The war on third-world remittances

HONG KONG There are many noncombatant casualties of the "war on terror." Most obvious may be victims of mistaken identity stuck in Guantánamo or some secret detention center. But the most numerous are the migrant workers and their families, whose global remittances now run at over $200 billion a year, or three times official aid budgets. Even for a higher-income individual with a long-established banking relationship in a developed country, the bureaucracy now involved in cross-border remittances can be mind-boggling - a reminder of the bad old days of mail transfers and near universal exchange control. This regulation does almost nothing to stop either terrorism or drug dealing. Most terrorist acts have required no more funds than needed to buy a second-hand car. As for drug money, there is no sign that this well-organized business has any trouble avoiding antilaundering regulations through apparently legitimate trade transactions. The losers are not terrorists or drug dealers but Nigerians in Belgium, Indians in Britain, Senegalese in Germany, Colombians in the United States and Tongans in New Zealand, to name a few, who send home perhaps $200 a month to their families. Costs for the small amounts of remittances typical of unskilled migrant workers are also a deterrent. Studies have shown that remittances could rise by an average of 50 percent overall, and more than double for Africa, if costs were cut significantly. The war on terror is only one part of that cost, but it is a significant one at a time when charges should have been falling. The sheer scale of migration and remittance has been increasing fast, and communication costs have been dramatically reduced by the Internet and the collapse of international call charges. A recent World Bank report has drawn attention to the high costs of remittances resulting from regulation and lack of competition, some of that attributable to antiterror measures. The bank uses cautious language, but it notes that the cost of post-9/11 regulations has been passed on to users and that "know your client" requirements are a hazard for workers who may have no bank account. Regulations have also benefited large money-transfer organizations and banks at the expense of smaller, cheaper channels. It notes: "Hundreds of money service businesses in the U.S. have been closed by banks for fear that they may be targeted by authorities for servicing customers regarded as 'high risk'." Similar trends have occurred in other developed countries. The report shows just how high costs can be. For a $200 remittance through a major money-transfer organization, the cost ranges from 12 percent from Belgium to Nigeria, to 11 percent from Britain to India, 5 percent from the United States to Mexico and 4.5 percent from Hong Kong to the Philippines. Banks mostly charge somewhat less but are more difficult to access. Smaller money-transfer organizations are also cheaper - but they are the ones that have been squeezed hardest by regulation. By far the cheapest remittance method is the "hawala" system used in India and the Middle East and its Chinese and other equivalents - informal systems based on trust. Their charge for a $200 remittance is from 1 to 2 percent. Fraud is very rare, but these systems are just the ones regarded with most suspicion by regulators who put their trust in form- filling and big institutions as the barrier to illicit transfers. Big transfers - say from Myanmar drug dealers to businesses run in Singapore or Hong Kong - go through the more formal routes. But regulators in developed countries find it easier to focus on the mysterious than on the obvious. Besides antiterror regulation, a lack of financial- sector competition, volatile exchange rates and currency controls also impede remittances. The Philippines, where migrant workers have political clout, has shown how addressing those issues cuts costs and leads to a significant increase in remittances. U.S.-Mexico costs have also come down, despite the war on terror, because of the scale of remittances and Mexican action to cut local delivery costs. But over all, remitters could be losing between $5 billion and $10 billion a year because of system inefficiencies and the high profits made by banks and transfer organizations. Potential remittances frustrated because of costs and difficulties could be $50 billion a year. What for the well-off is a minor additional cost when remitting $5,000 in college fees is a huge impost for someone sending his family that precious $200 a month.