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Economy

Where Does the Global Remittance Industry Stand?

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The need to transfer funds across borders has risen considerably over the last few decades. Scores of businesses pay suppliers and employees from other countries and several receive payments from international customers. Migrants require the services of the remittance industry on an ongoing basis, and their numbers continue to swell. Fortunately, advancements in technology have ensured that making international fund transfers is no longer expensive, time consuming, or bothersome.

The Evolution

The global remittance industry has come long way since the ninth century, when Chinese traders used ‘flying money’ in the form of paper vouchers as proofs of payment, which served as a means to safeguard themselves from thieves. It was only when the industrial age had set in that international money transfers took a completely new form. Wire transfers entered the picture in the late 19th century, and its popularity resulted in the birth of several private non-banking companies that offered this service. Some of the pioneers of this field, such as Western Union, remain in existence even today.

While wire transfers were common in the late 19th and early 20th centuries, the use of mail remained the primary mode of communication even until the early 1990s. By this time, international money orders started finding an increasing number of takers, and they soon became one of the most commonly used way to transfer funds internationally. In the mid-1990s, money orders accounted for around 40% of remittances sent to Mexico. Low costs worked in the favor of international money orders, although the time taken for funds to reach recipients depended on multiple factors.

The biggest changes have taken place around the turn of the last century. The use of electronic transfers has increased manifold, and this medium now accounts for over 90% of all cross-border remittances. A recipient can receive cash from a physical location moments after a sender initiates a transfer. Alternatively, funds can move between bank accounts held in different countries with relatively ease, without actually dealing with a bank.

The future looks better still, where a society is embracing going cashless. With the advent of virtual crypto-currency platforms such as Bitcoin, Ethereum, and Litecoin, moving funds from one country to another may get easier than ever before.

Banks – International Telegraphic Transfers and Wire Transfers

The terms wire transfers and telegraphic transfers are often used interchangeably. However, a telegraphic transfer, historically, relies on a cable message being sent from one bank to another in order to facilitate a fund transfer.  A telegraphic transfer, or a telex transfer, usually involves a fee charged by the sending bank, and in some instances, by the receiving bank as well.

A wire transfer involves the transfer of funds electronically, and you may carry out a wire transfer through your bank. Financial institutions might depend on different transfer systems and offer multiple options when it comes to aspects such as costing and turnaround times. For example, centralized bank wire transfers in the U.S. typically rely on real time gross settlement (RTGS) systems that offer real-time and irrevocable settlements.

Banks have lost out on their share of the global remittance pie over the last couple of decades mainly because of cost-effectiveness, although the time they typically take to process transfers has also played a role. The competition they face from their non-banking counterparts, without doubt, is stiff.

Specialist Money Transfer Companies

Western Union launched its wire transfer service in 1872, by making use of its then existing telegraph network. Now, the company has storefronts in several countries, giving people easy means to send and receive money in different ways. Some of the other popular players with physical locations or agents include WorldRemit, MoneyGram, Azimo, and Ria. While the wire transfer services offered by such companies are largely similar to what you’ll find through banks, they tend to offer quicker turnaround times by charging extra fees.

The online space, owing to fewer overhead costs and rapidly evolving technology, has sprung a number of FinTech companies such as TransferWise and CurrencyFair. TransferWise, a UK-based FinTech unicorn, for instance, has successfully driven down industry costs by offering game changing services such as low-fee multi-currency accounts.

Low Tech Remittance Across Exotic Currencies Using Second Generation Mobile Phones

Residents of several countries in Asia, Africa, and South America continue using second generation mobile phones. This presents a unique opportunity not just for businesses that deal in remittance of funds, but also for mobile phone network providers. Digicel, owned by the Irish billionaire Denis O’Brien, currently operates in 31 markets across Central America, the Caribbean, and Oceania. With around 14 million customers, it is already making inroads in the mobile banking and micro insurance sectors.  O’Brien has, in the past, made clear that he hopes to leverage his mobile brand to facilitate cash transfers.

The Future – Crypto Currency Remittance

There has been a rise in the use of crypto currency as a medium for global remittance, and the upward trend is set to continue. Catherine Wood, CEO of ARK Investment Management in the US, opines that “The liquidity isn’t there, but as we gain liquidity in bitcoin, the costs will drop dramatically and be minimized. As a digital ledger, blockchain is fully transparent. There is an audit trail. We are eliminating a lot of middlemen here. FinTech will be more of an answer to the problem of fraud than a cause of it.”

However, not everybody is equally optimistic. Taavet Hinrikus, CEO of UK-based TransferWise, feels “There is a fundamental problem. It is lacking a purpose and is pure speculation. I cannot really see a problem that bitcoin is solving.” His view of the overall blockchain technology is more positive, about which he says, “I see things coming to life which are built around blockchain but not digital currencies.”

For now, it looks like depth of market may impact the ability of exchanges to convert in and out of local exchanges in different global regions. As a result, crypto currencies may not be appropriate for some of the more exotic currencies yet.

Conclusion

The developing FinTech sector will, without doubt, define the future course of the remittance industry. With consumers becoming increasingly aware of the options they have, the industry will need to keep evolving so it can provide services that match the needs of its customers. The way money is transferred across borders has witnessed a sea of change in the last two decades, and by the looks of things with new multi-currency accounts, better things are yet to come.

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Economy

Turkey’s financial crisis raises questions about China’s debt-driven development model

Dr. James M. Dorsey

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Financial injections by Qatar and possibly China may resolve Turkey’s immediate economic crisis, aggravated by a politics-driven trade war with the United States, but are unlikely to resolve the country’s structural problems, fuelled by President Recep Tayyip Erdogan’s counterintuitive interest rate theories.

The latest crisis in Turkey’s boom-bust economy raises questions about a development model in which countries like China and Turkey witness moves towards populist rule of one man who encourages massive borrowing to drive economic growth.

It’s a model minus the one-man rule that could be repeated in Pakistan as newly sworn-in prime minister Imran Khan, confronted with a financial crisis, decides whether to turn to the International Monetary Fund (IMF) or rely on China and Saudi Arabia for relief.

Pakistan, like Turkey, has over the years frequently knocked on the IMF’s doors, failing to have turned crisis into an opportunity for sustained restructuring and reform of the economy. Pakistan could in the next weeks be turning to the IMF for the 13th time, Turkey, another serial returnee, has been there 18 times.

In Turkey and China, the debt-driven approach sparked remarkable economic growth with living standards being significantly boosted and huge numbers of people being lifted out of poverty. Yet, both countries with Turkey more exposed, given its greater vulnerability to the swings and sensitivities of international financial markets, are witnessing the limitations of the approach.

So are, countries along China’s Belt and Road, including Pakistan, that leaped head over shoulder into the funding opportunities made available to them and now see themselves locked into debt traps that in the case of Sri Lanka and Djibouti have forced them to effectively turn over to China control of critical national infrastructure or like Laos that have become almost wholly dependent on China because it owns the bulk of their unsustainable debt.

The fact that China may be more prepared to deal with the downside of debt-driven development does little to make its model sustainable or for that matter one that other countries would want to emulate unabridged and has sent some like Malaysia and Myanmar scrambling to resolve or avert an economic crisis.

Malaysian Prime Minister Mahathir Mohamad is in China after suspending US$20 billion worth of Beijing-linked infrastructure contracts, including a high-speed rail line to Singapore, concluded by his predecessor, Najib Razak, who is fighting corruption charges.

Mr. Mahathir won elections in May on a campaign that asserted that Mr. Razak had ceded sovereignty to China by agreeing to Chinese investments that failed to benefit the country and threaten to drown it in debt.

Myanmar is negotiating a significant scaling back of a Chinese-funded port project on the Bay of Bengal from one that would cost US$ 7.3 billion to a more modest development that would cost US$1.3 billion in a bid to avoid shouldering an unsustainable debt.

Debt-driven growth could also prove to be a double-edged sword for China itself even if it is far less dependent than others on imports, does not run a chronic trade deficit, and doesn’t have to borrow heavily in dollars.

With more than half the increase in global debt over the past decade having been issued as domestic loans in China, China’s risk, said Ruchir Sharma, Morgan Stanley’s Chief Global Strategist and head of Emerging Markets Equity, is capital fleeing to benefit from higher interest rates abroad.

“Right now Chinese can earn the same interest rates in the United States for a lot less risk, so the motivation to flee is high, and will grow more intense as the Fed raises rates further,” Mr. Sharma said referring to the US Federal Reserve.

Mr. Erdogan has charged that the United States abetted by traitors and foreigners are waging economic warfare against Turkey, using a strong dollar as ”the bullets, cannonballs and missiles.”

Rejecting economic theory and wisdom, Mr. Erdogan has sought for years to fight an alleged ‘interest rate lobby’ that includes an ever-expanding number of financiers and foreign powers seeking to drive Turkish interest rates artificially high to damage the economy by insisting that low interest rates and borrowing costs would contain price hikes.

In doing so, he is harking back to an approach that was popular in Latin America in the 1960s and 1970s that may not be wholly wrong but similarly may also not be universally applicable.

The European Bank for Reconstruction and Development (EBRD) warned late last year that Turkey’s “gross external financing needs to cover the current account deficit and external debt repayments due within a year are estimated at around 25 per cent of GDP in 2017, leaving the country exposed to global liquidity conditions.”

With two international credit rating agencies reducing Turkish debt to junk status in the wake of Turkey’s economically fought disputes with the United States, the government risks its access to foreign credits being curtailed, which could force it to extract more money from ordinary Turks through increased taxes. That in turn would raise the spectre of recession.

“Turkey’s troubles are homegrown, and the economic war against it is a figment of Mr. Erdogan’s conspiratorial imagination. But he does have a point about the impact of a surging dollar, which has a long history of inflicting damage on developing nations,” Mr. Sharma said.

Nevertheless, as The Wall Street Journal concluded, the vulnerability of Turkey’s debt-driven growth was such that it only took two tweets by US President Donald J. Trump announcing sanctions against two Turkish ministers and the doubling of some tariffs to accelerate the Turkish lira’s tailspin.

Mr. Erdogan may not immediately draw the same conclusion, but it is certainly one that is likely to serve as a cautionary note for countries that see debt, whether domestic or associated with China’s infrastructure-driven Belt and Road initiative, as a main driver of growth.

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Economy

3 trends that can stimulate small business growth

MD Staff

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Small businesses are far more influential than most people may realize.

That influence is felt well beyond Main Street. Small businesses make up 99.7 percent of all businesses in the U.S., and these firms employ nearly half (48 percent) the workforce, according to the 2018 Small Business Profile compiled by the U.S. Small Business Administration.

In addition, take a look at recent trends and developments in technology. It’s clear that these changes can give entrepreneurs that extra leverage to scale up. Here are three to consider.

Big companies have big opportunities for small firms

Back in the 20th century, a large company would get things done in this very straightforward way. Wherever there was a need, they hired someone directly to perform that task, whether it was a driver or an accountant.

Under today’s leaner models, these big companies are finding it’s much more efficient to partner with other firms to fulfill certain needs. According to Deloitte, 31 percent of IT services have been outsourced, as well as 32 percent of human resources. This increasing acceptance of outsourcing is a huge growth opportunity for small businesses owners.

For example, Amazon recently announced it is actively seeking and helping entrepreneurs who are willing to deliver packages as their contractors. The mega retailer will even go as far as helping with startup costs so long as these smaller firms deliver their packages. Landing a contract with a big corporation is a significant milestone for any company, but starting out with that lucrative contract is sure to let these startups hit the ground running.

Better connections for greater flexibility

When today’s entrepreneur has a new role to fill, they’re not confined to the talent pool in their immediate community. Because we now have the tools and connectivity to work from anywhere, a business owner can expand the search across multiple states!

What’s more, these flexible, work from anywhere options can give business owners the inspiration to do things differently. Having greater collaboration means having access to more options to fit specific needs.

For example, what is the very nature of being a small business owner? It’s dealing with a fluctuating volume of work. Tapping into the talent pool of freelancers to work on these specific, short-term tasks and projects is easier than ever, because for a segment of workers, freelancing is increasingly becoming a way of life. Freelancers currently make up 36 percent of the workforce, according to a study from Upwork. And, if trends maintain, most Americans will be freelancers by 2027.

Thanks to remote options with easy access to talent, small businesses can easily set up temporary or ongoing as-needed work arrangements. When you partner with Dell for your computing needs, you’ll get the expert help and support so you can set up the perfect flexible workspace system.

More automation brings better efficiencies

Without a doubt, new technology works in favor of small businesses and entrepreneurs because they have many tools at their disposal to automate labor intensive processes, be more productive and cut costs. For example, entrepreneurs can use software to process client payments and even set up automated payments, saving hours and costs associated with collecting, processing and reconciling under the traditional paper check payment system. That translates into a more efficient billing department that can spend more time focused on complex issues.

Let Dell equip your small business with the right tech tools, tailor made for your venture and backed with support, so you can focus on running your business.

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Economy

Transitioning from least developed country status: Are countries better off?

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The Least Developed Countries (LDCs) are an internationally defined group of highly vulnerable and structurally constrained economies with extreme levels of poverty. Since the category was created in 1971, on the basis of selected vulnerability indicators, only five countries have graduated and the number of LDCs has doubled.  One would intuitively have thought that graduation from LDC status would be something that all LDCs would want to achieve since it seems to suggest that transitioning countries are likely to benefit from increased economic growth, improved human development and reduced susceptibility to natural disasters and trade shocks.

However, when countries graduate they lose international support measures (ISMs) provided by the international community. There is no established institutional mechanism for the phasing out of LDC country-specific benefits. As a result, entities such as the World Bank and the International Monetary Fund may not always be able to support a country’s smooth transition process.

Currently, 14 out of 53 members of the Commonwealth are classified as LDCs and the number is likely to reduce as Bangladesh, Solomon Islands and Vanuatu transition from LDC status by 2021. The three criteria used to assess LDC transition are: Economic Vulnerability Index (EVI), Human Assets Index (HAI) and Gross National Income per capita (GNI).  Many of the forthcoming LDC graduates will transition based only on their GNI.  This GNI level is normally set at US $ 1,230 but if the GNI reaches twice this level at US $ 2,460 a country can graduate.

So what’s the issue?  A recent Commonwealth – Trade Hot Topic publication confirms that most countries graduate only on the basis of their GNI, some of which have not attained significant improvements in human development (HAI) and even more of which fall below the graduation threshold for economic development due to persistent vulnerabilities (EVI).  This latter aspect raises the question as to whether transitioning countries will, actually, be better off after they graduate.

Given the loss of ISMs and the persistent economic vulnerabilities of many LDCs, it is no surprise that some countries are actually seeking to delay graduation, Kiribati and Tuvalu being two such Commonwealth countries despite easily surpassing twice the GNI threshold for graduation.

How is it possible that a country can achieve economic growth but not have appreciable improvements in resilience to economic vulnerability?  Based on a statistical analysis discussed in the Trade Hot Topic paper, a regression model, based on all forty-seven LDCs, was produced.  The model revealed that there was no statistically significant relationship between economic vulnerability and gross national income per capita.  The analysis was repeated just for Commonwealth countries and similar results were obtained.

Most importantly, analysis revealed that there was a positive relationship between GNI and EVI. In other words, increases in wealth (using GNI as a proxy) is likely to result in an increase in economic vulnerability.  This latter result is counterintuitive since one would expect more wealth to result in less economic vulnerability.

So what’s the take away?

The statistical results do not necessarily imply that improving the factors affecting economic vulnerability cannot result in improvements to economic prosperity.  It does suggest, however, that either insufficient efforts have gone into effecting such improvements or that there are natural limits to the extent to which such improvements can be effected.

One thing is clear, the multilateral lending agencies should revisit the removal of measures supporting climate change or other vulnerabilities for LDCs on graduation, since the empirical evidence suggests that countries could fall back into LDC status or stagnate and be unable to achieve sustainable development. Whilst transitioning from LDC status should be desirable, it should not be an end in itself. Rather than to transition and remain extremely vulnerable, countries should be resistant to such change or continue to receive more targeted support until vulnerabilities are reduced to more acceptable levels.

What are your thoughts?

Commonwealth

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