Hearing of the Subcommittee on the Western Hemisphere of the House Committee on Foreign Affairs - Leveraging Remittances for Families and Communities
Statement
Hearing of the Subcommittee on the Western Hemisphere of the House Committee on Foreign Affairs - Leveraging Remittances for Families and Communities
BREAK IN TRANSCRIPT
REP. ALBIO SIRES (D-NJ): Thank you, Mr. Chairman.
Coming from a district where right around this time there seems to be an increase of remittance as the holidays approach and knowing many of the families what they basically do is they pool up an amount of money together -- well, the families that I hear -- and remit the money during the holidays. And if anybody has any concern where this money goes, I can tell you it goes directly to the families that need it, right to those families.
I know people have concern where the money goes. I lived through it. I live every day. The money that is sent, I have never heard people complaining that the money that they send goes for anything else but the people need in those countries that it's remitted to. So I'm looking forward to learning more about the process. And I want to thank you for being here, all the members that are going to testify before this committee.
Thank you very much, Mr. Chairman.
BREAK IN TRANSCRIPT
REP. SIRES: In your statement, can you just clarify for me what you said about El Salvador where I thought you said that the money that is sent to El Salvador, people tend to take that money and not go to work. Did you say something along those lines?
MR. BONICELLI: There are some studies that are showing that there may be -- there are labor shortages in Salvador in some pockets of the country, and some studies suggest that it could be because when remittances are high enough it is discouraging employment. Some people who look at it say it's the welfare curse, but I would not argue that it's conclusive. I would say that's what studies are pointing to.
REP. SIRES: The experience that I have is that the remittance that these people get, they barely are able to buy anything with.
MR. BONICELLI: Well, one of the reasons that the studies conclude that is because there are Nicaraguans who are working in parts of El Salvador, and the assumption is they've come there because there is a labor shortage.
REP. SIRES: Yeah, but whoever came up with that assumption, I have to tell you they have to restudy the whole thing, because the amount of money that these people are able to send to their families, first of all, they don't make a lot of money in this country and it's a sacrifice for these families to send money back home. So whoever came up with that deduction, you know, I wish I knew who it was so I could send them a letter because it is one of the dumbest deductions I ever come across.
MR. BONICELLI: I'll be happy to look more closely and get you the information.
REP. SIRES: The other -- people always worry about money laundering. Do you see evidence that -- I mean, is it prevalent? Is it something -- because, you know, people here who do not believe in remittance say that this could be used for money laundering. Do you have any evidence that there's a lot of that going on or do you hear of any of it? I mean, I don't expect you to know, but.
MR. BONICELLI: I haven't personally seen it. I believe my colleagues in the Treasury Department are aware of that more than we would be, but I have not seen that personally and I would assume that it is a small amount if it exists, because, as you said, most of our experience with people receiving remittances is exactly as you described.
REP. SIRES: It's a small amount of money.
MR. BONICELLI: Well, not only a small amount of money but it's going to people who have pressing needs for it and it's not terribly a loose system. But I don't want to speak for the Treasury Department.
REP. SIRES: Okay. Do you believe that this is creating a group of people dependent on the American economy or do you believe that this is a -- something that is going to help these families get ahead, this money that comes from --
MR. BONICELLI: I would have to say I assume both things are happening. People -- these families left behind are simply dependent, especially if they happen to be the ones who can't go and work and can't get a job where they are. There's no question of the fact of them being dependent. I don't think it's what they desire nor is it what their relatives in the United States desire or wherever the stronger economy is they've gone to. That's why our program overall seeks to strengthen the economies of these countries so that remittances aren't even a factor, or if they are, they are adding to the investment of people who are -- if I could put it as -- sophisticated investors in whatever they can invest in in their home economies.
REP. SIRES: Thank you very much.
BREAK IN TRANSCRIPT
REP. SIRES: Thank you, Mr. Chairman.
I -- (inaudible) -- before. What is the average size of a transaction to Central America? In other words, you have you said $100 a check, or is it $200?
MR. BONICELLI: I believe it's $300. I think it's 300 (dollars). I know it depends on the country.
REP. SIRES: Is that yearly or monthly or --
MR. BONICELLI: Monthly is my understanding, on average. The average person working in the United States sending a remittance is sending about 20 percent of his income back. And so --
REP. SIRES: On a monthly basis.
MR. BONICELLI: On a monthly basis.
REP. SIRES: Does it differ to, let's say, the Caribbean? Is it a little higher in the Caribbean or a little less?
MR. BONICELLI: (Off mike consultation.) The World Bank study shows a huge divergence across the (body ?) as high as 250, 300, 600 (dollars) down as low as $90. It depends.
REP. SIRES: Who gets 600?
MR. BONICELLI: And that's the entire region there.
MR. : Jamaica.
REP. SIRES: Jamaica gets $600 a month from families that work here? And --
MR. BONICELLI: It looks like that's an aberration for Jamaica because the Central America's like, Salvador's 400 (dollars).
REP. SIRES: And who gets 90 (dollars)?
MR. BONICELLI: Paraguay, about four of them are in the 90s. Panama is in the 60s.
REP. SIRES: Okay. Thank you.
BREAK IN TRANSCRIPT
REP. SIRES: Mr. Armenteros, I don't think we want to get to that point where we fight to the death for an account. (Laughs.)
I just have a couple of questions.
Dr. Orozco, you were talking before about how the money that is remitted has helped create bank accounts in El Salvador and in other places. Can you expand a little bit on that?
MR. OROZCO: Without any intervention, any person who has been receiving money for at least five years end up accumulating significant amounts of savings, over $2,000, and they're able to put them in a bank. When a financial institution realizes that there is an opportunity to be made not only for those people who take five years, they accelerate the process by offering bank accounts to the area recipient. After one year, they start offering you, and the result turns out to be that this individual was at least 30 percent of remittance recipients become bank -- (word inaudible). And they start by opening savings accounts.
Then there is another group of people who begin to borrow loans, and now we are trying to promote also different kinds of insurance products from -- you know, one insurance product that is becoming popular in Mexico is body repatriation. That is for the family of the migrant in the United States, but you buy the insurance over there. If the person dies, then you can't be able to afford to pay the 5(,000), $10,000 for return of the body.
So there is an increasing process, but it's not a systematic one. And what we are trying to do from the policy perspective is to promote opportunities for banking institutions to accelerate this process of financial service delivery. And still it's an early process, but this is where developing institutions like USAID can participate to trigger the change.
REP. SIRES: I assume that you don't agree with this idea that it creates people that stay home and do not go to work because they get this little amount of money every month.
MR. OROZCO: No, no, no. I think --
REP. SIRES: Whoever made that assumption I guess you don't agree with.
MR. OROZCO: -- I will take you to those communities and show you. But just -- it's simple arithmetic. Twenty percent of remittance recipients are people over 55 years of age, are almost about to get ready out of the economically active population. Another similar percentage are under 18 years of age. They are not in the economically active population. And then half of the people who receive remittances are actually employed. The other half, or two- thirds sometimes, are women, household -- homemakers. So, I mean, it just, the arithmetic doesn't add up on that case.
REP. SIRES: So we're not creating this lazy --
MR. OROZCO: We are not creating, but you can find -- you can always find the lazy person. I can point to them. Every country I go to, you find them, but the trend is not that.
REP. SIRES: Okay. Can you help me understand a little bit this idea of remittance use for development? Because some people have this idea that we should -- that this country -- that people that remit money to other countries, some of that money should be used for development (invested ?) for development. I don't understand that because what I -- you know, I'm having trouble understanding it because I -- let's say it's me. I work here. I make this money. I pay whatever, taxes, whatever I do. Then they want me to remit the money back and they're going to tell me how to use my money that I earned and pay my taxes here? Can you just explain that to me?
MR. OROZCO: Unfortunately, the topic of remittances have become a very sexy topic, and everybody develops an opinion about it. Some people say yes, you should remittances for development, but they don't know exactly what they mean. You cannot think of remittances as a development tool, per se, because they're already doing exactly what you need to do with that money, is taking care of your families; that in itself promotes development. So what one tries to do is to identify opportunities to leverage the funds basically to inform the public about how can you multiply, increase or capitalize the money that you are saving. And you cannot go beyond that. You can offer education, opportunities, et cetera, but you cannot tell people what to do with their money.
REP. SIRES: So where did this concept come from?
MR. ARMENTEROS: Let me give you a -- there's a -- the way I -- when people talk to me about remittances and development, how you can get more value, more development value out of remittances, what I mean when I'm asked is -- take a lake on a volcano, on the top of a volcano. What you get from it is maybe fishing and some tourist -- a tourist attraction. If you build a generator, an electric generator, halfway down the mountain, and you have gravity come down and power the generator, you create -- you have electricity that power -- electricity that you can use in the town next door. So without changing anything, you have additional value coming from that.
In a similar manner, if remittances are -- it's a mystery of capital -- (inaudible). In remittances, if you have remittances or a portion of remittances go to microlending institution or microfinance institutions or banks, you have that the unused portion -- I agree absolutely with you that money shouldn't be -- you get to do what you want. But if you are taught and convinced that you can leave some of that money into a bank account, that alone accumulates capital. Multiply that capital by a thousand remitters and depositors, and then you have that a microlending institution has more resources to lend in the community that it resides and it helps the people that do not have access to capital for and then it generates income for the owners of that capital.
And also for lending, once you create a history, a credit history, you can access more capital than you have. You have $5,000, you need 15(,000) to open a small business -- you don't have to wait another five years to accumulate them; you lend them using as collateral and as credit history a securitization of your historical flow of money. If the banker knows that your family has that income coming in every month and it's been there for the past five years, you can use that history to justify giving that person $10,000. And this is a peculiarity that is missed in many people.
There are only -- in poor countries, there are only two types of people that have an income in hard currency: the very rich that have a CD in the U.S. or in Europe and they draw interest, and someone with an aunt in New York or New Jersey that sends money. So the fact that that family receives a reliable and predictable income in hard currency changes the risk profile of that person and you can lend more money with longer periods at a lower rate. And it has more of an impact. That's what I mean when I'm talking about.
MR. SCHMITZ: Can I -- I would like to add just one thought to that. I think many migrants come here and they have the idea that they want to go back at some stage, and ideally they don't want to go back to the same situation that they left. So they want to build a house. Ideally, they want to create a business or at least an employment opportunity. And I think this really is what creates development because if they create small businesses, they build houses, they create assets, they may create employment opportunities for other people also.
Sometimes, they also have a knowledge transfer. They learn things here. They learn how to run a restaurant, for example, from working in a restaurant here. So they send money home to build a restaurant.
And there's I think many examples where remittances are sent to pay for a house or for the improvement of a house, but one of the biggest problems that we see is that there's no support for these type of investments on the ground. If a remitter wants to build a house in their country -- say a Salvadoran has a small plot of land he wants to build a house in his village, he doesn't have the $10,000 or $15,000 that he needs to build the house in one go.
If nobody gives him credit, they keep sending $1,000 every now and then whenever they can afford it to lay the foundation, six months later build some walls, the problem is that this drags the whole project on for years. Some of the material gets stolen. Some of the funds get lost and so on. So ultimately, if the house is ever completed, they probably spend $35,000 on a house that should have cost $15,000.
And something similar happens with business investments. They send money home to create a small business, but as it's difficult to manage the business from here and they can't travel, they hire somebody, they use their cousin, their brother or somebody to run that business. Sometimes it's not run very well, so in the end the investment is unsuccessful.
And I think the key to creating a development impact is to have programs on the ground that help small entrepreneurs to create these businesses to provide mortgage loans to people who want to build a house at home so that ultimately you can help the migrants to fulfill their dream and their objective of their migration.
REP. SIRES: Okay. And my last question is has there been progress in the last few years by some of these companies that offer money transferring to translate the fees and the requirements and the instructions regarding the transactions? In other words, have some of these places translated -- they give you a chart with fees. Do they explain it in their own native language?
MR. ARMENTEROS: Yes.
REP. SIRES: It's --
MR. ARMENTEROS: To your question, it's much more transparent than before. And the effect is that there's more trust. The combination of regulatory oversight and competition, me selling myself as more honest and transparent and having better rates has forced everybody to be absolutely transparent about everything. Not everybody absolutely, but it's not a problem anymore in most parts. That's my opinion anyway.
REP. SIRES: Anybody else have any --
MR. SCHMITZ: Well, I agree to an extent. I think there's still -- what you typically find in the very competitive areas where you have large migrant concentrations, there's a lot of competition and therefore transparencies. People are better informed.
Sometimes there's NGOs that inform migrants about their options and about the meaning of foreign exchange gains, for example.
But you have other parts of the country where you have smaller migrant communities where there's very little competition, where you typically only have one or two providers, and I think what you are describing still exists in those cases. The prices are much higher. There's not much disclosure about foreign exchange rates. So I think in the big communities yes, it has gotten much better. But if you go to, I don't know, Nebraska and Ohio where you sometimes find farm workers and so on, I guess you will find that it's very different there.
REP. SIRES: Thank you very much.
BREAK IN TRANSCRIPT
Source