change is needed mostly in recipient countries, or is there an issue of public policy change that you would say is a priority in the United States or other sending countries? And Cerstin, at some point maybe you could turn to a question that occurred to me when you were speaking about regulatory frameworks needing to be improved. Is that really--is there something distinctive about that with respect to remittances, or is it a general issue in developing countries for small and medium enterprise development and in general for improving options for people, 33

through the financial sector, to borrow and to save and so on? Is that a general issue, or is there something special about the remittance issue that caused you to raise that point? Okay, let's go to a couple of more questions and then we'll go back and forth and see how we do. QUESTION: Thank you. Martin Weiss with Congressional Research Service. A question I guess primarily for Ms. Quinn. The teleplay of the PATRIOT Act included a lot of provisions regarding financial money transfer and it's only going to get stricter with the legislation going through the House and the Senate this week, when it comes to--the 9/11 legislation, after that goes through conference. So, I guess, kind of a two-part question. One, could you address how the U.S., how the executive branch is dealing with the cultural aspects of remittances, where it's not just a strict development issue, but a lot of it has [inaudible]--these are cultural communities, which I guess to some extent needs to be addressed. And the other aspect is what are we doing on the technical assistance side to get small remitters up to standard so that we're not dealing with the PR problems when there's a big crack-down on an Eritrean or, you know, some other sender, that how are we getting--how are we dealing 34

with the technical assistance to get those remitters up to PATRIOT Act or legislative standards? MS. BIRDSALL: We'll take one more, and then we'll turn back to the panel. QUESTION: Thank you. My name is Gregory Simpkins. I'm with the Leon Sullivan Foundation. Remittances are used for a number of purposes. I'm wondering if anyone on the panel is aware of any organized effort to use remittances as financing for small business development--any equity funds or any other similar uses of remittance money. MS. BIRDSALL: Okay, let's turn--do you want to start, Lois? You had a very specific question, and then we'll see if others on the panel want to say anything to any of the issues raised. MS. QUINN: On the, I would call them related issues of the use of the informal sector. There's lots of different names for it. It depends on what region of the world you live in and what informal system is available where you live. There's a lot of disagreement in the international community as to how wedded people are to using these systems and whether they would continue to use these systems if they had viable alternatives. And it varies, actually, between regions, because in some regions using the informal system is very safe, very efficient, you don't have to worry about it. In other regions, using the informal 35

system, your recipient may only get a fraction of what you sent. So in that region you're much more likely to want to switch. But what has by and large been the case is that the formal sector is vastly more expensive than the informal sector. And the formal sector is not using efficient technology. Our experience in Mexico's case is that the cost of flows has fallen 60 percent since the end of the '90s. And with the drop in the cost of flows, the amount of flows going through the formal sector has increased dramatically. Now, we don't know how much of that money was not being sent at all before and how much of that money was previously in the informal sector. In Mexico's case, I would venture a guess that not the whole thing was an informal sector, because their informal sector is not as well as developed as the informal sectors in Asia. What we focus on in Treasury is to try to strengthen the formal sector so it's more attractive, easier to use, more accessible to the immigrant community and people that need it. We also try to work with the informal service providers who are legitimate--which there are lots and lots of legitimate ones. In the U.S. we call them money service businesses, the mom-and-pop shops, the grocery stores. They are allowed to offer remittance services in the U.S. And we try to encourage our counterparts around the world to allow these informal businesses to become 36

legitimate remittance service providers--register them, not necessarily license. A lot of countries like to license them, and in some countries licensing procedures are almost as strict as opening up a bank. We try to discourage that. We try to encourage--just register them, know who they are, and train, teach how to do anti-money laundering, counterterrorism financing regime. That's a sort of long answer, but-- MS. BIRDSALL: You said the cost of flows is down 60 percent. You mean the fees in Mexico at the recipient end? What did you mean by that, exactly? MS. QUINN: These are the costs as measured by, I think it was a Morgan Stanley survey a couple of years ago. And they took the average cost from the U.S. to Mexico by polling lots of different services. MS. BIRDSALL: Over time, and it has fallen? MS. QUINN: Right. It had fallen, yes. MS. BIRDSALL: And you raise this issue of, you know, let mom and pop set up services. It reminded me of something Ernesto said, which was when they started with his group to try and provide more services, they were accused, kind of, or they were-- up. MR. ARMENTEROS: No, no, it was-- MS. BIRDSALL: --not "accused," but the issue came 37

MR. ARMENTEROS: No, we actually had--it was like a--I found this many times. The regulators had been learning along with us. And the banking superintendent had three or four years of discussions with us where they allowed it, until they decided it was too close to a bank, it looked too much like a bank. And they decided--but it wasn't contentious. MS. BIRDSALL: Right. And maybe you could--when you refer to public policy issues, what is the priority you would set in the U.S. in terms of public policy? Is it this encouragement and counseling and technical assistance, or is it something about competition? Or do you really mean it's public policy at the recipient end in the financial sectors of the countries? MS. QUINN: It's both the sending and the recipient end. And there are a couple of different sides of it. One of the things is financial literacy aspects and promoting financial literacy programs. The FDIC has a very good program where they train the trainers. The trainers can go out to community centers, churches, they have a whole set of tapes or documentations in six different languages that they provide to the trainers. So that's one aspect of it. Another aspect is reaching out to the financial institutions themselves, helping them understand what the market is, how big it is, how to address this market, what works, what doesn't work. 38

They can set up a remittance service, but if they don't change their hours, if they don't have evening and weekend hours, they're not going to have anybody come in the door because people work and they just don't have the flexibility of leaving their jobs. Things like that. The other thing that is a particular difficulty in the U.S. reflects our regulatory supervisory structure, where we have state regulators and we have federal regulators. Nothing can really be done on that score to change that because of federalism issues. But one of the things is that the state regulators have expressed to us, some of them informally, that they really don't know how to regulate the money service businesses. And here we're talking about the informal providers that are not banks. They're not supervised by the central bank, they're not supervised by the state banking regulators. They're not sure how much they should require of the money service businesses. And this is one of the reasons--and this is the same issue that we have with many of our international counterparts. The various governments around the world, in the G7, in the recipient economies, nobody's quite sure how to regulate these institutions that don't qualify to be banks, that you don't want taking deposits because they don't have a big enough capital base, they don't have the right kind of internal structures. But you feel that they 39

could probably handle this two-day-night money, you know, this very short-term money, where they're not really taking a deposit. How much do you have to require of them? Do you need capital requirements? And this is the reason that we've asked and we've pushed for an international standards setting body to give some guidance to the whole international community on what needs to be required from this group and how strict to you have to be, or how lenient can you be. To give us more guidance and also to give tools, where we're looking at a country where we think they're being too restrictive. In many, many countries the banks are the only ones that are allowed to do this business. And that includes both the G7 countries as well as the recipient countries. And we feel that that really limits it because a lot of commercial banks are just not interested in going into rural and isolated communities. If you can't have your credit cooperatives and your microfinance companies handling remittance businesses, you're not going to reach the people that need them. But without international standards on what you need to require from remittance service providers, there's very little that we can do to urge our counterparts to change the policies. So that's one of the reasons we're pushing for that. 40

MS. BIRDSALL: Okay, thank you very much. Can anyone answer the question about financing for small business? It's the same as the mortgage using remittances as well. MR. ARMENTEROS: I venture that almost all remittances that are earmarked for investment are investment in small businesses. We process thousands of transactions a day, and when we see transactions that are meant to buy--we see many, many transactions meant to buy a small bodega, a small business. So a customer would run it back in the receiving country and in partnership with the sender, who just sent his savings. So it's a great vehicle for development investment, specifically for small business development. MS. BIRDSALL: There seems to be some difference of opinion on that issue of how much goes to investment versus consumption, and other points of-- MR. ARMENTEROS: Oh, no, no, less than 15 percent goes--from my experience and from Manuel Larosco's [ph] research, I've learned that less than 15 percent of total flow is earmarked for investment and savings. It's not because--the question is, can you improve on that? But the fact is that 85 percent of remittances, at least, are for immediate consumption. They're not meant to be invested or saved. Maybe you can increase it by 5 percent with taking the opportunity on every point of contact to cross-sell 41

investment. But that's not the nature of 85 percent of that flow, period. MS. BIRDSALL: Well, that would be not surprising given the income levels of the recipients, on average. MR. ARMENTEROS: Of course. MS. BIRDSALL: Why do we think they will use this money so differently from other income they might have. Let's go to your question. Oh, did you want to-- MS. SANDER: Yeah, could I just jump in quickly? I'm not aware of any specific funds on it, but I think, as it being pointed out, there is a significant portion in some cases, significant relative to consumption, that goes towards micro or small business development. There are studies, and part of it depends also on the investment climate in the country. It's a big question where do I put my money, where is it needed most. Is it still needed with the family and with, you know, education and health, or can we actually put it towards real estate, property, or the business. One study that I'm aware of that was trying to look at how are businesses financed actually is in Albania, where they found that a fair chunk of the capital that goes into businesses comes from remittances either directly or remittances providing the funds to get loans through family connections. Similar, for instance, even for a country like Senegal, seven out of 10 sends of remittances will invest in 42

real estate, and there's a real estate boom in Dakar which is due to remittances. But I think what we have to remember is that migrants are not venture capitalists. So the question would be why would a migrant be more likely to invest in an equity fund or a venture capitalist fund that goes towards businesses, and wouldn't their first choice be, if any, to invest in their own business or their family business. MS. BIRDSALL: You've been very patient. Please go ahead. QUESTION: Thank you. This is just a follow-on, in fact to the point that has just been addressed in terms of the development opportunity of remittances. And I gather from what has been said that the large majority of the funds are being used for day-to-day expenditures, for the immediate needs of families. And also, I think it was very interesting, sort of this inverse correlation that has been pointed out at the end by Professor Kapur that a large inflow of remittances is a negative indicator of the potential of development insofar as the young people have migrated and those are those who tend to send the money back home, which really means that those who are left behind are not the most productive segments of the population. The question is, to what extent have there been concrete attempts to harness even that limited portion of funds that don't go to immediate consumptions, which 43

essentially would be the equivalent of a sort of private charity? Instead of being a public charity, there's a private-to-private transfer of funds that are provided to people to sustain a standard of living, which is an indicator of lack of employment, lack of domestic opportunities; so to what extent this tiny portion of the total, the 10, 15, whatever that is--and I don't know whether this is a worldwide statistic or limited to different markets--can be really harnessed to provide instruments that lead to qualitative changes, that is, to real development as opposed to financing current expenditures. MS. BIRDSALL: Thank you. Do we have any other questions? QUESTION: My name is Cory, and I'm here from the Pan American Development Foundation. My question was probably directed to Lois. You talk about integrating aid policy with trade policy with migration policy. And I just wondered, your goal of making remittance markets more accessible to migrants, if you have been able to link that to migration policies that are favorable to migrants where they're not afraid to use formal channels, where they're not afraid to have their names recorded and things like that. I just wondered if you, as the Treasury Department, are able to create a dialogue on those types of issues. 44

QUESTION: Joan Guyez [ph] with the Society for International Development. I'd just like to push a little bit further on some of the things that Devesh said. The people that I know who send remittances back always have to make a choice and a decision about how well that money is going to be used when it gets there, whether or not it's a disincentive for the recipients, on the one hand, to pull up their socks, for example. They're always making a tradeoff between what they need here and what is needed in the home country. In a way, I was struck by Nancy's comment. These are flows from the poor to the poor. And I just wondered if there had been any social research on the impact of this within the family and within, you know, among the people who are the recipients. MS. BIRDSALL: Okay, maybe panelists want to- Devesh? MR. KAPUR: There is no simple answer there. A lot of what happens at the household level depends on who leaves. So if the migrant is male, as opposed to if the migrant is female, changes in the household dynamics can be quite substantial. For instance, I've looked at evidence at Philippines, where the migration is largely female, and in the Indian state of Kerala, it's largely male. In the case of the Philippines there is some evidence that the households are level. But the males who stay behind, the 45

one thing you definitely see is the levels of alcoholism are much higher where the female leaves and you have higher levels of remittances. In the case of Kerala we see a more positive thing. Because it's a more male-dominated society, it's the first time that females have access to cash flows and they can allocate these without the male sort of hovering behind them. And that leads, then, over time to have more--it gives them more autonomy and you find that when the male member actually returns, you actually see more problems now because he tries to go back to the status quo, which is no longer feasible. The evidence. We've been looking at household surveys to look at how these remittances have been used. Basically, I think what one has to ask is remittances are like a positive income shock for a household. And the question to ask is, is it different from any other source of cash flows which might increase the income of a household? Are remittances somehow different? And overwhelmingly we do find, at least from household surveys, that the money is used for consumption. But that need not be a negative. Because, of course, say we know that in almost every case it's used to build a larger house, for instance. But then, of course, there are other firms which supply housing material, build houses, so the construction sector gains. 46

And so actually, these small firms that gain the most are not firms being created through remittances, but indirectly other small firms which supply the consumption needs created through the remittances. That's what we find. But again, as I said, this really varies from country to country and I don't want to make very sweeping generalizations. MR. ARMENTEROS: Before I speak again, I failed to thank you for inviting me the first three times. So, I'm sorry. I'd like to disagree with a couple of points. I think Professor Kapur's points were all brilliant. There's one I'm not sure about. I would propose that remittances are not--or emigration is not a sign of a failed state, which would lead me to answer your question, Nancy. It's a defense mechanism by a nation to avoid failure, waves of emigrants and the flow-back of remittances. And not only remittances. But IBS teachings--our president is the son of immigrants. He grew up and started abroad, came back, and is now leading our country out of a crisis. This happens at every level. It's not only money. It actually is a defense mechanism, and what flows back immunizes the country from failure. It stabilizes it and gives it a floor on which to stand and rise again. Now, the other thing I disagree with is the characterization of "formal" and "informal," if by "formal" 47

you're referring to banks and by "informal" to things that are not banks. There are 400 licensed remitters in the U.S. alone. We're bound by anti-money laundering, by the PATRIOT Act and Bank Secrecy Act. We have to have compliance officers, external auditors. We have to have compliance systems, manuals, training, et cetera. We are heavily regulated, audited, et cetera. I would say that it's more difficult to launder money through a licensed remitter, especially the more sophisticated ones today, than it is through a bank. Because it's a single product. It's small transactions--95 percent of the transactions are less than $300. Small transactions and low volumes. So it's a simpler problem to solve, and there's a lot of attention on it. So there are banks which are formal. There are licensed remitters, it's also a formal and regulated channel. And there are the informal channels. The other thing is, remittances only came up on most people's radar screens lately. But they've existed for, I would say, tens of years, but I would go farther back. It was the convergence of cheap communications, cheap transport, TV in poor countries--I can go there and make better, and computers. The convergence of all of those things brought it up on the radar. To finish, I'd like to answer the question about the Dominican Republic. Why I think that a country like the 48

Dominican Republic is the most likely to get on the receive side quicker to the perfect remittance is basically because Dominican Republic is very wired. The communications had been in the hands of the private sector for longer than most other Latin American countries. The banks are very competitive. The POSs and merchants where you pay with credit cards and debit cards, bank products, are pushing to every level, not only to middle class or richer, but to everybody. So the push by the banking industry is harder, and the problem is smaller. It's a smaller country. We'll get there quicker just by virtue of it's a smaller problem. It will happen, I think, in Mexico and the other countries, but those impediments will slow it down and make it 20 years instead of 10. MS. BIRDSALL: I just want to make a bet with you about El Salvador, because it also has some of these same qualities and it's also very dollarized. MR. ARMENTEROS: I agree. I agree. It might make it first. I'm not saying Dominican Republic will. I'm saying that versus Mexico or the most talked about recipient of remittances--remember, I said a smaller country. I think one of those countries. The ones with those characteristics are more likely to get there first. And Spain, on the other side, Spain allows anybody into a bank and open an account and offer financial services. They don't put all the hurdles that the American banking industry puts. Never mind 49

that they're justified or not, but the fact is it will give them a quicker vehicle to bankerize the-- MS. BIRDSALL: They don't have the U.S. barriers that are created because of tradeoffs in the same way. MR. ARMENTEROS: How do you mean? MS. SANDER: Could I jump in? Because I think the global rules are the same. FATF rules are the same. Know Your Customer rules are the same. And Lois, I'm sure, will jump in on this. Part of the question is how they're interpreted by the industry, because there is no clear guideline on what you actually have to do. It's a guideline that, you know, you have to be able to comply. But what compliance means is not defined anywhere specifically. So what happens is that each bank has to decide how do we translate that for us into policy and then take that to the supervisor and say are we okay with this? And they basically say, on average--Lois, you jump in there, please- well, you know, you'll find out if we breathe down your neck but for now it looks okay. So there's a tendency in some markets to be extremely restrictive and conservative about this and in other markets not to be as restrictive. But-- MS. QUINN: I agree 100 percent, that it is--the banks and the financial institutions are responsible for their own anti-money laundering, counterterrorism financing regime within certain parameters. And a little-known fact 50

is that in the U.S. we have a $3,000 threshold, where you do not, as a financial institution, you are not required to even check IDs if the transaction is less than $3,000. But the financial institutions themselves often impose a much lower threshold, much lower figure. So there's a lot of confusion over whether the regulations are coming from the government or whether it's the financial institutions, and a lot of it is the uncertainty. And I would actually even suggest that some of it might be the banks not wanting the competition, so we have some problems involved there. I think that the more that the enforcement people hear about problems the industry has, the easier it is for us to get the enforcement people to be more clear on what their guidelines are. MS. SANDER: I just wanted to pick out a couple of points that have come up, questions that have come up, and also answer the one that you asked me earlier on, Nancy. A quick one on the question of harnessing real development rather than consumption. I'm glad to hear the language of "harnessing," first of all, rather than "leveraging." And that may be semantics, but I think it's important. There is a fair amount of attention on that in terms of, in the U.S., hometown associations and so on, you know, how do you maybe make it attractive to integrate that more with local development initiatives and so on and so 51

forth. Now, the experience with such schemes is mixed. One that's being lauded for being rather successful on average is the three-for-one in Mexico. There is a fair amount of documentation on another scheme, or set of schemes, in Mali, but there the feedback is much more mixed. Turkey, for instance, had a scheme a long time ago which was seen as totally inefficient and ineffective. But we have to realize that it's really a fragment of the total flows. And a lot of the issues are actually related to similar issues that you have within charity organizations. There are governance issues. They are the question of is there sufficient integrated planning when you start having, you know, church groups or migrant groups supporting the building of a school or a water system but it's not integrated with regional or town planning, for instance. And then, really, to think of these remittances as part of migrant philanthropy and charity much more than, maybe, investment in a broader sense. But scaling up that notion is a question of attracting remittances in the context of commercial terms. And you have some governments, like India, Egypt, and the Philippines that have issued bonds that target migrants specifically and provide special terms to attract those funds. And then going another step up from micro to macro, you've got applications that look at how does this 52

flow of funds allow us, either at a country or a sectoral level, to look at securitization and how does it, for instance--and that was the case of Brazil--how does it affect the country rating in the financial markets. So there are a whole set of issues and things that are happening in that area. Another point that came up was a question of--and Nancy raised that--do we need policy changes only in the recipient or only in the sending country. And I think a few of these points have already been made. The sometimes very restrictive regulation of money transfer services is an issue in both sending and receiving countries. So I'll leave it at that. I think it is looking at both sides. And lastly, the question that Nancy asked me, is the regulatory framework improvement related to remittances specifically or is it a much more general issue? There is a lot of it that's general. That's about financial sector access, that's about financial services. A lot of it is related to the question of payment systems generally and not just money transfer for the purposes of remittances. But at the same time, there are specific issues around licensing. There are specific issues about things that Lois brought up in terms of the harmonization or requirements and licensing requirements. And that's both within the U.S. because there is a--each state has different requirements, for instance, within a region and globally developing good practice or 53

best practice standards. Same thing, for instance, again, on Hawala [ph]. You know, how do you do Hawala that's transparent and can comply with international requirements. And I think what's also specific about it is that -or why it should receive attention is that it does have the potential to be a catalyst for taking financial services into client segments and into geographic areas that are currently not being served. MS. BIRDSALL: Okay, I think--is there one more question? Let's take that as the last question, and then I'll decide what next after that--if anybody gets to answer it. We'll see. QUESTION: My name is Jack Stone. I'm an economic consultant. My question is very simple. If the target country is one with a fairly reliable postal service, is there a lot of stuff that simply goes out in the mail? Like put a $50 bill either in my currency or in the home currency in, and bingo. What's the evidence on that? And does it ever work, or does it mainly work? MS. BIRDSALL: Ernesto, you get that one. MR. ARMENTEROS: Before computers could relay a payment order quickly, before the integration of the financial system worldwide, and many other things, that's the way a lot of people did it. But you're making an 54

assumption which is wrong, which is the fairly reliable postal service. MS. BIRDSALL: In developing countries. [Laughter.] MR. ARMENTEROS: Our countries are known to have very unreliable postal systems. And what one of the things -we were born out of the failure of banks, postal service to do this. How can I compete--and I have competed successfully against Citibank and local banks. How can I do that? It's basically because they're very bad at it. They stole the money. Postal services used to just steal the money orders. They took three weeks. We deliver--when someone walks into one of the branches on the 300 bucks, we keep the data on both the sender and receiver. We deliver within two hours at home, home delivery cash or on plastic within two hours. If a person in Barcelona walks into a branch, we deliver the cash in two hours. We actually advance the money from our capital until the money gets there. The postal service can't do that. MS. BIRDSALL: Well, let me take this moment to thank all of the panel and to thank all of you. I asked the question of Devesh why the hype now. I have a crude hypothesis. It's that the hype is coming not so much or only because of the apparent increase in remittances, but because--and I say this from the perspective of a 55

development aficionado--it's because migration, international migration, international movement of people is an issue that we will all be thinking about and grappling with for the next decade at least. And remittances is just the leading edge of a new wave of trying to understand the causes and consequences, and the future, of international labor movements--as in mobility. Let me thank again the panel and all of you for participating with us. We raised more questions, I think, than anyone could answer in such a short time. I'm sure that many of you will be thinking more about these issues in the future. Certainly we will be. And we're glad to have this start on what the agenda has to be. Many thanks. [Applause.] 56

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