For many countries, money transfers from citizens working abroad are a lifeline for development
When migrants send home part of their earnings in the form of either cash or goods to support their families, these transfers are known as workers’ or migrant remittances. They have been growing rapidly in the past few years and now represent the largest source of foreign income for many developing countries.
It is hard to estimate the exact size of remittance flows because many transfers take place through unofficial channels. Worldwide, officially recorded international migrant remittances were projected to exceed $483 billion in 2011, with $351 billion flowing to developing countries. These flows are recorded in the balance of payments; exactly how to record them is being reviewed by an international technical group. Unrecorded flows through informal channels are believed to be at least 50 percent larger than recorded flows. Not only are remittances large but they are also more evenly distributed among developing countries than capital flows, including foreign direct investment, most of which goes to a few big emerging markets. In fact, remittances are especially important for low-income countries. Remittance flows to low-income countries are nearly 6 percent of their gross domestic product (GDP), compared with about 2 percent of GDP for middle-income countries.
Getting the money there
A typical remittance transaction takes place in three steps:
● Step 1: The migrant sender pays the remittance to the sending agent using cash, check, money order, credit card, debit card, or a debit instruction sent by e-mail, phone, or through the Internet.
● Step 2: The sending agency instructs its agent in the recipient’s country to deliver the remittance.
● Step 3: The paying agent makes the payment to the beneficiary.
For settlement between agents, in most cases, there is no real-time fund transfer; instead, the balance owed by the sending agent to the paying agent is settled periodically according to an agreed schedule, through a commercial bank. Informal remittances are sometimes settled through goods trade.
The costs of a remittance transaction include a fee charged by the sending agent, typically paid by the sender, and a currency-conversion fee for delivery of local currency to the beneficiary in another country. Some smaller money transfer operators require the beneficiary to pay a fee to collect remittances, presumably to account for unexpected exchange-rate movements. In addition, remittance agents (especially banks) may earn an indirect fee in the form of interest (or “float”) by investing funds before delivering them to the beneficiary. The float can be significant in countries where overnight interest rates are high.
Remittances are typically transfers from a well-meaning individual or family member to another individual or household. They are targeted to meet specific needs of the recipients and thus tend to reduce poverty. Cross-country analyses generally find that remittances have reduced the share of poor people in the population (Adams and Page 2003, 2005; Gupta, Pattillo, and Wagh 2009). In fact, World Bank studies, based on recent household surveys, suggest that international remittance receipts helped lower poverty (measured by the proportion of the population below the poverty line) by nearly 11 percentage points in Uganda, 6 percentage points in Bangladesh, and 5 percentage points in Ghana. Between a fifth and half of the 11 percent reduction in poverty in Nepal between 1995 and 2004, a time of political conflict, has been attributed to remittances.
In poorer households, remittances may finance the purchase of basic consumption goods, housing, and children’s education and health care. In richer households, they may provide capital for small businesses and entrepreneurial activities. They also help pay for imports and external debt service, and in some countries, banks have been able to raise overseas financing using future remittances as collateral.
More stable than capital flows
Remittance flows tend to be more stable than capital flows, and they also tend to be countercyclical—increasing during economic downturns or after a natural disaster in the migrants’ home countries, when private capital flows tend to decrease. In countries affected by political conflict, they often provide an economic lifeline to the poor. The World Bank estimated that in Haiti they represented about 12 percent of GDP in 2011, while in some areas of Somalia, they accounted for more than 70 percent of GDP in 2006.
More recently remittances proved to be resilient during the financial crisis in source countries such as the United States or western European countries. The crisis affected migrants’ incomes, but migrants tried to absorb the income loss by cutting consumption and rental expenditures. Those affected by the crisis, say in the construction sector, moved to jobs in other sectors (such as restaurants or agriculture). While the crisis reduced new immigration flows, it also discouraged return migration because migrants feared they would not be able reenter the host country. Thus, the number of migrants—and hence remittances—continued to rise even during the global financial crisis that began in 2008.
There are a number of potential costs associated with remittances. Countries that receive remittances from migrants incur costs if the emigrating workers are highly skilled or if their departure creates labor shortages. Also, if remittances are large, the recipient country could face an appreciation of the real exchange rate that may make its economy less competitive internationally.
Dilip Ratha
