Remittances are cross border transfers of money from workers in one country back to their country of origin – often through payments to family members. There are two basic types of remittance – personal transfers in cash or in kind between resident and non-resident households and compensation of employees, which refers to the income of workers who work in another country for a limited period of time.
Migrant work is an increasingly significant feature of the global economy, and a by-product of globalisation. Many migrant workers are seasonal workers, but large numbers work for extended periods of time, and even those who have settled in a host country and gained the right to citizenship continue to transfer money back to extended families in their country of origin.
It is estimated that, in 2014, around 80% of all global remittances went to developing countries – $436 billion out of a total of $583 billion – around double the amount of global development aid.
Remittances represent somewhat of a problem for national governments, and global financial institutions. This is because they are difficult to track and measure with any degree of accuracy given that many transfers are made informally through the shadow economy and go unrecorded. Formal channels include officially authorised money transfer businesses (MTBs) including banks and specialist transfer businesses. Semi-formal transfers involve organised business, but are not subject to financial regulation, and informal transfers are through channels which do not involve a formal business.
The economic effects of remittances
Remittances provide a key source of finance for some of the poorest in the global economy, and its value greatly exceeds ODA. According to the Migration Policy Institute, remittances contributed more than 10 percent of GDP in 24 countries, and more than 20% in nine countries. Several studies have indicated that remittances have a significant effect on poverty reduction in recipient countries. Unlike development aid, remittances go directly to the individuals and families who need them and in this respect its impact is immediate.
There are many positive spillover effects of remittances in terms of reducing poverty and stimulating economic development through its effect on increasing disposable income and spending, and increasing tax revenues to governments. There is a positive multiplier effect that may be stronger than the effect of other forms of finance.
The effects of remittances may be counter-cyclical, with migrants transferring more to their host country when economic activity slows down.
Remittances clearly provide a credit on a country’s balance of payments for the recipient country, and for some (such as Belgium, Bulgaria and Lithuania in 2013) remittances make the difference between a deficit and a surplus. (ec.europa.eu)
Liquidity in the recipient country is also likely to increase, providing downward pressure on interest rates, which can be of benefit to local firms and encourage new businesses to start up.
Remittance flows may also make it easier for families to gain credit, and at the macro-level, financial organisations including the World Bank consider remittance flows as a factor in deciding whether to extend credit facilities.
However, remittances may generate some negative effects, including the possibility that poorer countries can become over-reliant on remittances and experience moral hazard. Remittances are also costly to make, with migrants paying, on average, 9% of the value of the transfer in costs to the transfer industry.
Furthermore, it is often argued that remittances can lead to an appreciation of local currencies, which can lead to a loss of competitiveness.