Remittances

Discovery that remittances are so large three times the size of official aid and have such direct effect on people, especially poor people, has shifted our attention to migration which is perhaps the most important aspect of globalization and yet is the least talked about aspect of globalization.

In that sense, you are right that in future development economists must also focus on international migration in addition to trade and investment flows.

One major constraint in this respect is lack of data on remittances, and especially on migration. We need to improve data but we will face a challenge that on migration it would be hard to make quick progress because migrants themselves, sending country governments, and receiving country governments have tended to be less open about revealing migration information. On remittances, we had a G8 remittances working group to improve remittances statistics. Three new variables are being added to the IMF balance of payments manual (6th edition). There is also a new G8 remittances working group trying to improve remittances data in addition to looking at development interconnections and payment system issues.

Excellent question!
Every now and then we have anecdotal evidence of this phenomenon especially in the aftermath of natural disasters. For examples, after the Hurricane Mitch in Central America and the recent cyclone in Myanmar, remittances from overseas migrants rushed in to help affected families while government help was slow to come in raising precisely this criticism. That said, remittances are only going to benefit families that have migrants abroad so they cannot help all the affected families in a post-disaster situation. This also applies to normal times, remittances will only benefit families that have migrants abroad. And the number of such families is very small—only 3% of world population are international migrants. Private funds such as remittances should not be expected to serve public needs. For that, public funding is necessary.

The second part of your question, how will development policy change if remittance levels continue to fall, is harder to answer. For sure a decline in hard currency remittance flows would create external financing gaps in many remittance dependent countries, particularly small and poor countries. Also, to the extent that remittances provide a safety net to a significant number of poor families, a decline in these flows would challenge governments to step in.

Remittances can help reduce poverty of recipient households and, perhaps, some other households in the neighborhood. But remittances cannot be a substitute for growth and employment generation efforts at home.

Regarding your 2nd question, I do feel that there is need for a one-stop shop that maps remittances and migration, examines ways to reduce remittance costs by introducing new technology, leverages on remittances for financial access of households, and for capital market access of institutions/countries. For official aid (about $100 billion a year), there are tens of institutions; for FDI, there are several institutions; however, there are only a handful of individuals focusing on remittances.

Until remittances were “discovered” and explained as the most tangible and, perhaps, the least controversial link between migration and development, not many institutions to my knowledge looked at migration as a development issue. In the World Bank, our focus is on development, and we believe that migration can be leveraged significantly for improving development outcomes. We are working closely with individual experts, and other institutions worldwide to understand the links between migration and development.

1.I welcome the recent decision by the U.S. to allow remittances to Cuba.
2. Although cell phone-based remittances look very promising, AML/CFT regulations are constraining their growth in the cross-border market. Card-based programs, especially stored value cards, seem to be doing well.
3. Remittances growth has been positive in the Middle East-to-South Asia corridor. Also domestic remittances in China and India will remain robust.
4. I have noticed an increase in price competition, but not necessarily because of the crisis-related slowdown in remittance flows. The market is definitely getting more competitive and this is a structural change not a short-term phenomenon.

This is probably true for all balance-of-payments items including world exports and world imports (and probably provides direct evidence that there is life outside earth;)). In general inward flows tend to be better recorded than outward flows. Also there is often confusion between personal remittances and trade- or tourism- or investment- or private charity-related small transfers. Different countries have different reporting standards - some (e.g., South Africa) insist on reporting all cross-border flows without any threshold for exemption, and others (e.g., Japan or EU countries) have high thresholds below which remittance transactions do not have to be reported. Then there are informal flows that mostly go unreported.

1. Please see my blog post at http://peoplemove.worldbank.org/en/content/remittances-reduce-poverty and the brief "Leveraging Remittances for Development".

On the impact on the host countries, research conducted for the Global Economic Prospects 2006 report on the economic implications of remittances and migration showed that migration benefits the countries of origin, the countries of destination as well as the migrants themselves -- a win-win-win solution.

2. In poorer families remittances are often used for consumption. But after basic consumption needs are met, remittances are also used to finance education, health, housing and small business investment. Some studies show that there is little difference between the use of remittances by recipient households and the use of additional income by households that don't receive remittances. However, I think remittances are value-added money. The added value comes from the migrant's close involvement in how his/her money is spent by the recipient. Remittances usually come with instructions on how to use the funds.

3. Not that I know of.

Although the number of new migrants appears to be significantly smaller this year than the last year, the number of returning migrants is still relatively small compared to the large stock of existing migrants abroad in South Asia as well as other parts of the world. I don’t think that the stock of migrants will decline any time soon.

Regarding your 2nd question relating to legal channels of remittances, my view is that people use Hundi and Hawala not because they want to violate the law, but because the formal channel is either not accessible or is too costly. Sometimes, social restrictions on the mobility of women who receive remittances require that remittances are delivered to the doorstep.

At the household level, the development impact of remittances, whether through informal or formal channels, is significant. At the macro economic level, however, Hundi or Hawala channels are always associated with capital flight, mostly because the recipient country has exchange controls.

You are right. The counter cyclicality of remittances varies from country to country, typically depending on the income level of the remittance recipients. In poorer households, remittances are mostly used for consumption, whereas in the relatively better off households, there is also an investment motivation. Remittances tend to be more counter cyclical when they are for consumption purposes than when they’re for investment purposes. That to a large extent would explain the regional differences in counter cyclicality.

We have discussed the reasons for resilience of remittances in our blog post Remittances expected to fall by 5 to 8 percent in 2009. Regarding the short-term versus the long-term resilience of remittances, you’re right that remittances might fall further if the crisis becomes deeper or lasts longer. That said, the decline in remittances would still be smaller than the decline in private capital flows to developing countries. Also, it is worth noting that remittances tend to be persistent over time mainly because the stock of migrants tends to be persistent and migrants send only a small portion of their income as remittances.

We have answered this question in our blog post Remittances expected to fall by 5 to 8 percent in 2009.

To quickly summarize, migrants are trying to stay on in destination countries despite weak job markets and lower pays there because the situation back home is often worse.
They are trying to absorb the income shock if any by skipping a meal or sharing accommodations to be able to continue to send remittances because every dollar saved is worth a lot to the family back home.

Also, as immigration controls have been tightened in many destination countries, migrants are discouraged from returning home because they know they can’t go back so easily when the situation improves.

Finally, in migrant destination countries facing crises and weak job markets employers will evaluate hiring and firing decisions on a case by case basis. Left to themselves no employer would want to hire only native workers and fire only migrant workers. Instead he or she would evaluate the contribution of the worker relative to the cost of hiring the worker, and make a decision about hiring/firing. Migrant workers are typically cheaper, more flexible and more productive. For an employer facing falling revenues, it would not make sense to fire only migrant workers. This is the first part of your question.

For answers to your questions 1 and 3, see my answer to Helena Swanson-Nystrom.

For question 2, you might want to take a look at this post on Migrant Remittances on my blog People Move. This blog post also has a link to the international remittances agenda. As I mention there, remittances can improve financial access at the household level and access to capital at the institution/country level. By reducing remittances costs billions of additional dollars can be channeled to developing countries. Thus, these small sums of money sent by millions of migrants can generate large development impact.

Regarding your final question, the African Union has identified the African diaspora as the 6th regional economic community of Africa. The AU can leverage the diaspora for Africa’s development.