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Workers’ Remittances

Author(s):
International Monetary Fund. Research Dept.
Published Date:
December 2005
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Nikola Spatafora

Workers’ remittances, which broadly include all unrequited transfers from migrant workers to family or friends in their country of origin, have grown steadily over the past 30 years. In 2005, recorded remittances to developing countries are likely to reach $160 billion. Until very recently, there was remarkably little awareness of the magnitude of remittance flows; as a consequence, research interest was also extremely limited. Three key questions currently stand out. First, how large are unrecorded remittances, and how can their measurement and regulation be improved? Second, what are the determinants of remittances, and in particular what are the key obstacles to further increases in such flows? Third, do remittances have an important development impact, and how can it be maximized? This article provides an overview of recent IMF research on these issues.

Workers’ remittances to developing countries have been growing rapidly, and their rising trend is likely to persist as populations continue to age, and as pressures mount for migration from developing to advanced economies. For many developing economies, remittances constitute the single largest source of foreign exchange, exceeding export revenues, foreign direct investment, and other private capital inflows. Moreover, remittances have proved remarkably resilient in the face of economic downturns and crises. As a result, interest in remittances and their impact is rapidly growing in policy circles, including the Group of Eight, in the research community, and among potential remittance service providers. Remittances are increasingly viewed as a relatively attractive source of external finance for developing countries that can help foster development and smooth crises.

Unfortunately, much is still unknown about remittances. For instance, some remittances are channeled through the informal sector and are not captured in official balance of payments statistics. These include cash transfers based on personal relationships between businesspeople, or carried out by courier companies, friends, relatives, or by oneself. Using balance of payments data as well as household surveys, Freund and Spatafora (2005) estimate that, overall, these informal remittances may amount to about 35 to 75 percent of official remittances. El Qorchi, Maimbo, and Wilson (2003) provide a comprehensive review of the historical development of these informal fund transfer systems, the operational characteristics that favor their use, and the national and international economic and regulatory challenges they pose. Reinke and Patterson (2005) summarize other issues and problems that data users may experience with the balance of payments framework. Looking ahead, they review the methodological improvements currently under consideration for measuring remittances in the future. The Statistics Department of the IMF (see IMF, 2005) reviews the progress made recently in these areas, and outlines current plans for further work.

In spite of their limitations, existing data reveal strong empirical regularities. For instance, using cross-country data, Aggarwal and Spatafora (2005) find that policies and regulations play an important role in determining remittance inflows. In particular, multiple exchange rates, restrictions on holding foreign exchange deposits, and large black market premium all have sizable and statistically significant negative impacts on remittances. Freund and Spatafora (2005) similarly find that high transaction costs, in the form of money-transfer fees and dual exchange rates, reduce official remittances. Importantly, such transaction costs—which in spite of recent declines still amount in many countries to 10 percent or more of the sum remitted—are systematically related to concentration in the banking sector, lack of financial depth, and exchange rate volatility. The papers cited above also find that remittance inflows are countercyclical, increasing during periods of weak economic growth in the receiving countries. This suggests that remittances can play an important role in maintaining macroeconomic stability and mitigating the impact of adverse shocks. This finding is further confirmed by Bouhga-Hagbe (2004) for Morocco, Chamon (2005) for Samoa, and Gupta (forthcoming) for India. Burgess and Haksar (2005) do not find clear evidence of such a stabilizing effect of remittances in the Philippines.

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The IMF and Russia in the 1990s

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The countercyclicality of remittances does make it hard to establish what effect, if any, they exert on economic growth. Chami, Fullenkamp, and Jahjah (2003) conclude that remittances have a detectable negative impact, perhaps because remittance recipients can decrease labor force participation or reduce labor effort. Using a different identification strategy, Aggarwal and Spatafora (2005) fail to find any such effect; in contrast, they find that remittances help reduce poverty. Giuliano and Ruiz-Arranz (forthcoming), noting the constraints on borrowing in many developing countries, hypothesize that remittances may substitute for lack of financial development. Consistent with this, their empirical analysis finds that remittances promote growth in countries with shallow financial systems, but have no impact in financially developed economies.

The increasing amount of remittances by workers is just one of the many channels through which rising global migration flows affect developing-country welfare. Migrants may learn skills that will prove valuable if they repatriate; further, emigration may encourage the development of commercial networks, and promote trade and investment flows. Set against this, “brain drain” and the loss of specialized human capital may hamper the development prospects of those left behind, for instance by affecting the tax base. Mishra (forthcoming) examines these issues in the context of the Caribbean, which has extremely high migration rates, especially among the highly skilled. Many Caribbean countries have lost more than 70 percent of their labor force with more than 12 years of completed schooling. In this context, Mishra’s welfare calculations suggest that losses due to emigration of highly skilled workers outweigh the benefits of remittances. More research on such issues is clearly important.

References

Visiting Scholars, July–September 2005

Joshua Aizenman; University of California, Santa Cruz; 8/15/05–8/19/05, 9/12/05–9/16/05

Olumide Steven Ayodele; University of Calabar, Nigeria; 8/15/05–9/23/05

Ralph Bryant; Brookings Institution; 6/20/05–7/1/05

Irina Bunda; University of Orleans, France; 8/8/05–9/2/05

Jeffrey Chwieroth; Syracuse University; 5/16/05–7/15/05

Matteo Ciccarelli; European Central Bank; 7/18/05–7/22/05

Stephen Haber; Stanford University; 6/27/05–7/1/05

Kenneth Kuttner; Oberlin College; 6/13/05–7/29/05

Philip Lane; Trinity College Dublin; 7/25/05–7/29/05

Paul Levine; United Kingdom; 9/12/05–9/23/05

Chia-Hui Lu; Academia Sinica, Taiwan Province of China; 4/15/05–7/15/05

Douglas Russell Nelson; Tulane University; 9/28/05–12/16/05

Enrico Perotti; Universiteit van Amsterdam, the Netherlands; 7/18/05–7/29/05

Assaf Razin; Tel Aviv University, Israel; 8/30/05–8/31/05

James Robinson; University of California, Berkeley; 5/23/05–7/14/05

Andrew Rose; University of California; 7/25/05–8/19/05

Federico Sturzenegger; Universidad Torcuato Di Tella, Argentina; 8/25/05–9/2/05

Allan Timmermann; University of California, San Diego; 7/5/05–8/26/05

Vadym Volosovych; University of Houston; 8/15/05–9/2/05

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