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APEC ARS Working Group Report Informal Funds Transfer Systems in the APEC Region: Initial Findings and a Framework for Further Analysis Prepared for APEC Finance Ministers and Deputies Meeting September 1-5, 2003 Phuket, Thailand IBRD 32660 80° 100° 120° 140° 160° 180° 160° 140° 12 0° 100° 80° EAST ASIA AND THE PACIFIC FORMAL WORKER RUSSIAN FEDERATION REMITTANCE FLOWS Hudson 60° 60° Bering Bay IN THE APEC REGION Sea Sea of Okhotsk CANADA APEC MEMBERS MEXICO TOTAL WORKER REMITTANCES AND 8,896,000,000 COMPENSATION OF EMPLOYEES RECEIVED FROM IMF BALANCE OF PAYMENTS DATA* REP. OF KOREA REMITTANCE FLOWS (RECIPIENTS): US $584 mn PHILIPPINES UNITED MEXICO ° ° 40 STATES 40 MALAYSIA CHINA CHINA REP. OF JAPAN US $1,209 mn KOREA UNITED STATES VIETNAM US $2,380 mn ATLANTIC INDONESIA OCEAN THAILAND REPUBLIC OF KOREA Gulf of CHINA Mexico HONG MEXICO CANADA 20° KONG MEXICO 20° UNITED STATES THAILAND US $9,920 mn HONG KONG US $1,252 mn THAILAND VIETNAM PHILIPPINES Caribbean Sea PHILIPPINES NEW ZEALAND US $6,357 mn AUSTRALIA BRUNEI PERU MALAYSIA MALAYSIA US $1,156 mn CHILE 0° 0° SINGAPORE PACIFIC OCEAN INTERNATIONAL BOUNDARIES INDONESIA PAPUA NEW GUINEA INDONESIA PERU US $1,046 mn Coral PERU *The numbers on this map refer to the US $716 mn workers' remittances credit and compensation Sea of employees figures from all countries. The source of the numerical data is the IMF Balance ° ° 20 20 of Payments Statistics Yearbook, 2002 (See Annex II). AUSTRALIA CHILE For the amount of outgoing remittance flows please AUSTRALIA refer to the APEC Economy Profiles in Annex I. INDIAN US $466 mn OCEAN Tasman Sea NEW 40° ZEALAND 40° NEW ZEALAND US $216 mn 0 1000 2000 Kilometers This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information 0 1000 2000 Miles shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any (Scale at the equator) endorsement or acceptance of such boundaries. 80° 100° 120° 140° 160° 180° 160° 140° 12 0° 100° 80° AUGUST 2003 Informal Funds Transfer Systems in the APEC Region: Initial Findings and a Framework for Further Analysis Note: The following document represents the views and conclusions of the World Bank research team that was primarily responsible for producing this report. Even though the members of the Asia Pacific Economic Cooperation (APEC) aided in the production of the document, the report has not yet been endorsed by the APEC Finance Ministers and Deputies Meeting. FINAL DRAFT Prepared for the meeting of the Asia-Pacific Economic Cooperation (APEC) Finance Ministers and Deputies, September 1-5, 2003. This draft report benefited from input provided by the ADB, including the use of an excerpt from a study of remittance flows into the Philippines, and comments from the IMF. ACKNOWLEDGMENTS The APEC Working Group provided consistent support throughout the drafting process, and the following individuals contributed especially valuable insights: Mahdi Mohd Ariffin, Salvador Bonilla, Audrey Chia Yen Ching, Sheridan Evans, Raul Gomez- Roman, Pedro Hernandez-Coss, Ahmad Hidayat, Shin In-Sik, Syurkani Ishak-Kasim, Alberto Islas, Ou Yun Jun, Ren Lie, Juan Bosco Marti, Hajime Misono, Lee Boon Ngiap, Lois Quinn, Kristina Rai, Geetha Rao, Gilles René, Woon Hooi Shyen, Sunittra Sittisettapong, Weerachat Sribunma, Ketsuda Supradi, John Thomas, Alfie Ulloa, Somrasri Yupho, and Andres Zetina. The team appreciates the comments and support provided by World Bank, IMF and ADB colleagues: Richard Adams, Khun Aei, Nagavalli Annamalai, Amar Bhattacharya, Maud Julie Bokkering, Pierre Laurent Chatain, Joaquin Cottani, Alain Damais, Nicolas De la Riva, Jose De Luna, Vie Tuan Dinh, Ejaz Ghani, Theodore Greenberg, Isabel Guerrero, Joseph Halligan, Eric Haythorne, George H. Hoezoo, Bert Hofman, Martin Josefsson, Jacob Kolster, Mark LaPrairie, Jeffrey Lecksell, Samuel Maimbo, Kazi Matin, Lloyd McKay, Kevin Mellyn, Bess Michael, Takashi Miyahara, Herbert Morais, Motoo Noguchi, Larry Promisel, Martin Rama, Dilip Ratha, James Seward, Vicky Tan, Thang- Long Ton, James Villafuerte, and Margery Waxman. The core team of the World Bank was integrated by Oriana Bolvaran, Nicolas Carter, Inken Hoepner, Maria Orellano, Jonathan Parnes, Juri Sekiguchi, Sanjay Sinha, Paolo Ugolini, and Raul Hernandez-Coss, as team leader. We are grateful to the following organizations for their cooperation in researching aspects of the report: Banamex, Bank of America, Banorte, Bansefi, Celent Communications, US Bank, US Federal Reserve Bank, Wells Fargo, and Western Union. CONTENTS Page Executive Summary i Map: Formal Worker Remittance Flows in the APEC Region iv Abbreviations and Acronyms vi Introduction 1 I. Overview: Perspectives on Informal Funds Transfer Systems 3 A. Formal Funds Transfer (FFT) Systems 3 B. APEC’s Goals, IFT Systems, and Abuse of Financial Systems 10 II. Initiatives: Understanding the Funds Transfer Market Through Micro-Level Policies and Market Products 14 A. Bilateral Initiatives to Strengthen Remittance Services in the Formal Sector 14 B. Private Sector Initiatives to Improve Remittance Services 16 C. The Need for a Comprehensive Framework 22 III. Framework and Preliminary Application 23 A. Developing a Framework 23 B. Diagramming the Framework 32 C. Applying the Framework 33 IV. Conclusions and Policy Recommendations 37 A. Assessing the Framework: Benefits and Limitations 37 B. Main Findings from the Framework 37 C. Recommendations and Policy Guidance 40 Bibliography 42 Annex I: APEC Economy Profiles 47 Annex II: Six APEC Economy Reports 73 Annex III: Excerpt of The Philippines Case Study 97 - ii - Informal Funds Transfer (IFT) Systems in the APEC Region: Initial Findings and a Framework for Further Analysis Executive Summary Objectives and Scope of the Asia-Pacific Economic Cooperation (APEC) Alternative Remittance Systems (ARS) Working Group Report This report has three objectives: (1) to equip individual APEC economies with a basic uniform framework with which to perform in-depth analysis of money flows through ARS; (2) to provide a first indication of the direction and volume of such flows to and from APEC economies, which can serve as a basis for future action; (3) and to highlight the benefits of formal money remittance channels and provide policy recommendations on how to encourage greater flows of funds through such channels. The report is an initial attempt to address ARS, called informal funds transfer (IFT) systems throughout the report, and should not be seen as a comprehensive finished tool. It is a modest contribution to the international discussion of IFT systems and the efforts of the APEC ARS Working Group. Private-sector entities and some governments have made strides in understanding the IFT phenomenon and addressing the market in funds transfers through new products and micro-level policies. However, governments have been prevented from formulating more effective macro-level policies because of the lack of comprehensive reliable information about IFT systems operating on a regional scale. Development of a Framework for IFT Systems Analysis The comprehensive framework presented in this report is an initial attempt to gauge the wider scope of IFT activity from a quantitative and qualitative perspective, providing governments with a means to gather the information they will need to address the IFT phenomenon in an organized uniform fashion. From a quantitative perspective, Part 1 (Quantitative Economic Analysis) of the framework demonstrates the need for a process to estimate the magnitude of IFT flows between economies based on indirect estimation from various data sources. The framework assumes that migrant workers’ remittances are a major component of IFT flows. From a qualitative perspective, Part 2 (Qualitative Incentives Analysis) of the framework analyzes IFT channels by identifying the perceived incentives—personal, economic, and customer- service related—that influence a money remitter when deciding how to send funds. This portion of the analysis suggests that if incentives, tailored to the cultural and economic nuances of a particular jurisdiction, can be offered by the formal financial sector and aided by supportive policies from the government, migrants will move from informal to formal systems. It should be acknowledged that legitimate IFT flows are composed of more than just workers’ remittances. Although some of these IFT components are addressed in the - i - framework, they are not the focus of this report. The framework addresses these topics indirectly by examining perceived incentives to use IFT systems. Applying the Framework This report applies the framework to all APEC members. Preliminary profiles for each APEC member demonstrate how each element of the framework can be fleshed out and which elements require further investigation. The framework is hindered, however, by a lack of reliable data for many APEC economies. The general observations in the profiles will need to be enhanced by detailed economy-focused case studies based on the framework proposed in this report. Key Findings When applied to economies with a reasonable amount of available data, the framework produces a descriptive analysis of the funds transfer systems at work in a particular economy, both quantitatively and qualitatively. The framework was applied to six selected economies because of available data reflecting significant migrant worker movement (sending, receiving, or both) and remittances. The economies