Remittances are not a substitute for aid, but their aggregate size encourages positive private sector activity that helps the BOP. This was my first thought when I saw Ignacio’s posting at the Poverty and Growth blog. He quotes the World Bank’s Raj Nallari, who criticizes government incentive programs as “more problematic than efforts to expand access to financial services or reduce transaction costs.” I couldn’t agree more.

At NextBillion, we’ve documented some of the positive externalities attributed to remittances, including increased access to financial and telecom services for BOP markets. On the other hand, government incentives – such as matching-fund programs and tax benefits – may encourage local fund diversion or tax evasion, certainly not the government’s intention but negative impacts nonetheless. I hope, as does Nallari, that governments will concentrate on improving their financial climate and telecom regulation, helping the private sector increase the quality and quantity of services it can offer to BOP consumers.

For more on the remittances argument, see Ignacio’s links, including a Washington Post editorial from Sunday’s edition, or browse NextBillion’s Remittances topics section.

(Via Poverty and Growth Blog)