Journal Issue
Share
Article

Research World Economic Outlook: Rapidly growing workers' remittances can boost development

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
July 2005
Share
  • ShareShare
Show Summary Details

Workers’ remittances are a large and rapidly growing source of foreign exchange for many developing countries, but surprisingly little is known about their economic effects, what determines their size and growth rate, and what policymakers can do to maximize their benefits. To address this analytical void, the IMF’s April 2005 World Economic Outlook (WEO) undertook a systematic cross-country analysis of remittances. One key lesson is that more can be done to reduce the cost of sending remittances. Nikola Spatafora (IMF Research Department and author of the WEO study) outlines this and other findings.

Remittance flows to developing countries—defined as the transfers made by migrant workers to family and friends in their home country—have grown steadily over the past 30 years. In 2003, remittance inflows for 90 developing countries analyzed in the WEO study amounted to about $100 billion—the equivalent of 50 percent of total capital inflows or 1.4 percent of aggregate GDP (see chart).

For many developing countries, remittances constitute the single-largest source of foreign exchange, exceeding export revenues, official aid, foreign direct investment (FDI), and other private capital inflows. Mexico, for instance, currently receives about $15 billion in remittances a year. In smaller economies, such as many Caribbean countries, remittances often exceed 10 percent of GDP. On the sending side, the United States remains the main source of remittances, providing over $30 billion in 2003. Indeed, outflows from the United States have almost quadrupled over the past 15 years, partly reflecting the recent rapid increase in immigration into the United States.

Some regions benefit more

Developing countries in the Western Hemisphere and Asia have received the bulk of remittance inflows.

Citation: 34, 13; 10.5089/9781451938715.023.A008

Note: Regional groups are based on the current IMF World Economic Outlook country groupings. Only developing countries are included.

Data: IMF, World Economic Outlook, April 2005.

Overall, remittances have proved remarkably resilient in the face of economic downturns, displaying greater stability and lower pro-cyclicality than, say, exports or private capital flows. Over time, remittances are also likely to continue growing as populations in industrial countries continue to age and as pressures for migration from developing to advanced economies intensify.

Not surprisingly, given all this, interest in remittances and their impact on developing economies is rapidly growing, whether in policy circles including the Group of Eight, in the research community, or indeed among potential remittance-service providers. Remittances are increasingly viewed as a relatively attractive source of external finance for developing countries, one that can help foster development and smooth crises. At the same time there are concerns, including that remittances can be abused to launder money and finance terrorism.

To date, there has been little systematic cross-country research on remittances. To begin to remedy this, the WEO took a detailed look at the effects of remittances. Based on an analysis of their determinants, it also examined options available to policymakers to encourage remittance flows while ensuring that they are properly regulated.

Maximizing the benefits of remittances

Overall, the WEO found clear evidence that remittances can play an important role in boosting growth, contributing to macroeconomic stability, mitigating the impact of adverse shocks, and reducing poverty in developing countries. Remittances allow households to maintain, or indeed step up, expenditure on basic consumption, including food and housing. They are often used to finance children’s education and to set up small businesses. Also, unlike aid or natural resource revenues, remittances typically do not have serious systematic adverse effects on a country’s competitiveness.

Given these considerable benefits, what can recipient-country authorities do to seize salient opportunities and meet attendant challenges? The WEO identified several key policy challenges that need to be tackled—notably, reducing transaction costs, ensuring that macroeconomic and exchange rate policies do not discourage remittances, reducing barriers to entry into the remittance market, and making certain that regulatory and supervisory frameworks are adequate but not onerous.

Lower transaction costs. Significant benefits could flow from measures that reduce the cost of sending remittances. While transaction costs have declined in recent years, they remain variable and are, in several cases, still high—often amounting to 5-10 percent or more of the amount transferred. To the extent possible, measures must be undertaken to reduce such costs, including removing barriers to entry and encouraging competition in the remittance market. One possible step, the WEO suggests, is publicizing information about available options for money transfers and the associated costs.

Ensure appropriate macroeconomic and exchange rate policies. In some cases, macroeconomic and exchange rate policies may both discourage remittances and shift them outside the formal financial system. The authorities must take this potential effect into account, particularly in those countries where remittance inflows (actual or potential) are significant. The WEO analysis provides additional grounds to be wary of exchange restrictions, such as constraints on personal payments or the presence of multiple exchange rates, and other economic restrictions. It also finds that, to some extent, unstable macroeconomic policies and exchange rate misalignments (overvalued currencies in potential recipient countries) may deter remittances.

Reduce barriers to entry. Remittance receipts can be leveraged by households to obtain better access to banking and financial services. This is more likely if formal financial intermediaries, including banks and microfinance institutions, enter the remittance market more actively. Here, as with the reduction of transaction costs, governments can help by reducing entry barriers.

Be vigilant, but not heavy-handed. It is vital to ensure that remittance-service providers are appropriately regulated and supervised to minimize the potential risks of money laundering, terrorist financing, or consumer fraud. But a balancing act is needed. Regulatory frameworks must take into account, and where possible minimize, any adverse impact on the cost of sending remittances and on the incentive to provide remittance services. Excessively onerous regulations could paradoxically drive remittance flows further underground.

In addition, remittances, like any other foreign exchange inflow, carry a potential for “Dutch disease”-type problems. In general, this does not appear to have been a major problem, but this consideration does suggest that, in the presence of significant changes in remittance inflows, authorities may need to accept a greater degree of exchange rate flexibility than would otherwise be the case in order to avoid instability in domestic inflation.

The WEO study acknowledges that better information is still needed on the magnitudes and sources of remittances, including both inflows and outflows. Without such information, other challenges—such as regulating remittances and developing new financial products to serve the needs of remittance senders and recipients—will remain extremely difficult.

Finally, it is important to remember that remittances are just one of the many channels through which rising global migration flows affect developing-country welfare. While workers’ remittances may be beneficial, the loss of labor, especially specialized human capital—the “brain drain”— may hamper the development prospects of those left behind, including by affecting the tax base. But on the positive side, migrants themselves often find better opportunities in their destination countries, and may learn skills and gain experience that will prove valuable if they repatriate. And, more broadly, emigration may encourage the development of commercial networks, promote trade and investment flows, and lead to significant diaspora philanthropy.

Copies of the April 2005 World Economic Outlook are available for $49.00 each ($46.00 academic price) from IMF Publications Services. The full text of the latest issue of the World Economic Outlook is also available on the IMF’s website (www.imf.org).

Other Resources Citing This Publication