The Netherlands-Suriname Corridor for Workers’ Remittances Prospects for Remittances When Migration Ties Loosen Study prepared for the World Bank and the Dutch Ministry of Finance by Prof. dr. Brigitte Unger and drs. Melissa Siegel, the Utrecht School of Economics Utrecht 7th of September 2006 Acknowledgements We thank all of those who helped on both sides of the remittance channel. From the Dutch side we thank the Dutch National Bank (DNB), the Dutch Banking Association (NVB), the Dutch Banks and the Dutch Ministries and Universities. In particular, the following people gave helpful support: Mr. Bakker, Heidi Broekhuis, Ad de Bruijne, Leo van Dun, Franziska Gassmann, Urmila Ghirrao, Ruben Gowricharn, Mr. Jakobs, Mr. Jonkheer, Stefan Keereweer, Mr. Kettening, Simon Lelieveldt, Chris de Neubourg, Mies van Niekerk, Annemarie Rima, Aart Schalkwijk, Denisa Sologon, Frans van Waarden. From the Surinamese side of the channel, we thank the Surinamese Central Bank, all of the Surinamese Banks and money transfer agencies, the Surinamese Ministries and Anton de Kom University. We would also like to thank: Rakesh Adhin, Roy P. Baidjnath Panday, Remy Bhailal, Jim D. Bousaid, Glenn Gersie, Carlo Godlieb, William Grisley, Dharmpersad Kalloe, Armand Karg, Lucille C. Karg, Marcel van Leeuwaarde, S.P. Mathura, Jack Menke, Loes Monsels, Sjirk Morsen, Subhas Mungra, Lie A Njoek, Bhagwandas Radjinderkoemar, Th. Ramlekhan, Monica S. Tjang A Tjoi-Pardi, Kenneth Vroom, and R.M.A. William. We would like to give a very special thanks to John Sloot for hosting us so graciously at Anton de Kom University. We would also like to thank Brigitte Slot and Raúl Hernandez-Coss for accompanying the project and Ms. Chinyere Egwuagu Bun for commenting on the first draft of it. 1 - Acronyms and Abbreviations 2 Table of Contents 1. Introduction 1.2. Why study remittances at all? 1.2. Reasons for Studying the Netherlands--Suriname corridor 1.3. Research Questions and Structure of the Study 2. Definition and types of remittances 3. The volume of remittances sent 3.1. General problems of data and estimates 3.2. Data collection in the Netherlands and information gaps 3.3. Amount of remittances being sent 3.4. The significance of remittances compared to ODA and other types of income 3.5. Illegal and informal flows 3.6. Change over time – until now and in the future 4. Senders and sources of Income 4.1. Surinamese-Dutch senders, and the Dutch-Surinamese historic relation 4.2. Differentiation 5. Remittance Recipients 5.1. Suriname - the receiving country 5.2. Surinamese remittance recipients 5.3 Remittance recipients and migration 5.4. Remittances received 5.5. Remittances and ethnicity 6. Goals, purpose and uses of remittances 7. Kind and frequency of remittances sent 7.1. In kind remittances 7.2. Frequency of transactions 8. The channels through which remittances flow: The First Mile and the Intermediary (The Dutch side of the corridor) 8.1. Corridors and channels 8.2. Various channels 8.3. Legal and formal channels 3 8.3.1. The Dutch banking sector 8.3.2. Money transfer offices MTOs 8.3.3. Financial Intermediaries: Western Union, MoneyGram, MoneyTrans and Automated Clearing Houses 8.4. Legal but informal channels 8.5. Illegal flows of money: call houses and others 8.6. Channels used by Surinamese immigrants 8.7. Major reasons for using the channels used in the first mile: 8.8. Pros and Cons of various channels 9. The channels through which remittances flow: The Last Mile (The Surinamese side of the corridor) 9.1. Corridors and channels seen from the other side 9.2. Various channels 9.3. Legal and formal channels 9.3.1. The Surinamese banking sector 9.3.2. Money transfer offices 9.3.3. Surpost and automated clearing house 9.4. Legal but informal channels: money transfer offices 9.5. Illegal flows of money cambios and casinos 9.6. Channels used in Suriname 9.7. Major reasons for using the channels used in the third mile: 9.8. Pros and cons of various channels 10. Costs and impediments to the use of various channels 10.1. Transaction costs 10.2. Risks, uncertainties and trust 10.3. Material costs and speediness 11. Regulations of remittances in the Netherlands 11.1. Regulations constituting the channels 11.2. Regulations facilitating or hindering remittances 11.3. Anti Money Laundering Regulations in the Netherlands 11.4. How the Dutch dealt with their Cambios 12. Regulation of remittances in Suriname 12.1. Regulations constituting the channels 12.2. Regulations facilitating and hindering remittances 12.3 Anti Money Laundering Regulations in Suriname 13. Conclusions and Policy Recommendations 4 Appendix 1. Some general remarks on the regulation of the Dutch financial sector: The development of the Twin Peak Model of Supervision of the financial sector Appendix 2. Some further problems with defining workers’ remittances References 5 1. Introduction 1.1. Why study remittances in the first place? For a long time it was thought that an emigration of the more enterprising and educated people from developing countries would be detrimental to their economies. Such a ‘brain drain’ was expected to have among others the following effects: • decrease in average level of education due to the loss of the higher educated • lower productivity due to the loss of skilled workers • decrease in economies-of-scale in skill intensive industries • decrease in health public expenditures due to less state income • lower public education expenditures • increase in the price of technical services However, more recently, it has been realized that such an emigration could also have positive effects on the home country. First of all, being abroad, emigrants establish networks through which information, ideas, or initiatives are exchanged. Moreover, they often transfer money back to their country of origin. They start investing back home by building houses in their home country for their pension. They send money home for the education of their relatives or to help out with health problems in the family. Thus, remittances are an important development factor for developing countries. The World Bank listed the following economic advantages that financial remittances can have for the home country (World Bank 2006): • poverty reduction. Remittances led to about 5 to 20 percent of poverty reduction in diverse countries • increase in entrepreneurship and of investment in education and health • increase in the creditworthiness of a country • hence cheaper external borrowing and more access to capital • growth effects Whether remittances increase growth or not is unclear. Some argue that remittances increase growth because the increased inflow of money or capital into a developing country means additional funds available for investment in business and human capital. Others argue that the relationship between remittances and growth is unclear, especially if remittances are not used for investment but are used for consumption and lead to higher inflation. Such remittances have acquired sizable proportions. The World Bank (2006) estimates for 2005 that remittances to developing countries amounted to 167 billion US dollars and have doubled within the last five years. Reasons for this are: • the scrutiny of flows has increased since September 11 • changes in industries that support remittances (lower costs, expanding networks) • improvement in data recording 6 • depreciation of the dollar, which increases the value of remittances denominated in other currencies • growth in migrant stock and incomes However, there are still a lot of unrecorded, informal remittances, which the World Bank estimates at 50% of the total sum. The reasons for this are: • several countries do not report any data • even formal channels are not reported • or they are reported under other BOP entrances and cannot be filtered out or compared with other countries It should be noted, however, that even today there are some negative aspects with regard to remittance as well. For example, possible moral hazard problems (Chami, Fullenkamp and Jahajah, 2003). People may become dependent on remittances and feel no need to work anymore. There is also mixed evidence of the effect of remittances on development. Giuliano and Ruiz-Arranz (2005), for instance, found out that remittances are used as a substitute for formal financial services when countries are less financially developed, which improves the development in these countries. For those countries that are financially well developed, they found no positive impact of remittances on development. Considering the importance of remittances for the economies of developing countries, and for the relative lack of information on these money flows, it makes sense to study this phenomenon. By studying the size, motives, driving forces, prospects and effects of remittances on the economies of the home countries, we will get a better idea of the balance of costs and benefits of the brain drain from developing countries. This study aims at contributing a building stone for the benefit side. We will focus on describing the volume and growth of remittances; the senders, the sources of their incomes and how frequently they send; the recipients and how the received resources are put to use; and the various channels that are used for remittances, from the host to the home country. In particular, we will pay attention to how such transfers can be facilitated. What are problems and impediments, such as material (financial-technical) and non-material (e.g. risk, transparency, and trust issues) transaction costs? Also, we will focus on the role of regulation, both as a possible facilitating factor and as a hindrance. Finally, we will look at how such hurdles and costs can be reduced. We will do all of this for one particular case, namely remittances from the Netherlands to Suriname. 1.2. Reasons for studying the Netherlands-Suriname corridor So far, the World Bank has completed several Remittance Corridor Studies, most recently the Canada-Vietnam Remittance Corridor (Hernandez-Coss World Bank 2005) and the US- Mexico Remittance Corridor (Raúl Hernandez-Coss World Bank 2005).