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July 2011, Volume 18, Number 3

Remittances, Recruitment, Circulation

Remittances to developing countries were $325 billion in 2010 and are expected to be higher in 2011. ( Remittances are almost three times Official Development Assistance but less than Foreign Direct Investment to developing countries, which was about $400 billion in 2010.

The single largest remittance agency is Western Union, with 445,000 locations that allow people to send money. Western Union says there are 16,000 "migration corridors" world wide, meaning significant flows of money from one country to another. The business of sending money over national borders is growing rapidly because it is relatively cheap to establish a network, and money transfers are less regulated than banking.

After the September 11, 2001 terrorist attacks, governments cooperated with banks and international institutions to reduce the cost of transferring small sums over national borders via regulated financial institutions. The goal was to minimize informal remittance channels that could be used by future terrorists.

The keys to reducing remittance costs include educating migrants, changing rules so that migrants can open bank accounts and send funds via regulated financial institutions, and take advantage of technological innovations that reduce remittance costs, including transfers via mobile phones. Some migrant-receiving governments require employers to pay migrant wages via direct bank deposit to expedite the resolution of wage disputes, which also increases the probability that migrants remit via regulated banks.

Over half of the 73 million migrants from developing countries in industrial countries in 2010, some 40 million, were in the labor force, making over six percent of the 600 million workers in industrial countries migrants from developing countries. Most migrants in industrial countries are low-skilled, as with Mexicans in the US, but many are highly skilled, such as Indian IT workers in the US and Europe.

Many developing country migrants pay high recruitment fees to get jobs abroad. A South Asian migrant may pay $2,000 for a contract to work in the UAE that will offer $7,500 in wages over three years, making recruitment costs a quarter of foreign earnings. Cutting recruitment cost in half saves the migrant $1,000, and more if interest on loans that are often taken is considered.

The options to reduce recruitment costs include educating migrants, regulating recruiters, promoting competition or ethical recruiter behavior, and establishing recruitment monopolies that have regulated fees. However, education, regulation, competition, and recruitment monopolies have so far not significantly reduced recruitment costs, especially in Asia, which has some of the fastest-growing labor migration flows.

There are many reasons why it has been difficult to reduce recruitment costs. First, remittance transfers occur more frequently than recruitment, making it easier to educate migrants about remittances. Second, remittance transactions are far more standardized than job-worker matches, which makes them more transparent to participating migrants as well as NGOs and enforcement staff; there are also more economies of scale with remittances. Third, remittances normally leave a paper trail, from an employer paying wages to a migrant transferring some of her earnings to family and friends at home, while many recruitment-related transactions are made in cash.

Remittance costs are on a declining trajectory because of greater migrant awareness, revised banking rules and competition, and technology such as mobile phones. Recruitment costs are not on a similar declining trajectory for many reasons. Recruiters in some countries are well-connected politically, making it hard to prosecute them for violating recruitment regulations. In many cases, charges against recruiters are dropped by workers after the recruiter provides a contract or makes a payment. In some cases, payments for recruitment are hard to detect because they are made early in the process in cash or reflect what recruiters in one country pay to obtain job offers in another. Finally, governments may set unrealistically low maximum recruitment charges and tolerate overcharges.

The cost of "bad" recruitment transactions can be much higher than the cost of bad remittance transfers, including workers finding themselves in debt bondage or forced labor abroad. When bad recruitment outcomes are discovered, there are several reactions, including halting the recruitment of workers from particular countries (such as periodic Saudi Arabian bans on the arrival of additional Bangladeshis) or stopping the deployment of particular types of workers (the Indonesian government ban on sending more domestic helpers to Malaysia between 2009 and 2011). These recruitment bans can hurt employers who do not get workers as expected, migrants who do not have the foreign earnings they expect, and recruiters and the businesses associated with them.

Other reactions to bad recruitment outcomes include mandatory migrant pre-departure training and government checks of job offers and migrant contracts. The theory of mandatory training is that workers who have never been abroad need help to understand working and living in a foreign country. However, there are several practical difficulties with effective pre-departure training. First, such training usually comes too late in the recruitment process for a migrant to change his or her mind, since most recruitment fees are paid well before the training. If training convinces them they should not go abroad, most migrants will have no good way to repay pre-departure debts.

Second, pre-departure training often has costs that are paid by migrants, from training fees to the opportunity cost of not earning wages during several weeks of training to living costs if training is provided away from migrant homes. Third, learning may be limited for low-skilled migrants if instructors are non-migrants who have never worked in the foreign jobs migrants are expected to fill.

Government checks of job offers and migrant contracts are also helpful but provide no panacea. Such checks have costs that must be paid by migrants or from general tax revenues. Government staff in embassies abroad dealing with hundreds of job offers, and staff dealing with the departure of several thousand migrants every day, may not catch all "bad" offers and contracts.

Circular Migration. Some governments and the European Commission have embraced circular migration, the notion that workers can circulate between homes in one country and jobs in another to make labor migration more acceptable in receiving countries and to promote development in migrant areas of origin.

Advocates of circular migration cite triple wins: for migrants who earn higher wages, receiving countries that get temporary workers but not settlers, and sending countries that reduce unemployment and obtain remittances. Critics say circular migration is simply another name for guest worker programs that failed to prevent worker settlement in the past, and that the emphasis on circulation helps receiving countries have more flexible labor markets.

In some cases, circular migration is simply a 21st century type of guest worker program, a way for migrant-receiving countries to get migrant-sending governments to cooperate to ensure that migrant workers return. Most labor migration to the Gulf oil exporters satisfies the definition of circular migration in the sense that low-skilled workers leave after two or three years, although some return for multiple periods of employment in Saudi Arabia and other Gulf countries. However, migration to Gulf countries from South Asia is distinguished by high recruitment costs paid by migrants and limited migrant protections abroad.

Critics say that circular migration programs can be "bribes" offered by rich countries to persuade poor countries to help manage unwanted migration from them and to accept the return of apprehended migrants. If circular migration programs were modified to better protect migrants, such as giving migrants the right to change employers abroad, issuing multi-year or return visas, and providing skills training and re-entry assistance, the costs of migrant workers may increase, dampening employer demand for them.

The circular migration programs in place are generally too new to be evaluated. Until there is more experience, immigration to fill year-round jobs and guest workers to fill seasonal jobs may be the best option to achieve the triple wins sought by migrants, sending and receiving countries.

Economy. The 30 richest countries included about one billion of the world's seven billion people and generated almost two-thirds of world GDP in 2010. The share of GDP produced in rich countries is about 50 percent at purchasing power parity, largely because services cost less in developing countries.

Wickramasekara, Piyasiri. 2011. Circular Migration: A Triple Win or a Dead End. ILO-GURN Discussion Paper 15.