Migrant remittances are even more amazing that we thought

January 30, 2015

     By Duncan Green     

At least in economic terms, migration appears to be some kind of developmental wonder-drug. Remittances from migrants to developing countries are remittances v other flowsnow running at some three times the volume of aid, and barely faltered during the 2008-9 financial crisis (see graph). The World Bank’s latest Global Economic Prospects report looks at the impact of migrant remittances on developing countries and consumption, especially during crises. Here’s their conclusions (my limited understanding of the econo-speak is that procyclical is bad – means everything goes up and down in synch, exacerbating volatility. Countercyclical is good, as things move in different directions, smoothing out overall volatility. Acyclical is somewhere in between):

‘Remittances are relatively stable, and acyclical. In a substantial proportion of the countries, remittance receipts are not significantly related to the domestic business cycle. In contrast, debt flows and foreign direct investment are procyclical.

Stability and acyclicality imply that remittances have the potential to make a critical contribution in supporting consumption in the face of economic adversity. This is particularly important in developing countries, where remittances are used to finance household consumption directly.

Remittances have also been stable during episodes of financial volatility when capital flows fell sharply. This stabilizing effect tends to be greater for remittance-receiving countries with a more dispersed migrant population.

Remittances are associated with more stable domestic consumption growth. Countries with large remittance receipts tend to display less correlation between output and consumption growth over the business cycle. Such consumption behavior often enhances welfare.

Development's footsoldiers?

Development’s footsoldiers?

These findings provide additional evidence of the beneficial effects of remittances. While household members may not themselves base their decisions to work abroad mainly on a desire to send stable remittances back home, these benefits provide a rationale to implement policies in recipient countries to reduce impediments to remittances, like lowering the costs of sending remittances, avoiding the taxation of remittances, and doing away with multiple exchange rate regimes. These impediments often discourage remittances as well as drive them into informal channels. Specific policy areas to be considered are as follows:

Costs of Remittances. While the average price of retail cross-border money transfers has been falling, it remains high. The average cost of sending about US $200 fell from 9.8 percent in 2008 to 7.9 percent in the third quarter of 2014. It will be important to reduce such costs further by ensuring competition in money transfer services, establishing an appropriate regulatory regime for electronic transfers, and supporting improvements in retail payments services.

Taxes on Remittances. Governments may be tempted to tax remittances in an effort to increase revenue. In general, this would discourage remittances and is likely to have a direct negative effect on household welfare. From the viewpoint of tax equity, one might note in addition that these transfers are made from after-tax income earned in source countries.

Exchange Rate Regime. Exchange rate flexibility provides an automatic stabilizer to recipients of remittances, in that the domestic currency value of remittances increases when the U.S.-dollar value of the currency drops, as it usually does during an adverse event. Dual exchange rate systems, in contrast, may deter remittance inflows, by artificially lowering the local currency proceeds of remittances and creating uncertainty about the U.S.-dollar cost of the domestic currency. This undermines the automatic stabilizer role that remittances can play during periods of exchange rate depreciation.’

Shame the political and cultural aspects of migration aren’t as straightforward. I guess the pragmatic approach is to pursue policies that maximise the developmental benefits of current migration levels, and then (if you want to) have a separate, enormous punch-up about migration and domestic politics in the North.

January 30, 2015
Duncan Green