Remittances and Development

Hans Timmer,based on work by Dilip Ratha

LINK meetingMexico CityMay 19, 2005

Remittances and Development

Why has development community become so interested in remittances?

How can the development-effectiveness of remittances be increased?

Is the impact of migration on development also positive?

Why the interest?

Remittances are a large, growing, and stable source of foreign exchange

Remittances go more than proportionally to the poor

Remittances don’t create debt problems

-25

0

25

50

75

100

125

150

175

1990 1992 1994 1996 1998 2000 2002 2004

$ Billion

Capital market flows

FDI

Remittances

Remittances are stable

67.655.1228.076.4as % of FDI inflows

7.14.815.36.7as % of domestic investment4.05.118.56.2as % of merchandise imports1.31.33.31.6as % of GDP

24.454.936.7116.0Total remittance receipts

Upper middle-income

Lower middle-income

Low-income

All developing

Remittances go more than proportionally to poor countries

$ billions, 2003

Although top recipients are large countries….$ billion, 2003

13.2

8.4 8

3.2 2.9

India EgyptMoroccoPhilippinesMexico

12.413.914.214.514.614.714.816.116.918.720.022.323.725.0

29.5

40.6

12.0 11.7 11.2

05

1015202530354045

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Leso

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Alba

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Remittances are relatively larger in smaller countries

Remittance payments are larger in richer countries…Remittance payments $ bn

1.5

20.4

67.7

3.8

Low-income Lower middleincome

Upper-middle income

High income

…But as a share of GDP, remittance payments are larger in upper middle- income countries

Remittance payments as % of GDP

0.2

2.5

0.30.2

Low-income Lower middleincome

Upper-middle income

High income

“Neighborhood” effect on remittances to the poorest countries, 2000-02`

02468

101214161820

0 20 40 60 80 100

Sub-Saharan Countries

Lesotho

Moldova

Nepal

Uganda

Yemen

NicaraguaPakistan

VietnamBangladesh

Mongolia

Remittances (%GDP)

Share of country border with richer countries not in conflict

Data and Definition

Workers’ remittances + Compensation of Employees + Migrants’ transfers

No-reporting or under-reporting of informal flows

Bilateral flows missing

Improving data

G7 working group to improve statistics

Scrutiny of existing data for misclassification or under-reporting

Surveys of remittance service providers

Surveys of senders

Surveys of recipients

Surveys of central banks

Central Banks that have Central Banks that have participated in the survey so far*participated in the survey so far*

17.Bolivia18.Brazil19.Costa Rica20.Ecuador21.Guatemala22.Guyana23.Haiti24.Honduras25.Mexico26.Nicaragua

Latin America

27.Egypt28.Tunis

7. Azerbaijan8. Belarus9. Croatia10.Cyprus11.Georgia12.Latvia13.Moldova14.Poland15.Serbia 16.Slovenia

1.Bangladesh2.India3.Indonesia4.Pakistan5.Philippines6.Thailand

Middle EastEurope and Central AsiaAsia

*Total = 28 countries*Total = 28 countries that that received received $49 $49 billionbillion in in remittance flowsremittance flowsduringduring 2002, 2002, overover halfhalf ofof flowsflows toto developingdeveloping countriescountries..

Sources of Data on RemittancesSources of Data on Remittances

27%31%

35%

88%

0%

20%

40%

60%

80%

100%

CommercialBanks

MoneyTransfer

Companies

Other Fin.Institutions

Post Offices

Percent of Central BanksPercent of Central Banksthat Collect Data from:that Collect Data from:

85%

62%

46%

23%

0%

20%

40%

60%

80%

100%

Electronictransfers

Money orders Drafts Withdrawals atATMs

TransactionsTransactions

WhatWhat TypeType ofof TransactionsTransactionsare are RecordedRecorded as as RemittancesRemittances??

PercentPercent ofof Central Central BanksBanks thatthat Record Record RemittancesRemittances fromfrom thethe followingfollowing TypesTypes ofof

TransactionsTransactions

How to improve effectiveness?

Lower cost of transfers

Offer special incentives to diasporas

Facilitate international travel

Improve financial system and improve investment climate

But … recognize the person-to-person nature of remittances.

Remittance costs are high, and regressiveCharge

21%

10%9%

8% 7%

6%5% 4% 4% 4% 4% 3%

13%

40 75 150 225 300 375 560 745 930 1120 1305 1490 1860

Principal amount (euros)

Improve migrants’ access to banks

Government Incentives to Transfer Government Incentives to Transfer Remittances Through Formal ChannelsRemittances Through Formal Channels

No61%

Yes39%

Which countries grant migrants Which countries grant migrants special incentives to send special incentives to send money back home?money back home?

1.1. AzerbaijanAzerbaijan2.2. BangladeshBangladesh3.3. EcuadorEcuador4.4. EgyptEgypt5.5. IndiaIndia6.6. MoldovaMoldova7.7. PakistanPakistan8.8. PhilippinesPhilippines9.9. SerbiaSerbia10.10.TunisTunis

Tax breaksTax breaksHigher interest rates Higher interest rates for depositsfor depositsFacilities for land Facilities for land purchasespurchasesEtc.Etc.

Improve investment climate in recipient countries

Remittances as % of GDP, 1996-2000

High Low

Corruption 0.5 1.9

Inequality 0.9 1.5

M2/GDP 1.2 0.9

Trade/GDP 1.2 1.0

What about migration?

Large gains for migrants (and receivers of remittances)

Mixed impacts on country of origin and host country.

Brain drain or brain gain?