JUNE 2007

Dilip Ratha

Migrant remittances are the most tangible and perhaps theleast controversial link between migration and develop-ment. They can play an effective role in reducing poverty,and they provide a convenient angle for approaching thecomplex migration agenda.

Remittances are personal flows of money from migrants totheir friends and families and should not be taxed or direct-ed to specific development uses. Instead, the developmentcommunity should make remittance services cheaper andmore convenient and indirectly leverage these flows toimprove the financial access of migrants, their beneficiar-ies, and financial intermediaries in the origin countries.

The Growing Importance of Remittancesand Their Impact on Development

Remittances received from migrants abroad are one of thelargest sources of external finance for developing coun-tries. In 2006, recorded remittances sent home by migrantsfrom developing countries reached $206 billion, up from$193 billion in 2005 and more than double 2001’s level(Table 1). The true size of remittances, including unrecord-ed flows through formal and informal channels, is believedto be even larger. They are almost as large as foreign direct

LeveragingRemittances forDevelopment

P R O G R A M O N M I G R A N T S , M I G R AT I O N , A N D D E V E L O P M E N T

Policy Brief

Migrant remittances are the most tangibleand perhaps the least controversial linkbetween migration and development.Remittances have become a major sourceof external development finance. In 2006,recorded remittances sent home bymigrants from developing countriesreached $206 billion, more than doublethe level in 2001.The true scale of remit-tances, including unrecorded flowsthrough formal and informal channels, isbelieved to be even larger.

Remittances provide a convenient anglefor approaching the complex migrationagenda.They play an effective role inreducing poverty. Since remittances arepersonal flows from migrants to theirfriends and families, they tend to be welltargeted to the needs of the recipients.And these flows typically do not sufferfrom the governance problems that maybe associated with official flows.

Remittances should not be taxed or direct-ed to specific development uses. Instead,the development community should makeremittance services cheaper and more con-venient and indirectly leverage these flowsto improve the financial access of migrants,their beneficiaries, and the financial inter-mediaries in the origin countries.

A strong flow of remittances can alsoimprove the receiving country's credit-worthiness, lowering their cost of borrow-ing money in international markets.Aresearch and policy agenda to maximizethe development impact of internationalremittances would include the followingfour elements: a) monitoring, analysis, andprojection; b) retail payment systems; c)financial access of individuals or house-holds; and d) leveraging remittances forcapital market access of financial institu-tions or countries.

S U M M A R Y

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investment, and more than twice as large asthe official aid received by developing coun-tries (Figure 1).

The doubling of recorded remittances overthe past five years is a result of a combina-tion of factors: better measurement of flows;increased scrutiny since the terrorist attacksof September 2001; reduction in remittancecosts and expanding networks in the moneytransfer industry; depreciation of the US dol-lar (raising the dollar value of remittances inother currencies); and growth in the migrantstock and incomes.

Poor Countries Receive Relatively Larger RemittancesIn 2006, the top three recipients of remit-tances—India, China, and Mexico—eachreceived nearly $25 billion (Figure 2). Butsmaller and poorer countries tend to receiverelatively larger remittances in proportion tothe size of their economies. Expressingremittances as a share of GDP, the top recipi-ents were Moldova (30 percent), Tonga (27percent), Guyana (22 percent), and Haiti (21percent). Remittances are thus more evenlydistributed across developing countries thanare private capital flows.

Table 1. Global Flows of International Migrant Remittances(US$ billion)

Source: World Bank staff calculations based on IMF Balance of Payments Statistics Yearbook 2007. Remittances are defined as the sum of workers' remittances, compensation of employees, and migrant transfers.The complete dataset including country specific information is available at www.worldbank.org/prospects/imigrationsandremittance.

Remittances Are Stable or Even CountercyclicalRemittances tend to be more stable than pri-vate capital flows, and may even be counter-cyclical relative to the recipient economy.They tend to rise when the recipient econo-my suffers a downturn in activity, an econom-ic crisis, natural disaster, or political conflict,as migrants may send more funds duringhard times to help their families and friends.Remittances rose during the financial crisisin 1995 in Mexico and in 1998 in Indonesiaand Thailand (Figure 3). They also increasedfollowing hurricanes in Central America. In

Somalia and Haiti, they have provided a life-line for the poor. In addition to bringing thedirect benefit of higher wages earned abroad,migration helps households diversify theirsources of income and thus reduce their vul-nerability to risks.

Remittances Reduce PovertyRemittances directly augment the income ofrecipient households. In addition to providingfinancial resources for poor households, theyaffect poverty and welfare through indirectmultiplier effects and also macroeconomiceffects. These flows typically do not suffer

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Policy Brief

Figure 1. Remittances and Capital Flows to Developing Countries

Source: Author's calculation based on Global Development Finance 2007 and IMF Balance of PaymentsStatistics Yearbook 2006.

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Figure 2.Top Recipients of Remittances, 2006

Source: Author's calculation based on IMF Balance of Payments Statistics Yearbook 2007, WorldDevelopment Indicators 2007, and World Bank Development Prospects Group data.

from the governance problems that may beassociated with official aid flows.

Regression analysis across countries world-wide shows the significant poverty reductioneffects of remittances: A 10 percent increasein per capita official remittances may lead toa 3.5 percent decline in the share of poorpeople. Recent research indicates that remit-tances reduced poverty in sub-SaharanAfrica and Latin America, although witheffects that vary across countries.

Household survey data show that remittanceshave reduced the poverty headcount ratio(percent of population below the nationalpoverty line) significantly in several low-

income countries—by 11 percentage pointsin Uganda, 6 percentage points inBangladesh, and 5 in Ghana. In Nepal,remittances may explain a quarter to a half ofthe 11 percentage-point reduction in thepoverty headcount rate over the past decade(in the face of a difficult political and eco-nomic situation).

The analysis of the poverty impact of remit-tances must take into account the loss ofincome that the migrant may experience dueto migration (for example, if the migrant hasto give up his or her job). Such losses arelikely to be small for the poor and unem-ployed but large for the middle- and upper-income classes.

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Policy Brief

Figure 3. Remittances Rise during Crisis, Natural Disasteror Conflict

Source: World Bank (2005)

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Very poor migrants may not be able to sendremittances in the initial years after theirmigration. Also, the remittances of very richmigrants may be smaller than the loss ofincome due to migration. But for the mid-dle-income groups, remittances enablerecipients to move up to a higher incomegroup. In Sri Lanka, for example, house-holds from the third through the eighthincome decile moved up the income ladderdue to remittances (Figure 4).

Remittances Finance Education, Health, and EntrepreneurshipRemittances are associated with increasedhousehold investments in education, entre-

preneurship, and health—all of which have ahigh social return in most circumstances.Studies based on household surveys in ElSalvador and Sri Lanka find that children ofremittance-receiving households have alower school dropout ratio and that thesehouseholds spend more on private tuition fortheir children. In Sri Lanka, the children inremittance-receiving households have higherbirth weight, reflecting that remittancesenable households to afford better healthcare. Several studies also show that remit-tances provide capital to small entrepre-neurs, reduce credit constraints, andincrease entrepreneurship.

Figure 4. Remittances Help Reduce Poverty

Source: De and Ratha (2006)* A negative number indicates the percentage of households that moved down to a lower income decile.

Remittances May Cause Currency AppreciationLarge remittance inflows, like any other for-eign currency inflows, can cause an appreci-ation of the real exchange rate and raise theinternational price of traditional exportswhile making imports more expensive.Although empirical evidence of such “Dutchdisease” effects of remittances is still lack-ing, the impact is likely to be large in smalleconomies. Several countries, including ElSalvador, Kenya, and Moldova, are concernedabout the effect of large remittance inflowson currency appreciation.

The traditional “sterilization” techniqueused to prevent currency appreciation due tonatural resource windfalls, however, is notappropriate for addressing the currencyappreciation due to remittances. Unlike oilwindfalls, remittances persist over long peri-ods. Trying to sterilize their impacts yearafter year can be very costly. Countries haveto learn to live with these persistent flows.Government spending on infrastructure andefforts to raise labor productivity can tosome extent offset the currency appreciationeffects of remittances.

The Effect of Remittances on Growth Is MixedTo the extent that remittances finance educa-tion and health and increase investment,remittances could have a positive effect oneconomic growth. In the economies where thefinancial system is underdeveloped, remit-tances may alleviate credit constraints and

act as a substitute for financial development.On the other hand, large outflows of workers(especially skilled workers) can reducegrowth in countries of origin. Remittancesmay also induce recipient households tochoose more leisure than labor, with adverseeffects on growth.

Remittances may be more effective in a goodpolicy environment. For instance, a goodinvestment climate with well-developedfinancial systems and sound institutions islikely to insure that a larger share of remit-tances is invested in physical and humancapital. Remittances may also promotefinancial development, which in turn canenhance growth.

Empirical evidence on the growth effects ofremittances, however, remains mixed. Inpart, this is because the effects of remit-tances on humanand physical capi-tal are realizedover a very longtime. This is alsopartly due to thedifficulty associat-ed with disentan-gling remittances’countercyclicalresponse togrowth, which implies that the causality runsfrom growth to remittances, when in fact thecorrelation between the two variables is neg-ative. Finding appropriate instruments forcontrolling such reverse causality is a chal-

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Policy Brief

Unlike oil windfalls,remittances persist over longperiods. Trying to sterilizetheir impacts year after yearcan be very costly. Countrieshave to learn to live withthese persistent flows.

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lenge. It would be easy to conclude thatremittances have a negative effect on growth,but that would be erroneous. Also, to theextent that they increase consumption, remit-tances may raise individual income levelsand reduce poverty, even if they do notdirectly impact growth.

Leveraging Remittances for Development

Governments in destination and origin coun-tries can facilitate remittance flows andenhance their development impacts throughthe application of appropriate policies.However, some current policy practices posepitfalls. Almost all developing countries offertax incentives to attract remittances, but such

tax exemptionson remittancesmay encouragetax evasion.

Matching-fundprograms (suchas Mexico’s 3-

for-1 program, in which the municipal, state,and national governments match migrantorganizations’ investments in development)may effectively leverage small volumes ofcollective remittances from migrant associa-tions for small community development proj-ects, but such programs may not be scalableand may divert funds from other local fund-ing priorities. Efforts to channel remittancesto investment have met with little success.Instead, efforts should be made to improvethe overall investment climate in the origin

countries. Some governments have been toy-ing with the idea of taxing remittances. Thiswould have an effect similar to that of raisingremittance costs and would hurt the poormigrants and their families in origin coun-tries. Taxation would also drive remittanceflows further underground.

Remittances should not be viewed as asubstitute for official development aid.Fundamentally, they are private money thatshould not be expected to fund public proj-ects. Not all poor households receive remit-tances; official funding is necessary toaddress the needs of such households.

Leveraging Remittances for theFinancial Access of Migrants and Their BeneficiariesEncouraging remittances through bankingchannels can improve the developmentimpact of remittances by encouraging moresaving and enabling better matching ofsaving with investment opportunities.Remittances received as cash are less likelyto be saved than those received through abank account.

For many poor households and migrants,remittances are the only point of contact withthe formal financial sector. By providingremittance services, banks and other finan-cial institutions can attract new customers fortheir deposit and loan products. Microfinanceinstitutions can use the history of remittancereceipts to judge the credit history of poten-tial customers.

Remittances are almost as largeas foreign direct investment,

and more than twice as largeas official aid received by

developing countries.

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Policy Brief

Both sending and receiving countries canincrease migrants’ banking access by allow-ing origin country banks to operate overseasand providing identification cards (such asthe Mexican matrícula consular), which areaccepted by banks to open accounts. Accessto remittance services in rural and remoteareas can be improved by encouraging theparticipation of microfinance institutions,credit unions, and saving banks (includingpostal saving schemes) in the remittancemarket. Existing regulations may need to beamended to allow these institutions to morefully participate in providing remittanceservices. In many countries, microfinanceinstitutions would need legal permission toreceive foreign exchange. In some cases, they

may need limited access to national clear-ance and settlement systems.

Leveraging Remittances for Capital Market Access of Financial IntermediariesRemittances can improve a country’s credit-worthiness and thereby enhance its access tointernational capital markets. Hard currencyremittances, properly accounted, can signifi-cantly improve country-risk rating, andthereby lower their cost of borrowing moneyin international markets. The ratio of debt toexports of goods and services, a key indebt-edness indicator, would increase significant-ly if remittances were excluded from thedenominator (Figure 5). Model-based calcu-

Figure 5. Remittances Improve Country Creditworthiness

Source: World Bank (2005)

lations using debt-to-export ratios thatinclude remittances in the denominator indi-cate that including remittances in creditwor-thiness assessments would improve creditratings for Lebanon and Haiti (by two notch-es) and result in implied sovereign spread(the difference in interest rates between asovereign bond and comparable US treasur-ies) reductions ranging from 130 to 334basis points.

Future flows of remittances can be used ascollateral to improve the rating of commer-cial (sub-sovereign) borrowers. Several banksin developing countries (such as Brazil,Egypt, El Salvador, Guatemala, Kazakhstan,Mexico, and Turkey) have been able to raisecheaper and longer-term financing (more

than $15 billionsince 2000) frominternational capi-tal markets via thesecuritization offuture remittanceflows. By mitigat-ing currency con-vertibility risk, a

key component of sovereign risk, the futureflow securitization structure allows securitiesto be rated better than the sovereign creditrating. In the case of El Salvador, for exam-ple, the remittance-backed securities wererated investment grade, two to four notchesabove the sub-investment grade sovereignrating. Investment grade rating makes thesetransactions attractive to a wider range of“buy-and-hold” investors (for example,

insurance companies) that face limitations onbuying sub-investment grade. As a result, theissuer can access international capital mar-kets at a lower interest rate spread andlonger maturity. Moreover, by establishing acredit history for the borrower, these dealsenhance the ability and reduce the costs ofaccessing capital markets in the future.

Reducing Remittance CostsReducing remittance fees would increasethe disposable income of poor migrants,boost their incentives to send more moneyhome, and encourage the use of formalremittance channels.

The cost of sending remittances tends to behigh and regressive. A typical poor migrantsends about $200 or less per transaction.The average cost through the top threemoney transfer operators (Western Union,MoneyGram, and Dolex) can be as high as$16 for $100 and $18 for $200. These feesare highly regressive because the smallerremittances sent by poor migrants cost moreper dollar sent.

With increased awareness among policymak-ers and migrants, and due to the falling costsof technology, remittance costs have beendeclining in recent years. In the US–Mexicocorridor, for example, the cost of sending$300 fell by 54 percent between 1999 and2004, from more than $26 to $12. Sincethen, however, costs have remained sticky,dropping only to $10.60 by the end of 2006.

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High remittance costs facedby poor migrants can be

reduced by increasing accessto banking and strengthen-

ing competition in theremittance industry.

South–South remittance costs are even higherthan North–South remittance costs (Figure 6).Nearly half the migrants from the South livein the South. Yet South–South remittances areeither impossible due to capital and exchangecontrols, or they are prohibitively expensivebecause currency conversion charges have tobe paid at both ends.

High remittance costs faced by poormigrants can be reduced by increasingaccess to banking and strengthening compe-tition in the remittance industry. Banks tend

to provide cheaper remittance services thanmoney transfer operators. Entry of new mar-ket players can be facilitated by harmonizingand lowering bond and capital requirements,as well as avoiding overregulation such asrequiring a full banking license for special-ized money transfer operators.

Although anti-money-laundering regulationsand regulations that attempt to counter thefinancing of terrorism (AML/CFT) are neces-sary for security reasons, they should notmake it difficult for money service businesses

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Policy Brief

Figure 6. South-South Remittance Fees Are Higher thanNorth-South Remittance Fees

*These fees are the average of Western Union and other agencies.**These fees and foreign exchange (FX) commissions are from Western Union only.Source: Ratha and Shaw (2007)

to operate accounts with correspondent banks.These regulations are currently unclear, andto make matters worse, they are not systematicor harmonized. Developing transparent com-pliance guidelines on AML/CFT regulationsshould be a policy priority.

Sharing payment systems would avoid dupli-cation of efforts. Establishing partnershipsbetween remittance service providers and

existing postal and otherretail networks would helpexpand remittance serviceswithout requiring largefixed investments. However,exclusive partnershipsbetween post office net-works and money transferoperators have often result-ed in higher remittance fees

than when there are no such partnerships.Partnerships should be nonexclusive.

Requiring greater disclosure of remittancefees from remittance service providerswould help remitters make informed choic-es. Poor migrants would also benefit fromfinancial education.

Summary: The InternationalRemittances Agenda

Remittances can contribute significantly topoverty reduction and other UN MillenniumDevelopment Goals. Following the discussionabove, the international remittances agendacan be summarized under four headings(Figure 7):

1. Monitoring, analysis, and projection;2. Retail payment systems;3. Financial access of individuals or

households; and4. Leveraging remittances for capital

market access of financial institutions or countries.

1. Monitoring, analysis, and projection. This includes understanding the size, corri-dors, channels, and costs of remittance (andmigration) flows and the cyclical behavior ofthese flows; analysis of remittances’ impactson poverty, inequality, education, health, andinvestment in remittance-recipient countries;and analysis of policy factors affecting remit-tance costs—for example, entry barriers andexclusivity contracts affecting market compe-tition and exchange controls affecting foreignexchange commissions. The effect of costreduction on size and channels of flows alsofalls under this heading.

2. Retail payment systems. The changesin the payment system relating to personalremittances impact all retail or small-valuepayments, including person-to-business andbusiness-to-business payments. The items inthis category include new payment platformsor instruments (including cell phone-based,card-based, or Internet-based remittanceinstruments); prudential capital require-ments; and regulations governing access ofremittance agents to clearing and settlementsystems; compliance with anti-money laun-dering and attempts to counter the financingof terrorism; disclosure of remittance fees;and cross-border arbitration in the event that

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Remittances areassociated with

increased householdinvestments in

education,entrepreneurship,

and health.

a remittance transaction is not delivered asper the service agreement.

3. Financial access of individuals orhouseholds. While financial intermediariessuch as banks, microfinance institutions,credit unions, and saving banks can helpdeliver remittance services, they can alsobenefit by offering remittance services thatmay attract new customers and then encour-age them to save and invest. Besides encour-

aging saving out of remittances, these finan-cial intermediaries can develop remittance-linked consumer or housing loans and insur-ance products. They can also use the historyof remittance receipt for evaluation of arecipient’s creditworthiness.

4. Leveraging remittances for capitalmarket access of financial institutions orcountries. Large and stable remittance flowsundoubtedly improve a country’s creditwor-

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Policy Brief

Figure 7. The International Remittances Agenda

Notes

Earlier versions of this policy brief were presented at the Second Plenary Meeting of theLeading Group on Solidarity Levies to Fund Development, Oslo, February 6-7, 2007; andthe Brainstorming session on Migration and Development organized by the Migration PolicyInstitute and the German Marshall Fund of the United States, Brussels, February 27, 2007.It draws heavily on Ratha (2003) and Global Economic Prospects 2006: EconomicImplications of Remittances and Migration. Thanks to Uri Dadush and Sanket Mohapatrafor extensive discussions and Zhimei Xu for research assistance. The views expressed arethe author’s own, not those of the World Bank. This paper will also appear in Migration,Trade, and Development: Proceedings of a Conference Sponsored by the Federal ReserveBank of Dallas, The Tower Center for Political Studies, the Department of Economics atSouthern Methodist University and the Jno E. Owens Foundation, October 2006. Reprintedby permission.

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thiness and thereby the creditworthiness ofsub-sovereign entities as well. Banks in manycountries have used future remittances as col-lateral for raising significant bond financing(sometimes billions of dollars) from interna-tional markets. The interest spread on thesebonds was lower and the tenor was higher than

comparable plain sovereign bonds. Someestimates show that the potential for suchbond financing remains untapped, especiallyin many poor countries that also receivesignificant remittances. The funds raised viathese bonds can be targeted to specificdevelopment projects.

References

De, Prabal K. and Dilip Ratha. 2006.“International Migration Behavior andImpact of Remittances on Human Capital:Evidence from Sri Lanka IntegratedHousehold Survey.” World Bank. Mimeo.

Ratha, Dilip. 2003. “Worker Remittances:An Important and Stable Source of ExternalDevelopment Finance.” Global DevelopmentFinance 2003. World Bank.

Ratha, Dilip and William Shaw. 2007. South-South Migration and Remittances.World Bank Working Paper No. 102,Washington, DC.

World Bank. 2005. Global EconomicProspects 2006: Economic Implications ofRemittances and Migration. Washington, DC.

For more references, please see World Bank(2005).

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Policy Brief

Dilip Ratha is a Senior Economist and Manager of the Migrationand Remittances Team in the Development Prospects Group atthe World Bank. An expert on remittances and migration, he isthe author of “Workers’ Remittances: An Important and StableSource of External Development Finance” in Global DevelopmentFinance, 2003, and a lead author of the World Bank flagshippublication, Global Economic Prospects 2006: EconomicImplications of Remittances and Migration. He has written exten-sively on international finance topics including shadow-ratingsfor unrated countries, future-flow securitization as a tool fordevelopment financing, and the rise of South-South foreign

direct investment. Prior to joining the World Bank, he worked as a regional economist forAsian emerging markets at Credit Agricole Indosuez, and as an Assistant Professor at theIndian Institute of Management, Ahmedabad. He has a PhD in economics from the IndianStatistical Institute, New Delhi.

About the Author

The Migration Policy Institute(MPI) is an independent,nonpartisan, nonprofit thinktank dedicated to the study ofthe movement of peopleworldwide.The instituteprovides analysis, development,and evaluation of migrationand refugee policies at thelocal, national, and internationallevels. It aims to meet therising demand for pragmaticresponses to the challengesand opportunities thatmigration presents in an evermore integrated world. MPIproduces the MigrationInformation Source atwww.migrationinformation.org.

M O R E F R O M M P I :

1400 16th Street NWSuite 300Washington,DC 20036

202 266 1940202 266 1900 (fax)

www.migrationpolicy.orgwww.migrationinformation.org

This policy brief is the third in a series from MPI’s Program on Migrants, Migration, andDevelopment. Future reports in the series will include an analysis of the policy gapbetween migration and development strategies and the Overseas Workers’WelfareAdministration in the Philippines. Previous publications of the program include:

• “The Phenomenal Rise in Remittances to India: A Closer Look” by Muzaffar A. Chisti,May 2007.

• “Circular Migration and Development:Trends, Policy Routes, and Ways Forward” byDovelyn Rannveig Agunias and Kathleen Newland, April 2007.

• Special Issue on Migration and Development. Migration Information Source. February2007. Online at: http://www.migrationinformation.org/issue_feb07.cfm.

• “Remittances and Development:Trends, Impacts, and Policy Options: A Review of theLiterature” by Dovelyn Rannveig Agunias, September 2006.

• “From Zero-Sum to a Win-Win Scenario: A Literature Review on Circular Migration”by Dovelyn Rannveig Agunias, September 2006.

• “Beyond Remittances:The Role of Diaspora in Poverty Reduction in the TheirCountries of Origin.” A Scoping Study by Kathleen Newland with Erin Patrick for theDepartment of International Development, UK, July 2004.

MPI’s work on Migrants, Migration, and Development can be accessed athttp://www.migrationpolicy.org/research/migration_development.php and is made possibleby the generous support of the John D. and Catherine T. MacArthur Foundation, and by agrant from the Multilateral Investment Fund of the Inter-American Development Bank.

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