by Eric V. Guichard
Global Remittances, a Complement to Official Development Aid?
For several decades now, global remittances – money that immigrants and citizens send to their families in countries from where they originate – have steadily grown in significance. The World Bank’s Migration and Remittances Unit recently pegged these global flows at $350 billion per year. Some estimates peg them as high as $500 billion annually – particularly when you include unofficial flow estimates and intra-continental transfers.
For some countries these foreign receipts account for as much as 20% of Gross Domestic Product. This is the case for Haiti, many central American nations, several eastern European and Asian countries. Mexico, India and the Philippines have set up entire agencies to handle the needs of migrant workers leaving country and family to work abroad. In many cases these remittances serve as rural socio-economic policy substitutes to government development programs.
In contrast, Official Development Aid (ODA), the aggregate dollar value of economic development assistance programs from developed nations such as the USA and the EU, stands only at US$147 billion as of 2017. Unlike remittances, which target domestic households directly, ODA goes through government budget allocation processes and depends heavily on successful program implementation. The current development model, which amounts to lending to sovereign governments to finance development projects, is subject to the vagaries of domestic priorities in the West. Furthermore, the socio-economic impact of ODA can be diffuse and, in many cases, hard to quantify.
Given the power of remittances to directly impact households in developing countries, how can one channel remittances towards broader development finance policy objectives? What are the challenges? What are the experiences to date? What are policy implications?
Remittances Received by Families are, for the most part, Consumed. Is that a Good Thing?
Connecting remittances to development finance is a challenging endeavor. On the one hand, there is a consumption incentive. According to the World Bank, the majority of flows received by recipient families are not saved but are spent on creature comforts. Thus, very little of these flows, as a percentage of GDP, finds its way to financing small businesses or financing development projects.
On the other hand, for most members of the diaspora seeking investment opportunities back home, deciding how much money to send and getting family members to invest rather than spend the funds, can be stressful. Often, these extra funds are not handled as directed. With no one to turn to, many diasporans travel at their own expense to initiate and oversee their investments back home – a costly proposition. Policymakers have increasingly focused on trying to improve savings rates among remittance recipients but with little success.
Paradigm Shift: Targeting Senders Rather than the Recipients – and the Birth of Homestrings
In 2011, I launched Homestrings as an online portal to introduce a new paradigm: one that focuses on diasporans who send money back home rather than on savings schemes targeting families who are recipients of remittances. Homestrings offered diasporans an array of transparent, well-structured investment opportunities, empowering them in the process. The Homestrings approach highlighted the unlimited possibilities of mobilizing diaspora capital as a force for good; other organizations have since adopted this approach.
The portal’s online investment dashboard gave diasporans many vetted choices, in their home countries, to select from: access to real estate projects, the ability to make small business loans by pooling with other diasporans; the ability to participate in the financing of healthcare projects; and the ability to invest in infrastructure bonds. Through the portal, diasporans could create a tailored investment portfolio that yielded income, but also contributed to socio-economic impact back home.
Despite these groundbreaking achievements, Homestrings faced many challenges from inception. A couple of big ones were vetting diasporans for compliance with global anti-money laundering rules, and also vetting them for compliance with regulatory qualification standards. Both of these challenges were costly propositions.
Who are the remittance Senders? – the heart of the development finance challenge.
Remittances are essentially sent by three groups of people: migrants, professionals and high net worth individuals. The size and stability of remittances sent depend on whether the home country ‘exports’ migrant workers (Philippines) or exports future white-collar professionals (Jamaica). For instance, countries like the Philippines have invested heavily in the export of migrant workers to the Middle East. Relatives in rural areas of the Philippines receive flows from individual migrant workers in the form of small regular payments between $100 and $200 per month, which are sent through tellers at a money transfer company (MTO). Because these migrants work in low skilled sectors, they tend to have less stable employment, which in turn affects the stability of their remittances. For the more sophisticated white-collar professionals, such as doctors, nurses, engineers, lawyers and entrepreneurs, who are usually from the Caribbean and from Africa, remittances sent are larger and are likely sent via an MTO’s mobile application or likely sent via formal bank transfers. Because they are more skilled, job stability is a hallmark of this group and as a result they tend to increase their remittances in periods of distress back home.  
A 2012 study done by USAID and George Washington University, sponsored by Western Union, estimated that educated Africans living in the US individually send an average of $10,000 to $15,000 per year to their relatives in Africa. Higher net worth individuals who have achieved financial success in the West tend to have their financial affairs managed by private banks who invest in professional investment vehicles. This group tends to send even larger sums. However, their transfers are understandably less transparent about how much they send to their families back home. The one thing these three groups have in common is their deep commitment to supporting their relatives in their home country and to seeking opportunities to invest in the improvement of their daily lives.
Qualifications-based regulatory barriers and the difficulty of linking Remittances to Development Finance.
The US Securities and Exchange Commission distinguishes between accredited and non-accredited investors. An accredited investor is a person with a net worth in excess of $1 million (minus the net value of their primary residence). All privately offered securities, such as unregistered debt and equity offerings, are deemed to be accessible by accredited investors only. Extending that definition, an “unregistered” economic development project, seeking private financing, is deemed to be a private offering, and therefore can only be accessible by accredited investors. This means that only “wealthy” diasporans can invest or participate in the private financing of a development project in their home country. The reality is that less than 20% of global diasporans qualify as wealthy individuals under the accredited investor definition. The US accredited investor rule considerably shrinks the available pool of diasporan remittances one could tap into to finance development projects in their home country. This restriction is woefully arbitrary, inefficient and eradicates a unique opportunity to take advantage of a natural connection between motivated private capital and social good.
The powerful appeal of connecting diaspora capital to socio-economic transformation that yields both a social dividend and a reasonable return is unfairly lost to arbitrary regulation.
Democratizing access and the emergence of crowdfunding as a development finance tool.
In 2012, an alternative means of tapping into private capital emerged. The Obama administration signed into law the JOBS Act which included a ground-breaking provision on Crowdfunding Securities (debt and equity). These new provisions of the US securities law made it easier for private companies seeking private capital to tap into contributions from the general public in exchange for an interest in the offering entity. Hence, in theory, any private offering, such as a development project, could qualify to raise capital from the general public. By extension, a privately offered development project could target and raise private capital from a diaspora group in the general public.
But some challenges remained. The rules around crowdfunding securities weren’t fully approved by the SEC until 2016. And, unlike in the United Kingdom, US crowdfunding securities rules are still relatively restrictive and expensive to comply with.
State legislators, however, seeing the potential for job creation, were quick to experiment with crowdfunding – particularly crowdfunding debt securities. Debt securities, unlike equity, are collateralized by underlying assets of the issuer, which mitigates some of the risks. Lower state-level regulatory qualification requirements help crowdfunding of securities emerge as a powerful tool to connect diasporans living in the state to the financing of development projects. However, state-by-state compliance can be an expensive proposition – even for Homestrings.
New Challenges on the Horizon: The Trump administration’s immigration policies and their projected impact on remittances.
Speculation abounds on what impact the Trump Administration’s stance on immigration will have on remittance flows from the US to emerging economies. Recent actions are not encouraging:
- The US Withdrawal from the Global Compact on Migration.
The Trump administration withdrew from the Global Compact on Migration which was agreed among developed nations to assist with refugees from conflict regions. The withdrawal means that the flow of migrants into the US will be more selective and thereby smaller. The result is clearly lower levels of remittances from the US to these conflict areas where remittances support families in distress and potentially help promote socio-economic stability;
- Enhanced Border Controls, ICE and family separations.
News of forced family separations, through enforcement of current laws, has had a chilling effect on immigration and may reduce the number of low income migrants entering the US. The result will most likely be a drop in remittances to Latin and Central America;
- H1B Visa and related spousal employment freeze.
Despite pleas from giant tech firms seeking to hire highly educated foreigners, the Trump administration intends to freeze and possibly cut the number of H1B visas that are issued by the US. This will undoubtedly reduce the pool of highly paid foreigners who remit back to their home country – thereby again reducing the flow of remittances from the US.
The combined effect of these and other related policy changes is a potential structural shift in the safety nets that are funded by immigrants through the remittances they send back. The elimination or reduction in these safety nets could lead to instability and to further security risks for the US and its allies.
What Lessons have we Learned at Homestrings?
From 2011-2016 Homestrings ran an active diaspora investment platform. With a limited annual budget of less than $500,000, the achievements were quite encouraging despite several administrative challenges. Homestrings registered over 5,000 African diasporans living primarily in Europe and Africa; listed over 35 investment opportunities; and invested over $25 million in 13 African countries. The venture confirmed Homestrings’ initial proposition: connecting diaspora capital to impactful projects back home works and can be easily scaled.
We learned some valuable lessons that may form the basis for future development finance policy initiatives:
- Crowdfunding works – democratizing access through crowdfunding works. It is facilitated by technology as easy as downloading an app on a mobile phone. It requires creating online communities not limited by geographical boundaries;
- Crowdfunding takes money. Creating and maintaining online communities takes money: it takes money to run awareness campaigns (on and offline); it takes money to identify and structure impactful opportunities; and it takes money to pay for regulatory compliance;
- Regulatory exemptions are critical (e.g.: UK banks vs. Crowdfunding platforms). At the height of the 2008 financial crisis, UK policymakers realized the conundrum they had created for themselves: on the one hand they had punished banks by imposing stringent credit-making standards; and on the other hand, they wanted and needed banks to ease their credit standards to help the economy recover. Instead of pressing banks to make loans, the UK government partnered with crowdfunding platforms making small business loans. Over £1 billion in loans were pushed in this manner, circumventing banks altogether. In part due to easier access to credit by small businesses, the UK exited the crisis faster than both the EU and the US. UK regulators made regulatory exceptions for Financial Technology companies (FinTech) to facilitate their growth and impact on British households. Similar regulatory exemptions are needed in the US to support connecting diaspora capital to development finance. No such effort has been undertaken in the US as yet. Homestrings is seeking support to make the case for these much-needed paradigm-shifting regulatory exemptions.
US Foreign Policy Implications of Channeling Remittances into Development Finance – A Competitive Advantage
Since China’s emergence as an economic power, it has been investing heavily into emerging markets, in Asia and Africa in particular. With its foreign exchange reserves standing at over $3 trillion, China is seeking in part to secure natural resources to fuel its own growth, but also it is seeking to position itself geopolitically as an alternative, and possibly more accommodating, economic development partner to emerging economies. The size of China’s foreign investments, which target economic development projects in emerging economies, dwarfs the size of ODA provided by the West, making China a competing influence. This rapidly expanding influence has begun to crowd out US companies from gaining market share in emerging markets where China is present.
But, the US has an advantage. Despite recent immigration policy changes, over 60% of worldwide remittances emanate from the US, which is reflective of the immigrant nature of this country. It could be said that the US has a significant “migrant competitive advantage” relative to a more homogeneous China. With developing countries filtering their allegiance through the lens of development finance contributions, the US stands a chance of narrowing the influence gap with China if it is able to leverage its “remittances advantage”. The US can achieve this by making it easier, through partnerships with the private sector, to structure development projects that are financed through remittances sent from the US. An active engagement with MTOs by agencies like USAID, in conjunction with development project sponsors, and Homestrings, could lead to a new, more competitive, development finance paradigm.
Remittances are a powerful force for good. Channeled into development finance they can be transformative. In these times of tight fiscal budgets, diaspora capital and remittances can be critical pillars of US development finance policy. Regulatory reform around investor qualifications is needed to channel remittances into development finance. The rules are not set in stone. The example of the World Bank being granted regulatory exemptions for its private sector-inspired management of sovereign foreign exchange reserves proves that US regulators are amenable to a well-argued case. The World Bank successfully argued to the US regulator that its active management of its members’ foreign exchange reserves, an otherwise regulated investment management activity, qualified as an economic development endeavor, thereby exempt from SEC oversight. In that vein, remittances targeted at socio-economic support and safety nets clearly qualify as an economic development activity and should therefore be exempted from SEC investor qualification rules.
As a nation of immigrants, the US is the largest sender of remittances to the rest of the world – standing at $138 billion annually. We have recently been challenged by a new form of expansionary ideology, a kind of Sino-Capitalism that is placing an influence juggernaut on emerging markets at the expense of US business interests. US policymakers can and should turn remittances emanating from the US into a potent policy response to this kind of influence. Homestrings has proven that this can be achieved. But it requires a fundamental rethinking of the development finance paradigm and maybe a disruption of the current model.
 World Bank 2016 Migration and Remittances Report.
 A limited study comparing the impact of USAID programs to the impact that direct receipt of cash has on household well-being was conducted by CASH AID with interesting conclusions (cf. https://www.cashaid.org)
 Harvard Business School Case Study: “Homestrings, Inc. and the Crowdfunding of Development” – Case No. N9-814-031
 The receipt process is a little more complex, but the point is that the family ultimately receives cash payments directly.
 Haitian diaspora sent over $2 billion to relatives in Haiti following the 2010 earthquake.
 Dilip Ratha, PhD – World Bank Migration and Remittances Unit findings.
 USAID/GWU/Western Union African Diaspora Survey – 2012
 SEC definitions reference: https://bit.ly/2pzHCkF
 Homestrings estimates
 Unlike the US, the EU definition of accredited investor is based on a knowledge test rather than a wealth test. Who better knows the risks inherent in their home country than diasporans?
 JOBS Act of 2012: https://bit.ly/2xPou68
 Georgia, California and New York State – more notably. Understanding where migrants/diasporans have clustered informs whether one should consider making private development offerings at the State or at Federal level.
 The Dialogue – Manuel Orozco – Program Director, Migration, Remittances and Development
 Funding Circle and UK Government partner to fund UK SMEs: https://bit.ly/2Id91BJ
 World Bank.
Eric V. Guichard is the Brooklyn-born founder and CEO of Homestrings, Inc., a diaspora engagement research and consulting firm. Prior to Homestrings, Eric founded GRAVITAS Capital a boutique asset management company and prior to this he was Portfolio Manager at the World Bank.
Eric has advised the African Development Bank, the Asian Development Bank, The World Bank and USAID on diaspora engagement matters. He has published research papers on connecting remittances to development finance in Bangladesh and Sri Lanka for the Asian Development Bank and on Haiti for the World Bank (IFC).
He is a graduate of Cheikh Anta Diop University (Dakar, Senegal); of Duquesne University and of Harvard Business School where he was a World Bank Scholar and a Harvard Fellowship recipient. Eric is recipient of several awards including 2013 Entrepreneur of the Year; and 2014 African Financier of the Year for Homestrings.