Flows of workers´ remittances to developing countries have grown

Raquel Torres Ruiz
Alejandro Lorca Corróns
Foreign Direct Investment (FDI) has emerged as the main source of growth and development
financing in East Asia and Latin America, rendering widely analyzed development models (the
“Flying Geese2 and the “maquiladora” development models, respectively). Large volumes of
export-oriented FDI have flown from North to South, from economic powers such as Japan or
the USA to their neighboring developing regions, helping increase their productive capacity,
and boosting economic growth and development through the integration of such economies into
global production chains and international trade.
Influenced by geographical and cultural proximity, over half of FDI flows from Japan to
developing countries have been invested in East and Southeast Asia (and slightly less than the
other half in Latin America). And two thirds of the FDI flows from the US to developing
countries are invested in Latin America, and almost one third in Asia. Such North-South
investment pattern is not observed between another economic power, the EU, and its Southern
neighbor. The EU countries invest five times more in Latin America than in the Middle Eastern
And North African (MENA), four times more in Asia and more than double in Eastern Europe.
As a result, in the period from 1995 to 2002, Latin America received about 40% of FDI flows to
developing countries, East Asia 35% and Eastern Europe 16%, while the MENA countries
absorbed just 2%, while its GPD represents 9.5% of developing countries GDP.
Within the Mediterranean region, FDI is rather asymmetrically distributed, both geographically
and across sectors. Algeria and Turkey, followed by Egypt, Morocco and Tunisia are the main
recipients of FDI. While FDI from the EU exceeds 40% of total FDI in Turkey, this share is
much lower in the Maghreb and Mashrek countries, where only some 10% of total FDI
originate in the EU.
In addition, FDI flows follow an erratic trend in time, varying greatly from year to year as they
are mainly linked to the allocation of oil and gas exploration and exploitation licenses and the
privatization of public enterprises in strategic sectors. Foreign investment, thus, does not
generally represent a long-lasting capacity building commitment, contributing little to firm
productivity increase, to integration in the global trade and production chains and, finally, to
growth. Indeed, the region’s growth performance in the last decade and a half has had a lot to do
with the strength of the oil price since the 1990s, rather than with a productive capacity increase.
In contrast, the surge of capital flows has helped increase productive capacity in East Asia and
Latin America. While Latin America managed to grow at an average rate of 3.3% in the 1990s,
compared to a rate of 1.4% in the previous decade, East Asia has maintained the growth rate of
over 7% achieved in the 1980s, and this despite suffering during the debt crisis and the Asian
crisis and its aftermath.
Reform programs were initiated in the 1990s by most Mediterranean countries to diversify their
economies away from oil and from a public sector led growth, and to create a favorable
environment in which the private sector could emerge and become an engine for higher and
sustainable growth. While the region has done very well in terms of economic stabilization,
lowering inflation, ending black market in exchange rates and narrowing current account
deficits, it has been a late comer to structural reforms relative to other developing regions in the
world, such as Latin America and Asia. Furthermore, mostly modest make-up reforms with
limited effects on the economy have been implemented so far. These slow and modest reforms
have been mainly motivated by the external pressure exerted by the EU, rather than by a real
conviction and determination for change of some political elites that, in the presence of little or
no political opposition, are more concerned about preserving their privileges.
So, relative to other developing countries in Latin America and Asia, there are still many
obstacles to foreign investment in the Mediterranean that need to be addressed by wide ranging
structural reforms: weak legal and institutional frameworks; restrictive trade regimes and scarce
regional trade integration; restrictive investment regimes (probably due to fears of some sort of
neo-colonial experience); excessive public regulation and intervention; inadequate educational
systems and insufficiently developed financial systems, mostly oriented towards the public
sector and unable to channel efficiently and effectively private capital to productive
The reforms to be undertaken are numerous, require long implementation periods, and
frequently face strong opposition from the political elite. Meanwhile, there exists a rather
overlooked alternative that can be exploited to contribute to improve the attractiveness for both
domestic and foreign investors, and that may get around political opposition more easily. Such
is the case of measures directed to strengthening migrants´ links to their home countries, and
increasing the volume of workers’ remittances sent back home through formal channels, as well
as the share of these remittances funding productive investments and development projects.
Both in Central America (particularly Mexico) and Asia (particularly China), immigrant
communities abroad have become valuable “cultural sponsors” for the promotion of private
investment, domestic and foreign, of the economic transformation of their regions of origin and
of economic reforms in their country of origin. Infrastructure and industrial development,
foreign trade and foreign investment have benefited from the development of business contacts,
of distribution channels and of sophisticated financial networks between these diasporas and
their home country, as well as from the financial support through remittances and the
international business know-how of these communities. The numerous Arab communities
spread throughout the world, particularly the numerous North African communities in the EU,
could also be a valuable asset for the development of the Mediterranean region.
The issue of migration and workers remittances is, indeed, of crucial importance in the
relationship between the EU and the Mediterranean countries, and the Euro-Mediterranean
Partnership could find in it a new instrument of co-development.
In the following, diverse aspects of workers´ remittance flows to the Mediterranean countries1
(flow dimensions, remittance channels, impact and use of remittances, and measures to increase
them) are reviewed in order to assess the potential of such capital flows in influencing the
investment climate and leveraging private investment, both domestic and foreign.
Flows of workers´ remittances to developing countries (the portion of migrant’s earnings sent
back from the country of residence to the country of origin) have grown steadily during the last
30 years. At a 7% annual growth rate during the last decade, they have gone up from 67.6
billion dollars in 1999, to 93 billion in 2003 and about 100 billion in 2005. Remittances are only
second to FDI as a capital flow towards developing countries, and substantially exceed both
private debt flows and development aid.
Table 2. Net financial flows to developing countries
(Billion current USD)
Net private debt flows
Total foreign aid (grants)
Net FDI inflows
Workers’ remittances
Source: IMF Balance of Payments Yearbook and World Bank staff estimates.
The substantial rise in officially recorded remittances over the last decade has in part been
fuelled by increasingly intense migration and in part by an increasing use of formal channels of
transmission for remittances (banks, post offices, credit unions, or money transfer companies
Even though an accession country and, thus, not part of the Euro-Mediterranean Partnership, Turkey is
included in the study because of its condition as a middle income developing country in the Southern
border of the EU, and its relevance as FDI and remittance destination even before becoming and
accession country. Israel and the Palestinian authority, on the other hand, are not considered because of
their territorial particularity and, the classification as high-income country in the case of Israel, and lack
of data in the case of the PA.
such as Western Union and Money-Gram). However, a precise estimation of total remittance
flows is difficult for various reasons:
- The lack of comparable migration figures across countries with different nationalization laws.
- The different understanding of the specific components of remittance flows by different
countries, and even by international organizations (e.g. IMF´s Balance of Payments Statistics
and the World Bank’s Global Development Finance Report2).
- The still large share of remittances sent through informal channels (in-cash or in-kind transfers
through hand-carriage when visiting home, or through family members or friends, and
transfers through cash carriers, unlicensed money transfer operators, travel agencies or call
shops), and thus going unrecorded, which may be even larger than formal remittances.
As in the last years, the volume of recorded remittances is expected to rise further due to a more
intense use of formal channels to transfer remittances. Such expectation is supported by recent
developments: slowly decreasing transaction fees in the presence of higher competition in the
formal sector; the liberalization of exchange restrictions and disappearance of the premium on
black market currency exchanges (El Qorchi and others, 2003); and tighter controls of informal
remittance networks after September 11th to prevent money laundering for funding terrorism.
Geographically, the largest flows are directed toward Latin America (one third of total flows)
and South and East Asia (over a third of total flows), followed by Mediterranean countries
(table 3). The major remittance corridors are: Canada/US to Latin America and Asia; the EU to
Eastern Europe, Turkey and North Africa; and the Persian Gulf to South and Southeast Asia.
Table 3. Geographic distribution of workers´ remittances 2001-2003.
(Billion current USD)
Europe & Central Asia
East Asia & Pacific
South Asia
Latin America & Caribb.
Sub-Saharan Africa
2003 % increase
Source: Balance of Payments Yearbook, several years, IMF.
IMF´s definition only includes current transfers by immigrants employed in new economies and
residents for over a year there, while the World Bank also considers compensation of employees (persons
who are considered non-residents because they work and stay for less than a year) and migrant transfers
(net worth transferred from one country to another at the time of migration).
In relative terms, however, remittances are more important for Mediterranean countries. They
represent, on average, 3.5% of GNI (reaching 20% in Jordan, 12% in Lebanon, 8% in Morocco
and 5% in Tunisia) and 11% of imports (two thirds of trade deficit in Morocco and one third in
Tunisia). These are significantly higher ratios than those for developing countries in general
(just over 1% of developing countries GDP and 5% of imports in 2002). The ratio of remittance
inflows to other types of capital flows is also significantly higher in Mediterranean countries
than in the developing regions. In fact, while remittances are globally well below FDI, this is
not true for Mediterranean countries. In Jordan, for example, annual remittance inflows were
nine times FDI and six times foreign aid on average in the last decade. Moreover, in 2002, they
tripled total tourism receipts and represented 75% of Jordan’s total revenues from exports.
Even in Tunisia, where tourism contributes to a higher percentage of GDP, remittances
represent up to 50% of total revenues from tourism. And in Morocco, remittances exceed
receipts from the phosphate and the tourism industries.
Reflecting the importance of remittances in the region, five Mediterranean countries (Morocco,
Egypt, Lebanon, Turkey and Jordan) are among the top ten recipients of remittances worldwide
(see Figure 4). Furthermore, remittances are an important source of income for Lebanon,
Morocco, and particularly Jordan, where they account for some of the largest shares of local
GDP worldwide (Figure 5).
Figure 4. Main remittance recipient countries in billion dollars
ilip o
M es
Tu t
Le ey
Ba an
ng on
R an
El ubl
Sa ic
C dor
Pa n
Ec il
Yu ado
go r
Th ia
Sr ina
Figure 5. Main remittance recipient countries in percentage of GDP
Le a
Le va
El ano
Sa n
C vad
FR am
Yu aic
go a
an roc
R co
Va ic
ilip tu
on s
Ec a
Sr dor
Source: Global Development Finance, 2003. World Bank.
Total formal remittances to the Mediterranean region are estimated to amount to more than 13
billion dollars (table 4), more than one-sixth of global remittances to developing countries
(while their share of developing countries GDP is less than a tenth). Actual flows are believed to
be substantially higher, since unrecorded flows or informal remittance flows are estimated to be
higher than in other regions, and range from 50 to 100 per cent of the official amount,
depending on the recipient country.
Table 4. Workers’ Remittances in Mediterranean countries
(Million current USD)
$ Million % of GNI
$ Million
% of GNI
$ Million
% of GNI
Source: Global Development Finance 2004, World Bank.
For comparison purposes, development aid from the EU to 8 of the 12 Mediterranean countries
amounts to about 2 billion US dollars yearly: less than a billion come from the MEDA program,
launched in the Barcelona Process, and another billion comes from the European Investment
Bank. This money, i.e. 9 US dollars per capita, is supposed to provide the needed support for
the modernization of the economies to prepare their production systems to compete on a free
market with the EU from 2010 on.
A large share of remittance flows to Mediterranean countries originates from the European
Union (at least half of total remittance flows received), destination of a large percentage of
Mediterranean migration because of geographical proximity: 95% of total migration originating
from Algeria lives in the EU, 85% from Morocco, Tunisia and Turkey, 10% from Lebanon and
5% from Egypt, Jordan and Syria, which receive most of remittances from the USA and the
Gulf countries.
The main EU destination countries of migration are: France, Germany, Belgium and the
Netherlands, all countries of old migration which now include third and fourth generations, and
Spain and Italy, countries of new migration, i.e. receiving first generation migrants, mostly
young and well-educated. Mediterranean immigrants living in the EU are highly regionally
concentrated determining mayor EU-Mediterranean remittance corridors. Most Moroccan and
Algerian immigrants in the EU live in France (30% of Moroccans and 85% of Algerians living
in the EU), which is also home to a high concentration of Tunisians (50%). The Moroccan
migrant population in Spain, though, is growing fast and expected to surpass the size of the
Moroccan migrant community in France by 2006. Germany is the main destination for Turkish
migrants (70% of total immigrants in the EU), Jordanian (45%), Syrian (45%) and Lebanese
(40%). The low percentage of Egyptians living in the EU concentrates in Italy (40% of Egyptian
immigrants in the EU).
Remittances flowing from the EU to Mediterranean countries will continue rising in the future
due to:
The capital liberalization process that many Mediterranean countries are immersed in.
The continuously growing active population in the region, a result of the incorporation to
the labor market of a markedly young population and of women.
The structural adjustment that labor markets, and the economies in general, are going
through while implementing neo-liberal policies and advancing in trade and capital
And a possible shift of the destination of Maghreb and Mashreq migration from GCC
countries to the EU given a similar demographic and labor situation in Gulf countries and
Mediterranean countries, although the recent surge in oil prices and large inflow of
petrodollars in the Gulf may mitigate this shift.
As already mentioned, remittances can be transferred formally or informally. Formal money
transfer systems include mainly banks, post offices, and MTOs (e.g. Western Union, MoneyGram). Informal sector channels mainly refer to cash or in-kind transfers through carriers, be it
family members, friends or other carriers, and money or goods taken by the migrant on his
seasonal visits to his/her homeland or funds remitted through unlicensed money transfer
operators. Informal money transfer systems are attractive to many immigrants because they are
accessible (no bank account needs to be opened, and no complex bureaucratic procedures are
needed), anonymous (no proof of identity is required), cheap, swift and reliable. However, at a
more collective level, there are disadvantages associated to the use of informal channels: it
hinders valuable data collection; increases the risk of misuse of remittances for money
laundering and financing of illegal activities, among them terrorism; diminishes the
development impact of remittances, as will be seen later.
In the EU-Mediterranean corridor, informal channels are heavily used due to the relatively high
cost of formal channels, the large group of irregular immigrants and the geographical proximity.
Informal remittances range from 50% to well over 100% of formal remittances depending on
the country, with the exception of Turkey, where the share of informal channels is small.
Turkish immigrants rely heavily on Turkish banks operating out of Germany, which offer a well
developed network of branches in both countries, low cost remittance services, and a wide array
of incentives in the form of special services (mortgages, education financing, credits for small
business investments) and premium bank accounts.
In contrast, transaction costs are relatively high in the rest of the Mediterranean region (except
for Morocco), encouraging the use of informal channels, for various reasons:
Limited competition in the MTOs network. Exclusivity contracts of MTOs with post offices
prevail in countries such as Algeria (only Western Union is present).
Limited competition in the banking system and insufficiently developed payment systems.
Governments retain control over the main banks in many of the countries; the branch
network in rural areas, where many migrants come from, is insufficient; banking penetration
is, thus, relatively low (the average regional share of the population holding bank accounts
is 15%, a very low number compared to EU countries, with shares exceeding 100%); and
most transactions are made in cash or by check (including wage payments).
Limited accessibility to bank accounts for migrants residing in the EU, particularly illegal
migrants as proper identification is needed to open a bank account, and for destination
families in some rural areas.
Insufficient banking products tailored for remitters and their families, with few exceptions
(Turkey, Morocco, and Tunisia).
Inadequate information on available transfer mechanisms and associated costs, speed and
reliability; and lack of transparency on transfer cost (which frequently, in the case of banks,
reveals surprise costs).
Among formal channels, MTOs are often the dominant transfer system despite their higher cost
because they provide speed, reliability, do not require an account and usually have good
distribution networks. The general disadvantage of MTO remittances (and informal transfers) in
comparison with bank transfers is that, whereas banks can pool resources and lend them on to
finance productive investments, MTOs just transfer money. Thus, even when remittances are
not largely used to fund productive investment, if they are primarily channeled through the
banking sector into deposit accounts, such as in Turkey, and to a lesser extent in Morocco and
Tunisia, they still have a multiplier effect on the economy and contribute to the development of
the financial sector. Of course, non-bank transfers can later be deposited into bank accounts, but
it is not likely.
Migration has mixed effects on the economic conditions in the receiving country. The debate
over the economic impact of migration and remittances is far from over. Research on
remittances and their impact in home country households and regions is abundant (for a review,
Massey et al. 1998, or Taylor 1999). The most visible effects are summarized in the following
Remittances augment the income and welfare of those relatives left behind in the home
country, alleviating the poverty of the recipient (Adams and Page, 2003). However, poorer
and lower-skilled households may benefit relatively little from remittances because they are
less able to meet the migration associated costs, but also because immigration policies in
advanced economies often favor skilled workers with a permanent occupation (Carling,
2004). Consequently, other authors argue that remittances may rather raise income
inequality in the receiving country. They might even raise urban-rural inequality, since
remittances are predominantly used to finance investments in urban rather than in rural
areas. In addition, some authors argue that remittances may reduce recipients motivation to
work, creating permanent financial dependency, and slowing down economic growth
(Chami et al. 2003).
Empirical evidence indicates that remittances tend to rise in times of economic downturns
(Chami et al., and Ratha 2003), smoothing household consumption and contributing to the
stability of the country when facing macroeconomic shocks.
They improve a country’s credit worthiness for external borrowing as the ratio of debt to
exports of goods and services, a key indebtedness indicator, decreases significantly when
remittances are included in the denominator. In the case of Lebanon, for example, credit
ratings would improve two notches, reducing the sovereign spread from 130 to 334 basis
points (UN, 2006).
The marked stability of remittances over time allows for their use as collateral against
which both public and private sector entities may borrow in international capital markets
(Ketkar and Ratha, 2001) at lower borrowing costs (lower interest rate and longer maturity).
The first major securitization deal involving workers´ remittances occurred in 1994 in
Mexico. The largest issuers of remittance backed securities nowadays are Turkey (35% of
total remittance backed securities), Mexico (24%) and Brazil (31%).
Remittances can also accelerate financial development in recipient countries, as remittance
recipients are persuaded to turn their remittances into deposits with financial institutions,
and more credit and savings products are developed to attend their demands for financing
education, housing, investments, etc. Financial development, in turn, has positive effects on
growth and development, both directly and indirectly by encouraging a more effective
utilization of remittances.
Large foreign exchange inflows, especially in small economies, can lead to exchange rate
appreciation and lower export competitiveness. However, as remittances tend to be
relatively stable and persistent over long periods, the “Dutch disease” effects of remittances
are less of a concern than similar effects of natural resource earnings and other cyclical
flows, and the real exchange level achieved through sensible policies may be sustainable
(IMF 2005).
Low-skilled migration might represent a valuable safety valve for insufficient employment
at home. In the long run, however, developing country policies should aim to generate
adequate employment rather than relying on migration (UN 2006).
A well-educated diaspora can improve access to capital, technology, information, foreign
exchange and business contacts for firms in the country of origin. Both the return of
expatriates and the maintenance of close contacts with high-skilled emigrants play an
important role in the transfer of knowledge to origin countries, and the development of
commercial networks and foreign investment opportunities. At the same time, large
outflows of skilled workers can negatively affect growth as the society: it loses its return on
high-skilled workers, sometimes trained at the public expense; their potential contribution to
other workers through education and training; and their potential contribution to the debate
of public issues to improve governance and administrative capacity.
Remittances represent a source of savings and capital for investment in education, health
and entrepreneurship, all of which have an effect in a shorter or longer term on productivity
and employment, and ultimately on growth. Woodruff and Zenteno (2004) and Masey and
Parrado (1998) find a positive impact of remittances on entrepreneurship in Mexico, Yang
(2004) on education and entrepreneurship in the Philippines, Brown (1994) for business
investment in Tonga and Western Samoa. There are also studies that find a negative
correlation between remittances and investment and growth, but this might reveal some
causality problem as remittances increase during economic downturns.
It is widely recognized that remittances are mainly dedicated to consumption of food, clothing
and sometimes luxury consumer goods, but also to health care, education, and housing
construction. Generally only a small percentage is invested in productive activities, which a
study by Orozco on Mexico estimates at 6% to 7% of remittances. Even though investment in
housing, health care and education are not perceived as productive investments, they can have
an indirect effect on local production and employment opportunities through: consumption of
local inputs and labor, improved household welfare and increased human capital, which
positively affect the productivity of the workforce and have long term effects on growth.
(Taylor 1999; Stahl and Arnold, 1986; Durand, Parrado and Massey 1996). The largest impact
on growth and development, though, occurs when remittances fund productive investment.
The use of remittances for funding productive investments depends on many factors:
Skills of the migrant or the family left behind. If they are coming from rural areas, are
unskilled, have low levels of education, and lack the necessary skills to identify market
opportunities and innovate, there is little chance that investments, if any, be made in more
productive and development-enhancing sectors, where technical and managerial knowledge
is required.
Attachment to the homeland. Migrants who are more attached to their country of origin will
send more money home and for a longer time, visit the country more frequently, and invest
in real estate and economic activities with higher probability. Remittances and involvement
with the home country tend to weaken with time and through generations. Governments in
some countries, such as Algeria, Morocco, Tunisia, have been quite successful in
developing programs to maintain their migrated nationals´ attachment, even that of second
and third generations already born in the EU.
Opportunities for small-scale investment and awareness about such opportunities.
The social and financial capital needed for a new business.
Access to credit and other financial instruments.
The investment climate, influenced by political stability, macroeconomic policies,
infrastructures and institutional framework. A good investment climate with well-developed
financial systems and sound institutions is likely to imply that a higher share of remittances
is invested in physical and human capital (IMF 2005).
Realizing the potential of this important financial flow flooding into capital-thirsty countries,
governments eager to tap into this form of financing for development are making important
efforts in certain countries to support their diaspora abroad. There is a wide array of measures
that governments and financial institutions, in both remittance-sending and –receiving countries,
can take to increase the flow of formal remittances and the share dedicated to fund productive
investments and, thereby, enhance the development impact and multiplier effects on local
production and employment. And there are ample opportunities for cooperation.
Remittance cost reduction through encouraging increased competition in the formal sector by:
lowering the high entry barriers to the MTOs sector, allowing alliances of new comers with
foreign financial institutions to use their branch network, promoting the integration and
modernization of the financial infrastructures supporting remittances. For example, the
automated clearinghouse system established by the US Federal Reserve and Banco de México
to facilitate remittances of Mexican migrants working in the US has contributed to the 60%
reduction of remittance costs in the US-Mexico corridor since 1999. La Caixa and CECA (the
Spanish Confederation of Savings Banks) have cooperation agreements with Banque Populaire
and Credit Maroc to channel remittances and offer cheaper services to migrants, such as
remittances through cell phones (SMS), internet and card-to-card or visa credit cards.
Allowing domestic banks to operate overseas can also contribute to increase the alternatives for
sending remittances. For example, the Banque Populaire of Morocco has opened branches in all
European destination countries of Moroccan migration bringing trust and offering low fees,
simple procedures and non-financial services targeting migrants.
Incentives on the saving of remittances: foreign currency and premium bank accounts, and
special services targeted at migrants needs, such as loans, pension schemes and bonds may
encourage remittances indirectly. Countries such as Lebanon or China, among others, have
issued bonds for their diaspora, and experience shows that after maturity, some portion of the
money is likely to remain in the country. In Morocco, Bank Al Amal, established in 1989, is
specialized in financing migrants´ investment projects. In Turkey, the DESIYAB (State Bank
for Industry and migrant Investment), established in 1976 to channel remittances to productive
investments, supports companies founded by residents abroad or returned migrants, who have to
fund at least 50% of the capital needed and take up a managerial role.
Tax exemptions on incoming remittances. In most countries remittances are exempt from taxes,
a measure that raises remittances, but also the possibility of misuse for tax evasion.
Travel and custom preferential treatment to migrants sending home or bringing with them
goods and equipment. For example, once a year, Tunisians are entitled to import goods or
services up to a custom value of a thousand Tunisian dinars without paying tax, and a private
vehicle, home equipment and furniture are tax free when they return. Turkey and many other
countries also offer such import privileges.
Relaxation of exchange and capital controls. Some Mediterranean countries still limit
investment by non-residents, whether foreign or migrants living abroad, who in some countries
have to get authorization to even invest in certain real estate properties. For example, in Tunisia,
non-residents require prior approval from the Central Bank to purchase real estate and for
investments that raise foreign ownership to more than 50% of the capital. In Egypt, nonresidents can own maximum two real estate properties not exceeding 4000 square meters. In
Lebanon, to register a company, local residency and working permit are required, and to acquire
real estate exceeding 3000 square meter a permit is needed. In Jordan, non-resident investment
is limited to 50% of ownership in a given sector of the economy, and approval is required for
real estate transactions. In Syria, non-resident investment cannot exceed 49% of invested
capital, real estate ownership by non-residents needs government approval, and residents are not
allowed to open a foreign currency account.
ID cards providing identification to migrants, regardless of their legal status, to access bank
accounts. A prime example is the Mexican matrícula consular, an ID card extended by Mexican
consulates abroad and widely accepted by commercial banks in the US. Some countries, like
Tunisia, issue ID cards, carte consulaire, to expedite domestic services for their immigrants, i.e.
special customs clearance, reduced airfares and foreign currency bank accounts in Tunisia. In
1995, the Turkish government created the “pink card” for migrants that gave up their Turkish
citizenship but wanted to preserve their right to buy and inherit land in Turkey.
Active policies and institutional arrangements to support the diaspora and its engagement in the
development of the homeland. According to a recent study commissioned by the European
Investment Bank, a few Mediterranean countries have been quite proactive in creating
institutional support and incentive schemes for migrants such as:
Training schemes. For example, the Turkish and German governments agreed to make
funds available to those migrants wishing to return and open a small business, provided that
the migrant participated in training programs in both countries. The Algerian government
has created knowledge transfer programs to engage groups of expert Algerian workers
residing abroad in R&D and educational and training programs to improve productivity and
to stimulate small and medium start-ups, particularly in high-tech sectors such as
biotechnology for agriculture. The Tunisian government provides migrants and their
families financing for studies to improve their skills.
Information campaigns on the different support and incentive schemes: pre-migration
information and orientation (Philippines), fairs and reorientation visits for migrants and
their families (Colombia and Tunisia), and hotline for migrant investors (Tunisia).
Support in legal and administrative disputes, and guarantees for investment. The Hassan II
Foundation in Morocco, funded through donations from the profits of banks offering
remittance services, supports residents abroad interested in investing in the home country,
providing social and legal assistance, but also education and cultural exchange, cooperation,
partnership and economic promotion. Syria is establishing an Expatriates´ Fund audited by
the UNDP through which Syrians living abroad can safely invest in development projects.
Shortened military service or payment of a fee instead (Turkey).
Policies and institutional settings to encourage migrants´ attachment to the homeland. For
example, Algerian residents abroad can vote for the National People’s Assembly and are
represented in it. Morocco allows for dual citizenship, even if born abroad and the
Mohammed VI Foundation in Morocco supports migrants returning for the summer. The
Coordinating Committee for Nationals Living Abroad, established in Turkey in 1998,
includes representatives of Turks in 12 foreign countries and its Supreme Committee is
chaired by the Prime Minister.
All these incentives have been met by varying degrees of success. Certainly attachment to the
homeland is strong among Moroccans, reflected in the significant investment in real estate in
the home country and the high participation of third and fourth generation descendants of
Moroccan migrants in solidarity projects at the village and national levels high. Also Tunisians,
Algerians and Turks (as opposed to Egyptians, Jordanians and Lebanese) are quite attached to
their home countries. And the volume of capital flowing into Mediterranean countries coming
from remittances, as indicated before, is very important and increasing. Now, what is the use of
those remittances?
They are mainly funding households’ daily livelihood, including housing. However there are
indications that migrant earnings are used for productive investment when investment
opportunities are identified and the local conditions are favorable. There is increasing interest by
Moroccans to invest directly in their country, Tunisians that finance small businesses and
returning migrants in Egypt, Jordan and Turkey who become entrepreneurs.
Evidence from Morocco suggests that remittances have played an important role in supporting
local economies and infrastructure development in certain areas. Traditionally, remittances have
funded investment in the service sector, where the most popular investments require little
entrepreneurial and managerial capability (e.g. taxi services, small tea and coffee shops,
restaurants and hotels), and have a limited multiplier effect on employment. But in recent years,
investments have included modern land exploitation techniques increasing agricultural
productivity, the introduction of state-of-the-art stock-raising technology, the setting up of
commercial establishments and small and medium-size industries in the food-processing,
building materials and retail sectors, and the management of parts of the public transport
system. And there is a growing interest in the information and communication technology
sector. This trend might reflect the shift observed in migration patterns. While migration to
traditional immigration countries has had a larger rural component, new immigration countries,
like Spain, are receiving a younger and better educated immigrant population.
According to national data, over 4,000 entrepreneurial projects were financed by emigrated
workers in Tunisia in the period 1993-99, creating over 20,000 new jobs. Such investment,
however, represented only 2.7 per cent of total remittance receipts during that period, which
points to the enormous potential for development finance if the appropriate policies are set in
In Egypt, evidence indicates that half of returning immigrants have invested savings
accumulated during their working years abroad into housing projects, and an additional 10%
have established their own enterprise. In Jordan, returning migrants have created small and
micro enterprises in low technology and labor intensive sectors. In Turkey, studies analyzing the
occupational choice of returning immigrants find that more than half of returnees are
economically active and mostly engaged in entrepreneurial activities.
However, according to surveys conducted among immigrant communities from Mediterranean
countries living in the EU3, investment in their home country is still perceived as difficult and
unattractive because of the lack of information about investment opportunities, the insecurity
inspired by the economic and political situation, and a slow bureaucratic system and widespread
lack of transparency, conditions which have caused some to even pull out their investment from
various kinds of business activities. Also, a large share of remittances remain unutilized because
many of the migrants come from underdeveloped areas in terms of infrastructures (electricity,
water, telecommunications, health systems, and schools), which constrain investment
opportunities. If this is the perception of nationals living abroad, the negative impression that
foreign investors have of Mediterranean countries as investment destination is no surprise. It is
precisely this perception in international capital markets that has to be addressed and changed to
promote FDI flows towards the Mediterranean region.
The pooling of remittances and cooperation of public and private agents may help increase the
impact on investment and development of remittances.
Most remittances are sent by migrants individually, yet a small fraction is sent collectively by
groups of migrants who pool their money and invest it collectively in development related
activities. The most common forms of association are the so-called Hometown Associations
(HTAs), which group migrants from the same town in the home country. HTAs started in
Central America in the late 1990s, account now for 1% of total remittances to Central America,
and are expected to increase their share to 3% in the next couple of years (UN 2006). However,
there are also other kinds of associations formed by refugee groups, professional groups or even
virtual associations that work through the Internet.
These associations have traditionally invested in social projects (schools, medical outreach
clinics, recreational parks, and household support) and channeled post-disaster humanitarian
Specifically among Moroccan households in Denmark, as part of research project coordinated by the
Federico Caffè Centre and co-financed by the EU under FEMISE Network Research Program: “A
favorable macro-environment, innovative financial instruments and international partnership to channel
workers´ remittances towards the promotion of local development. Two case studies in Morocco and
Tunisia”. The primary results of the research can be generalized to other Mediterranean countries.
aid. But their focus is expanding to include economic infrastructure and income-generating
projects managed by the community and local NGOs or banks (Orozco 2003), where HTAs in
Central America have been quite proactive and successful. Governments have, on occasions,
offered matching grants to attract funding for specific community projects. When these
associations debate project ideas and investment climate issues with local governments, they
can also promote higher standards of transparency and accountability among local authorities
and higher labor standards, thus further improving the general investment climate.
So, encouraging the creation of immigrant associations, supporting them and encouraging
cooperation with remittance service providers, local financial entities (including micro-finance
institutions, credit unions and development funds), local governments and civil society
(development NGOs) can help channel remittances towards local infrastructure projects and
entrepreneurial activities. These local development projects will contribute to remove
impediments to productive investment and leverage further private investment funded by
migrants or foreigners.
According to the previously mentioned EIB study, Moroccan migrants´ associations are
particularly active in Morocco. For example, Moroccan residents in Catalonia (Spain) have set
up associations to support the building of a small dam and an irrigation system to spur
agricultural development in Al-Hoceima in the North of Morocco, and to construct four
kilometers roads in an area close to the border with Algeria. Also associations of Algerians in
France are mobilizing human and financial resources for collective development projects.
Projects initiated by Syrian expatriates include the establishment of two private universities in
the western cities of Homs and Tartous, and the construction of an animal feed factory in the
northern province of Hassake.
Mediterranean and EU governmental and financial institutions could also cooperate to:
Ensure financial and technical support for the development and improvement of efficient
payment systems.
Encourage further alliances between EU and Mediterranean banks to lower fees, and
compensate for the absence of sufficient bank outreach in the case of some countries or
increase competition on the case of others. The introduction of new technologies (such as
telephone and Internet) in cooperation with communication companies would also lower
transaction fees and processing times.
Offer the opportunity to open a bank accounts to irregular migrants by creating ID cards
issued by consulates and accepted as identification by banks.
Offer attractive services (savings accounts designed for specific purposes such as building a
home, paying for school fees, supporting a business); and investment instruments that offer
some kind of guarantee of investment like investment funds or bonds for investment
projects in the home country.
Sponsor migrant knowledge transfer and the establishment of diaspora networks for
business development, such as in Algeria.
Further remove administrative hurdles and provide information on investment opportunities.
For example, the EIB´s FEMIP facility could create, in cooperation with governments, a
database and a unit to maintain and update information on a website on: remittance transfer
mechanisms, process, speed and reliability, links to EU governments sites dealing with
migration issues, and to home country sites of government and non-government institutions
that deal with diaspora, return migrants, micro-credit institutions and business development,
and information on investment opportunities.
Provide migrants willing to invest their money some sort of guarantee on investments
return, for example by establishing a knowledge center to conduct research and consulting
on investment projects, initiate and monitor projects and organize awareness and visibility
campaigns to spread information on investment opportunities in those sectors with
comparative advantages
EU and Mediterranean authorities could also cooperate with such a knowledge center, financial
institutions and the business community to establish development clusters or production
networks located on the Southern EU and Northern Mediterranean border, and based on
activities where the different countries have a competitive advantage (textile, agro-food
products and fishing). Such production network results from the geographical concentration of
interconnected upstream and downstream industries, which both compete and collaborate with
each other.
A development cluster requires a structure composed of:
A trigger or engine, with a political character, that elaborates a route map committing the
different participants in the launching of the cluster project to the assigned duties and
An academic community or knowledge center which, as mentioned, would act as a research,
consulting and information diffusion center on the opportunities for investment in the
cluster, and also as education and training provider for the development of the cluster.
A business community supported by an appropriate service provider network.
Financial services. The new Mediterranean targeted European Investment Bank (FEMIP), in
co-operation with the banking sectors and local administrations of both rims of the
Mediterranean (North and South) could tap into these large private financial flows that are
the migrant workers´ remittances to channel them to productive investments in such
clusters, which would trigger growth and development, and act as a magnet for foreign
investment as well. The backing of the EIB would be an investment guarantee for those
migrants willing to invest but held back by their skepticism and fear to risk all the money
earned during years of work.
The Mediterranean region has been unable to attract the quantity and quality of foreign direct
investment that has spurred growth and development in other regions of the world. The quite
acceptable growth performance of the last decade or so has had more to do with the
international favorable global environment than with a substantial capacity building or
productivity improvement resulting from investment, whether domestic or foreign. Yet, the
scarcity of investment is not so much due to a lack of capital. It is rather due to the scarcity of
investment opportunities for the small investor and the unfavorable investment climate,
including insufficiently developed infrastructures, inefficient administration, inadequate training
and lack of entrepreneurship, and the absence of a sufficiently developed financial system to
channel efficiently and effectively private capital to productive investments.
Officially, there were 13 billion dollars sent to Mediterranean countries by immigrant workers
living abroad in 2003. The volume of remittances forecasted for 2006 is close to 20 million
dollars, and the amount of unrecorded remittances sent through informal channels ranges
between 50% and 100%. A large share of these flows originates in the EU. There is, thus, a
substantial volume of capital flowing to the Mediterranean countries that exceed the total
volume of FDI inflows, and that remains largely unutilized. Remittances are mostly dedicated to
increase consumption, education and health improvement. Migrant’s household investment
preferences, though, remain in the housing sector, which can be explained by both a
psychological factor, i.e. the risk of loosing the savings of an entire life in a bad enterprise, and
an institutional factor, i.e. the lack of market opportunities, lack of infrastructures and limited
interest of local development institutions. Yet, the utilization of remittances for education,
improvement of living standards and health need to be considered as important tools to increase
households labor productivity, which indirectly increases growth and may encourage
Nevertheless, there is a small share of remittances dedicated to fund productive investments,
and a considerable number of migrants engage in small start-ups upon return. Many policy
measures and incentive schemes can be set up to keep the migrants attachment to the homeland,
increase their entrepreneurial and managerial skills, encourage their involvement in the
development of the home country through remittances, productive investments, technology and
knowledge transfer, business contacts, commercial networks and education and training. Higher
volumes of formal remittances can help the development of a more efficient financial system,
and improve the country’s infrastructure.
EU and Mediterranean national and local governmental and financial institutions (including the
EIB) and civil society (migrant associations and NGOs) can cooperate to exploit this new
instrument of co-development. The EU countries and institutions, such as the EIB, are
instrumental in providing the financial and technical assistance needed. By improving the
investment environment and attractiveness of the Mediterranean countries through financing
development projects, remittances have the potential of leveraging further investment, including
foreign investment. And together with the academic and business communities, development
clusters could be designed and developed on the EU-Mediterranean border, based on activities
where there is a significant comparative advantage.
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