1. Economic Implications of Remittances and Migration Dilip Ratha World Bank Global Consumer Money Transfer Conference London October 30, 2006
Migration that must precede remittances is a complex phenomenon. The challenge facing policymakers is to fully achieve the potential economic benefits of migration, while managing the associated social and political implications. Our objective in this report is to help enlighten this difficult policy debate on migration by analyzing its economic impact, and particularly its impact on development. We realize that this is just one part of a complex picture, but speaking from the perspective of a development institution, we believe that this is a gap that needs to be filled.
While migration must precede remittances, and therefore the set of migration issues overlap a great deal with the set of remittance issues, the overlap is not complete. There are issues specific to remittances, and there are also issues specific to migration, that must be discussed separately. In Sri Lanka, for example, we found that a third of households that said they received remittances also said they did not have a relative abroad. This is important to bear in mind – remittances result from the cumulated stock of migrants, not the flow of migrants in the last year alone. The Sri Lanka example also raises an interesting question: what is a household?

2. Development implications of migration and remittances
Migration and remittances continue to increase. South-South migration may be as large as South-North migration
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
I will focus on the thematic chapters of this year’s GEP, on the economic implications of migration and remittances. I will highlight three main messages of the GEP and then discuss three policy priorities.
The main messages are: First, migration and developing countries’ remittance receipts have increased substantially over the past few decades, and will continue to increase in future. Migration is not only a South-North phenomenon as commonly believed – South-South migration may be as large as South-North migration. Second, migration generates substantial welfare gains for migrants, as well as countries of origin and destination, and reduces poverty. The benefits to origin countries come mostly through remittances, money sent home by migrants. And finally, there is considerable scope for reducing remittance costs faced by poor migrants, which would further increase the benefits of remittances.
We recognize that migration also has costs, including economic and social costs for the migrants, for their families and others left behind in the countries of origin, and for destination countries. Our goal here, however, is to focus on the strictly economic implications of migration, from the perspective of developing countries, an area where we felt there is still some gap in our understanding.

3. Development implications of migration and remittances
Migration and remittances continue to increase. South-South migration may be as large as South-North migration
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

4. Global migrant stock is rising
The global migrant stock is increasing, with an estimated $191 million migrants in Migration is expected to continue to grow as income and demographic differences between sending and receiving countries persist.
Conventionally migration has been thought of as a South-North phenomenon, but migration to the South used to be larger than to the North in 1965 and in Only in the last 20 years South-North migration has outpaced South-South migration. Even then, South-South migration has also increased in recent years, although at a slower pace. However, these estimates of migrants to the South are likely to be under reported. 37 developing countries have no censuses, compared to only 6 in the high-income countries. Collecting census data is more difficult in the South.
Estimates of the number of migrants are under estimated for several reasons: reporting problems, missing data, definitional ambiguous definition of migrant (foreign born vs foreigner, seasonal vs permanent), irregular migration.
Source: United Nations

5. South-South migration is almost as large as South-North migration
(millions, 2005)
Migrant stock in
South
North (HI OECD)
North (HI non-OECD)
Total
Migrants from: 74 62 20
156
North (HI OECD) 3 25
1.2 30
North (HI non-OECD) 1 4
0.3 5
TOTAL 78 91 22
191
Only about 2 out of 5 migrants from the developing countries are in the high-income OECD countries (or the traditional “North”).
Some 20 million (or 13 percent) are in other high-income countries outside the OECD (e.g., Saudi Arabia, UAE, Singapore and Hong Kong).
[For calculating South-South migration stocks, we need bilateral migration data. Such data are hard to get. We use the bilateral migration data gathered by University of Sussex. This is based on census data and secondary databases (OECD, ILO) for 162 countries. Then for 64 countries, they estimate bilateral flows using some assumptions (e.g., the shares of Malaysians and Nigerians in China are estimated using the average propensity of Malaysia and Nigeria to send people to East Asia).
We have updated data for 57 countries using most recent census data. To allocated migrants in the “other” category, i.e., whose source countries are not identified, we assume that those in South countries come from other South countries, whereas those in North countries come from both North and South countries in the proportion of identified migrants.]
Source: Ratha and others (2006)

6. South-South migration is almost as large as South-North migration
Destination of migrants from the South
The global migrant stock is increasing, with an estimated $191 million migrants in Migration is expected to continue to grow as income and demographic differences between sending and receiving countries persist.
Conventionally migration has been thought of as a South-North phenomenon, but migration to the South used to be larger than to the North in 1965 and in Only in the last 20 years South-North migration has outpaced South-South migration. Even then, South-South migration has also increased in recent years, although at a slower pace.
South-South migration is almost as large as South-North migration (47 percent of total).
Migration to other countries in South is at least as large as migration to North in three developing regions - South Asia (50%); Europe and Central Asia (64 percent), Sub-Saharan Africa (69 percent).
Could be larger since many more “unidentified migrants” in the South (migrants for whom source country is not known, but most likely from other South countries) relative to the North.
South-South migration is overwhelmingly intra-regional.
[However, these estimates of migrants to the South are likely to be under reported. 37 developing countries have no censuses, compared to only 6 in the high-income countries. Collecting census data is more difficult in the South. Estimates of the number of migrants are under estimated for several reasons: reporting problems, missing data, definitional ambiguous definition of migrant (foreign born vs foreigner, seasonal vs permanent), irregular migration.]
Source: Ratha and others (2006)

7. Top migration corridors include several South-South corridors (excluding the FSU)
Source: University of Sussex and World Bank

8. Former Soviet Union corridors are among the largest South-South corridors
Source: University of Sussex and World Bank

9. Remittances are large, have continued to increase
Private debt and portfolio equity
FDI
Recorded
remittances
Over the past decade, remittances have become increasingly prominent. Worldwide remittance flows are estimated to have exceeded $250 billion in 2005, of which developing countries received $181 billion, according to new estimates.
This amount, however, reflects only transfers through official channels. Econometric analysis and available household surveys suggest that unrecorded flows through informal channels may conservatively add 50 percent or more of recorded flows. Thus, in 2005 the true size of remittances received by developing countries was in excess of $250 billion. Thus, remittances were larger than foreign direct investment, and amounted to more than twice the size of official aid received by developing countries. Remittances are the largest source of external financing in many developing countries.
Note also that in the 1990s, remittances were one of the less volatile sources of foreign exchange earnings for developing countries.
Remittances have doubled over the past five years as a result of (a) increased scrutiny of flows since the terrorist attacks of September 2001, (b) reduction in remittance costs and expanding networks in the remittance industry, (c) the depreciation of the U.S. dollar (which raises the value of remittances denominated in other currencies), and (d) growth in the migrant stock and incomes.
A point worth noting is that remittances are sent by the cumulated flows of migrants over the years, not only by the new migrants of the last year or two. This fact makes remittances persistent over time. If new migration stops, then over a period of a decade or so, remittances may stop growing, as they did in Turkey in the 1980s. But they will continue to increase as long as migration flows continue.
ODA

10. South-South remittances were likely between $19 to $53 billion in 2005
Sources of Remittances to developing countries
($ billion, 2005)
By migrant stocks
By migrant stocks and host country incomes
By migrant stocks, host country incomes, and sending country incomes
South 53 19 32
North
128
162
149
Total
181
Source: Ratha and others (2006)

11. Top recipients of remittances, 2005 (estimate)
$ billion
The top recipient countries (of recorded remittances) are India, China, Mexico, France and the Philippines. [As a % of GDP, the figures are as follows: India 3.1%, China 1.3%, Mexico 2.7%, France 0.6% and the Philippines 13.4%.]
As a share of GDP, however, smaller countries such as Tonga (31%), Moldova (27.1%), Lesotho (25.8%) and Haiti (24.8%) were the largest recipients.
Recorded remittances are larger than:
10% of GDP in 20 largest recipients
Capital flows in 36 developing countries
Merchandise exports in 12 countries
Largest single commodity exports in 28 countries

12. Top recipients of remittances, 2005
% of GDP
The top recipient countries (of recorded remittances) are India, China, Mexico, France and the Philippines. [As a % of GDP, the figures are as follows: India 3.0%, China 1.0%, Mexico 2.8%, France 0.6% and the Philippines 13.6%.]
As a share of GDP, however, smaller countries such as Moldova (31.7.1%), Tonga (27%), Lebanon (25.8%), Lesotho (24.4%) and Haiti (21.7%) were the largest recipients.
Recorded remittances are larger than:
10% of GDP in 20 largest recipients
Capital flows in 36 developing countries
Merchandise exports in 9 countries
Largest single commodity exports in 28 countries (“Commodity Exports 1” in 50 countries)

13. Top sources of remittances
$ billion, 2005
% of GDP, 2004
Rich countries are the main sources of remittance flows. The United States is by far the largest source, with $39 billion in outward remittance flows. Saudi Arabia (classified as a high-income country in 2005) is the second largest, followed by Switzerland and Germany.
But when expressed as a share of GDP, outward remittances were the largest in the upper middle-income developing countries (0.7 percent of GDP compared to percent of GDP in other countries).

14. Development implications of migration and remittances
Migration and remittances continue to increase. South-South migration may be as large as South-North migration
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

15. Migration boosts welfare for most households Change in real income in 2025 $ billion
Global gains of $356 billion
To illustrate the potential gains from migration for developing countries, and to illustrate key channels through which migration affects welfare, we undertook a model-based simulation of the economic impact of a 3% rise in industrial countries’ labor force achieved through migration from developing countries. [The assumed increase is close to that observed over the 1970–2000 period.]
The assumed rise in migration—small relative to the labor force of high-income countries, but large relative to the existing stock of migrants—would generate large increases in global welfare. These welfare gains are likely to be larger than the gains from a full trade liberalization. Migrants’ real incomes roughly triple from the increase in wages compared to what they earned in countries of origin. Natives in industrial countries experience modest gains (0.4% increase from base line), as the increased supply of workers boosts returns to capital and has only a limited effect on wages. Those in origin countries gain largely through remittances (0.9% increase from baseline). By contrast, existing migrants in industrial countries experience significant losses (-6%), as they are assumed to be relatively close substitutes for the new migrants.
In the origin countries, migration reduces poverty, mainly through remittances, but also by reducing unemployment and increasing wages, and through the benefits of diaspora in the form of increased investment, technology, business contacts, and potential for return with improved skills.
[However, high-skilled emigration may impose costs on the origin country. The loss of skills through high-skilled emigration has particularly impaired health services in several developing countries.] .

16. 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
The benefits of migration to countries of origin are realized mostly through remittances. Remittance directly augment the income of the recipient households. They also indirectly affect poverty and welfare through their macroeconomic effects.
Evidence from household surveys shows that remittances may have reduced the share of poor people in the population by 11 percentage points in Uganda, 6 percentage points in Bangladesh and 5 percentage points in Ghana.
Cross-country analysis also show significant poverty reduction effects of remittances: a 10% increase in per capita official remittances may lead to to a 3.5% decline in the share of poor people.
Remittances are associated with increased household investments in education, entrepreneurship, and health—all of which have a high social return in most circumstances.
[Studies based on household surveys in El Salvador and Sri Lanka find that children of remittance recipient households have a lower school drop-out ratio and that these households spend more on private tuition for their children. In Sri Lanka, the children in remittance receiving households have higher birth weight, reflecting that remittances enable households to afford better health care. Several studies also show that remittances provide capital to small, credit-constrained entrepreneurs.]

17. Remittances tend to rise following crisis, natural disaster, or conflict Remittances as % of private consumption
While capital flows tend to rise during favorable economic cycles and decline in bad times, remittances tend to be counter-cyclical relative to recipient countries' economic cycles. They are likely to rise when the recipient country suffers an economic downturn following a financial crisis, natural disaster, or political conflict as migrants transfer more funds during hard times to help their families and friends.
They rose during the financial crisis in 1995 in Mexico, and in 1998 in Indonesia and Thailand. They also increased following hurricanes in Central America. In Somalia and Haiti, they have provided a lifeline for the poor.
In addition to bringing the direct benefit of higher wages earned abroad, migration, therefore, helps households diversify their sources of income and thus reduce their vulnerability to risks.

18. Remittances improve countries’ access to capital
Present value of external debt as % of exports of goods, services, and remittances
By generating a steady stream of foreign exchange earnings, remittances can improve a country’s creditworthiness and enhance its access to international capital markets. The ratio of debt to exports, a key indebtedness indicator, increases significantly when remittances are excluded. Proper accounting of remittances can, for example, improve the credit rating of Lebanon and Haiti by two notches, and may lower sovereign borrowing costs by 130 to 334 basis points.
Financial institutions in Brazil, Mexico, Turkey, and El Salvador have used innovative financing mechanisms such as securitization of future remittance flows to raise over $10 billion during the last decade. These financing transactions typically carried lower borrowing costs and longer tenor than sovereign bond issues.

19. Downside
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
There are some downsides to remittances, however. At a macroeconomic level, large and sustained remittance flows may lead to currency appreciation with adverse consequences for exports. This outcome, however, may be less severe than it is in the case of natural resource earnings, because remittances are distributed more widely and may avoid deleterious effects on institutional capacity that are associated with natural resource windfalls.
Households receiving large amounts of remittances may become dependent on this source of income, and may prefer to reduce work efforts. Some authors have argued that such outcomes may dampen growth. Evidence on the growth impact of remittances, however, is inconclusive. Empirical evaluation of effects on growth is difficult because of the counter-cyclical behavior of remittances, and because the effects on human capital take root over a very long time period. On the other hand, to the extent that they finance education and health, and alleviate credit constraints for small entrepreneurs, remittances may even increase growth. To the extent that they increase consumption, remittances may increase individual income levels and reduce poverty, even if they do not directly impact growth.
Finally, remittance channels, particularly the so-called hawala and other informal channels, may be misused for money laundering and the financing of terrorism. The evidence of such misuse, however, is scarce relative to the size of transactions that are believed to be flowing through these channels. Besides, remitters often use informal channels because the formal channel is often costly, inconvenient, or just not there in certain corridors.

20. Development implications of migration and remittances
Migration and remittances continue to increase. South-South migration may be as large as South-North migration
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
I will focus on the thematic chapters of this year’s GEP, on the economic implications of migration and remittances. I will highlight three main messages of the GEP and then discuss three policy priorities.
The three main messages are: First, migration and developing countries’ remittance receipts have increased substantially over the past few decades. Second, migration generates substantial welfare gains for migrants, as well as countries of origin and destination, and reduces poverty. The benefits to origin countries come mostly through remittances, money sent home by migrants. And finally, there is considerable scope for reducing remittance costs faced by poor migrants, which would further increase the benefits of remittances.
We recognize that migration also has costs, including economic and social costs for the migrants, for their families and others left behind in the countries of origin, and for destination countries. Our goal here, however, is to focus on the strictly economic implications of migration, from the perspective of developing countries, an area where we felt there is still some gap in our understanding.

21. Remittance fees are high, and regressive
Fee and foreign exchange commission as % of principal
In this chart, we present weighted average fees of the top four money transfer operators. A typical poor migrant sends about $200 or less per transaction. For sending $100, he would have to pay $16, and to send $200, he would have to pay $18, according to this chart. These costs are unnecessarily high.
Reducing remittance fees would increase the disposable income of poor migrants, as well as their incentives to send more money home.
Reducing remittance costs would also encourage the use of formal remittance channels.
Weighted average of fees of four largest money transfer operators in the U.S.-Mexico corridor

22. South-South remittance costs tend to be higher than North-South costs

23. Policy priorities
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
Second, high remittance costs faced by poor migrants can be reduced by increasing access to banking and strengthening competition in the remittance industry. Banks tend to provide cheaper remittance services than money transfer operators. Encouraging account to account transfers is likely to increase saving from remittances, and contribute to financial development of remittance recipient countries.
Both sending and receiving countries can increase banking access of migrants by allowing origin country banks to operate overseas, providing identification cards (such as the Mexican matricula consular) which are accepted by banks to open accounts, and facilitating participation of microfinance institutions and credit unions in the remittance market. These institutions can deliver remittance services in poorer communities and in remote areas. They can in turn benefit as the availability of remittance services may attract customers for their loan products.
Costs could be cut by strengthening competition in the remittance industry. Entry of new market players can be facilitated by harmonizing and lowering bond and capital requirements, and avoiding overregulation such as requiring a full banking license for specialized money transfer operators. While regulations for anti money-laundering and countering the financing of terrorism (AML/CFT) are necessary for security reasons, they should not make it difficult for money service businesses to operate accounts with correspondent banks.
Sharing payment systems would avoid duplication of efforts. Establishing partnerships between remittance service providers and existing postal and other retail networks would help expand remittance services without requiring large fixed investments. However, exclusive partnerships between post office networks and money transfer operators have often resulted in higher remittance fees than when there are no such partnerships. Partnerships should be non-exclusive.
Requiring greater disclosure on remittance fees from remittance service providers would help remitters make informed choices. Poor migrants would also benefit from financial education.

24. Policy priorities
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
Finally, incentives offered by origin countries to either increase flows or to channel them to “productive” uses may produce unwanted effects. Tax incentives to attract remittances may encourage tax evasion. Matching-fund programs (such as Mexico’s 3-for-1) to attract remittances from migrant associations may divert funds from other local funding priorities. Efforts to channel remittances to investment have met with little success. Instead, efforts should be made to improve the overall investment climate in the origin countries.
Some governments have been toying with the idea of taxing remittances. Taxation of remittances would be hard to enforce as flows would likely go underground. That would also be inconsistent with the efforts to lower remittance costs.
Fundamentally, remittances are private money that should not be expected to fund public projects. They should never be viewed as a substitute for official development aid.
It should be stressed that while migration can play an important role in reducing poverty, it is not a substitute for economic progress in origin countries. Development ultimately depends on sound domestic economic policies.