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Remittances
Reducing Poverty
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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. |
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 are
projected to exceed $232 billion in 2005, with $167 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.
How is the Money
Transferred?
A typical remittance
transaction takes place in three steps. In 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. In step 2, the sending agency instructs its agent in the recipient's
country to deliver the remittance. In 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.
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Worldwide, officially recorded international migrant
remittances are projected to exceed $232 billion in 2005, with $167
billion flowing to developing countries. |
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 (MTOs) 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.
Why are
Remittances Helpful?
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. In fact, World Bank studies,
based on household surveys conducted in the 1990s, 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.
How are
remittances used?
In poorer households, they 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.
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If remittances are large, the recipient country could
face an appreciation of the real exchange rate that may make its economy
less competitive internationally. |
Remittance flows
tend to be more stable than capital flows, and they also tend to be
counter-cyclical—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 estimates that in Haiti they
represented about 17 percent of GDP in 2001, while in some areas of Somalia,
they accounted for up to 40 percent of GDP in the late 1990s.
Is there a
Downside?
There are a number of potential
costs associated with remittances. Countries receiving migrants' remittances
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. Some argue that
remittances can also create dependency, undercutting recipients' incentives to
work, and thus slowing economic growth. But others argue that the negative
relationship between remittances and growth observed in some empirical studies
may simply reflect the counter-cyclical nature of remittances—that is, the
influence of growth on remittances rather than vice-versa.
Remittances may
also have human costs. Migrants sometimes make significant sacrifices—often
including separation from family—and incur risks to find work in another
country. And they may have to work extremely hard to save enough to send
remittances.
Can High
Transaction Costs be Cut?
Transaction costs are not usually
an issue for large remittances (made for the purpose of trade, investment, or
aid), because, as a percentage of the principal amount, they tend to be small,
and major international banks are eager to offer competitive services for
large-value remittances. But in the case of smaller remittances—under $200,
say, which is often typical for poor migrants—remittance fees can be as high
as 10–15 percent of the principal.
Cutting transaction costs would
significantly help recipient families. How could this be done? First, the
remittance fee should be a low fixed amount, not a percent of the principal,
since the cost of remittance services does not really depend on the amount of
principal. Indeed, the real cost of a remittance transaction—including labor,
technology, networks, and rent—is estimated to be significantly below the
current level of fees.
Second, greater competition will bring
prices down. Entry of new market players can be facilitated by harmonizing and
lowering bond and capital requirements, and avoiding overregulation (such as
requiring full banking licenses for money transfer operators). The intense
scrutiny of money service businesses for money laundering or terrorist
financing since the 9/11 attacks has made it difficult for them to operate
accounts with their correspondent banks, forcing many in the United States to
close. While regulations are necessary for curbing money laundering and
terrorist financing, they should not make it difficult for legitimate money
service businesses to operate accounts with correspondent banks.
An example where competition has spurred
reductions in fees is on the U.S.–Mexico corridor, where remittance fees have
fallen by 56 percent from over $26 (to send $300) in 1999 to about $11.50 now.
In addition, some commercial banks have recently started providing remittance
services for free, hoping that would attract customers for their deposit and
loan products. And in some countries, new remittance tools—based on cell
phones, smart cards, or the Internet—have emerged.
Third, establishing partnerships between
remittance service providers and existing postal and other retail networks
would help expand remittance services without requiring large fixed
investments to develop payment networks. However, partnerships should be
nonexclusive. Exclusive partnerships between post office networks and money
transfer operators have often resulted in higher remittance fees.
Fourth, poor migrants need greater
access to banking. Banks tend to provide cheaper remittance services than
money transfer operators. Both sending and receiving countries can increase
banking access for migrants by allowing origin country banks to operate
overseas by providing identification cards (such as the Mexican matricula
consular), which are accepted by banks to open accounts and by facilitating
participation of microfinance institutions and credit unions in the remittance
market.
Can Governments
Boost Flows?
Governments have often offered
incentives to increase remittance flows and to channel them to productive
uses. But such policies are more problematic than efforts to expand access to
financial services or reduce transaction costs. Tax incentives may attract
remittances, but they may also encourage tax evasion. Matching-fund programs
to attract remittances from migrant associations may divert funds from other
local funding priorities, while efforts to channel remittances to investment
have met with little success. Fundamentally, remittances are private funds
that should be treated like other sources of household income. Efforts to
increase savings and improve the allocation of expenditures should be
accomplished through improvements in the overall investment climate, rather
than targeting remittances. Similarly, because remittances are private funds,
they should not be viewed as a substitute for official development aid. |
