Global Economic Prospects 2006 Economic Implications of Remittances and Migration November 28, 2005

Outlook for the global economy Despite a cyclical slowdown, GDP continues to grow rapidly in developing countries, underpinned by past policy reforms.

Outlook for the global economy Despite a cyclical slowdown, GDP continues to grow rapidly in developing countries, underpinned by past policy reforms. Low-income oil importers have only recently started to feel the squeeze of high oil prices and are vulnerable to further spikes.

Outlook for the global economy Despite a cyclical slowdown, GDP continues to grow rapidly in developing countries, underpinned by past policy reforms. Low-income oil importers have only recently started to feel the squeeze of high oil prices and are vulnerable to further spikes. The possibility of a large and disruptive rise in interest rates also poses a serious risk.

Growth in developing countries is still strong Real GDP annual change % Developing High-income Forecast 2007

Poverty forecast Poverty forecast Share of population living on $1/day, millions

Outlook for the global economy Despite a cyclical slowdown, GDP continues to grow rapidly in developing countries, underpinned by past policy reforms. Low-income oil importers have only recently started to feel the squeeze of high oil prices and are vulnerable to further spikes.

Poor oil-importing countries now more vulnerable m7 Sub-Saharan Terms-of-trade impact (% of GDP) Low-income

Outlook for the global economy Despite a cyclical slowdown, GDP continues to grow rapidly in developing countries, underpinned by past policy reforms. Low-income oil importers have only recently started to feel the squeeze of high oil prices and are vulnerable to further spikes. The possibility of a large and disruptive rise in interest rates also poses a serious risk.

Basis points Low spreads have supported growth, but…

Basis points Low spreads have supported growth, but…

Policy priorities Long-term prospects of developing economies will depend importantly on further reforms, including a successful Doha round. Policy must promote not impede oil-sector adjustment mechanisms. Increased public and private savings in the U.S., supportive policy in Europe and continued balance sheet vigilance by emerging markets will reduce global interest rate risks.

Development implications of migration and remittances Migration and remittances continue to increase Migration generates substantial welfare gains and reduces poverty. Benefits to countries of origin are mostly through remittances There is considerable scope for reducing remittance costs faced by poor migrants

Development implications of migration and remittances Migration and remittances continue to increase Migration generates substantial welfare gains and reduces poverty. Benefits to countries of origin are mostly through remittances There is considerable scope for reducing remittance costs faced by poor migrants

Private debt and portfolio equity FDI ODA Recorded remittances Remittances have continued to increase

Top recipients of remittances, 2004 $ billion% of GDP

Development implications of migration and remittances Migration and remittances continue to increase Migration generates substantial welfare gains and reduces poverty. Benefits to countries of origin are mostly through remittances There is considerable scope for reducing remittance costs faced by poor migrants

Migration boosts welfare for most households Change in real income in 2025 $ billion. Global gains of $356 billion

Remittances reduce poverty Evidence from a few household surveys shows that remittances reduce poverty Cross-country evidence shows that a 10% increase in per capita remittances leads to a 3.5% decline in the share of poor people Remittances also finance education and health expenditures, and ease credit constraints on small businesses

Remittances tend to rise following crisis, natural disaster, or conflict Remittances as % of private consumption

Remittances improve countries access to capital Present value of external debt as % of exports of goods, services, and remittances

Large remittance flows may lead to currency appreciation and adverse effects on exports Remittances may create dependency Remittance channels may be misused for money laundering and financing of terror Downside

Development implications of migration and remittances Migration and remittances continue to increase Migration generates substantial welfare gains and reduces poverty. Benefits to countries of origin are mostly through remittances There is considerable scope for reducing remittance costs faced by poor migrants

Remittance fees are high, and regressive Fee and foreign exchange commission as % of principal Weighted average of fees of four largest money transfer operators in the U.S.-Mexico corridor

Policy priorities Governments can provide information and regulate intermediaries to reduce risks, costs of migration High remittance costs faced by poor migrants can be reduced by increasing access to banking and strengthening competition in the remittance industry Governments should not tax remittances or direct the allocation of expenditures financed by remittances

Policy priorities Governments can provide information and regulate intermediaries to reduce risks, costs of migration High remittance costs faced by poor migrants can be reduced by increasing access to banking and strengthening competition in the remittance industry Governments should not tax remittances or direct the allocation of expenditures financed by remittances

Policy priorities Governments can provide information and regulate intermediaries to reduce risks, costs of migration High remittance costs faced by poor migrants can be reduced by increasing access to banking and strengthening competition in the remittance industry Governments should not tax remittances or direct the allocation of expenditures financed by remittances

Thank you!

International migration has increased Stock of migrants as share of destination countries population (%) Source: UN

Top sources of remittances, 2004 $ billion % of GDP

Income differences are a powerful motivation for migration Median wage levels for workers in the same occupation, relative to high-income economies ( , adjusted for purchasing power) Source: Freeman and Oostendorp 2000

Sources of gains for origin countries (Composition of percent change in real income in 2025)

Critical assumptions behind model results Differentiation between native and foreign workers Share of income sent home by migrants Distribution of profits Impact on government budget

High-skilled emigration rates are high in some countries # of countries share of developing country population (%)

Private debt and portfolio equity FDI ODA Recorded remittances Remittances have continued to increase…as % of GDP

International investors Remittance payments (foreign currency) Remittance senders Excess cash (foreign currency) Debt service payment Remittance securitization structure Trustee collateral account Correspondent banks Issuing bank credits beneficiarys account in domestic currency Beneficiarys account Message DomesticOffshore Issuing bank

Borrowing cost rises exponentially as credit rating deteriorates

Remittances can help obtain and improve credit rating Remittances (% of GDP, 2004) Rating excluding remittances Rating including remittances Spread saving (basis points) Lebanon14B+BB-150 Haiti*28CCCB-334 Nicaragua*11CCC+B-209 Uganda*5B-B161 * Calculated using a model similar to Cantor and Packer (1995), see Ratha and De (2005)

Securitization of future remittances can improve credit rating above investment grade YearIssuer Amount (US$ mn) Flow type Transa- ction rating Sover- eign rating 1998 Banco Cuscatlan 50Remit.BBBBB 2004 Banco Salvadoreño 25DPRsBBBBB+ 2002Banco do Brasil 250Remit.BBB+BB-