Paul Vaaler has gotten into the habit of asking cab drivers what they do with their money.
The law and business professor at the University of Minnesota has a good reason for it. He studies how immigrants to the U.S. impact their home countries economically with the money they send home.
“I work at (Minneapolis neighborhood) Cedar-Riverside and it’s a community of first-generation immigrants,” he said. “They’re our neighbors and you see what they do. I started looking into why they’re going to money transfer organizations (like Western Union and MoneyGram). They’re part of a larger phenomenon of first- and second- generation immigrants who have remitted money home to extended families and home communities.”
A lot of the immigrants that Vaaler interacts with have moved to the U.S. from developing countries—Somalia, Ethiopia and Liberia—that don’t have strong formal economies. Banking institutions and government aid aren’t necessarily a given. In these countries, most commerce and infusion of cash that strengthens the economy is done off the books. Vaaler has learned that the money that’s being sent home by immigrants living all over the U.S. is bolstering and creating new businesses in their often-struggling home countries.
“When you think of an entrepreneur, you probably don’t think of someone in Cedar-Riverside,” he said. “The answer is these guys don’t fit that; you have to rejigger your thoughts of what a funder is or an entrepreneur is.”
Over the past 25 years, money sent out of the United States by its immigrant population has snowballed. In 2000, immigrants sent $100 billion to their home countries; that figure grew to $350 billion in 2009. In 2016, it was about $500 billion, Vaaler said.
According to the Migration Policy Institute, about 81 million people, or 25 percent of the U.S. population, are immigrants or children of immigrants.
There’s an incredible amount of money coming from a big chunk of people,” Vaaler said. “If you called the (hypothetical) country (of U.S. immigrants) ‘Diasporia’ it would be the fifth largest country in the world.”
Most of that money goes to meet family members’ basic needs, but in countries where formal economies aren’t developed, “entrepreneurship is a necessity,” Vaaler said.
Entrepreneurship is “just an extension of household activities,” he said. “The more economically developed (the home countries) are, the lower the percentage (of the money sent home) goes to entrepreneurship.”
But in Somalia, for example, 80 percent of all businesses are funded this way. A family might be running a hair care shop out of the back of their home and a car maintenance shop out of the front.
“That’s what makes it really important: it’s bootstrap capital,” Vaaler said. “It’s going to the basic hierarchy of needs and some is going to small businesses and that’s how Somalia and Liberia are pulling themselves up by their bootstraps.”
Vaaler also found that the more concentrated an immigrant community is in the U.S., the more economic impact it has on its home country. It can create financial, social and governmental institutions that diffuse immigrant groups can’t.
“The bump you get from remittances goes way up when the diaspora in the country is big,” he said. “They form their own communities like Little Havana or Little Italy. Little Havana sends a lot of money home to Havana, and has even in the darkest days of Castro.”
Vaaler is working on ways to turn this research into global policy. Encouraging diaspora communities to send money home is a lot cheaper for developing countries and the World Bank than providing infusions of cash.
“These are countries that are very poor, failed states,” he said. “What do you do when you have nothing? You find all those people who have left, and while they maybe poor in those countries, they’re rich compared to you.
“The cabbie who takes you to the airport, the woman who cleans your home, the man who does food services at the airport, those people are actually venture capitalists back in their home countries. It doesn’t look like Yahoo or Apple but it probably ends up being more important than Yahoo or Apple to the economy.”