Economic Implications of Remittances and Migration

Dilip RathaWorld Bank

Global Issues Seminar SeriesOctober 11, 2006

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

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

International migration has increased

Stock of migrants as share of destination countries’ population (%)

2.2

4.3

1.6 1.6

2.9

8.3

1.81.3

World Industrial countries Developingcountries

Developingcountries, excl.

USSR

1970 2000

Source: UN

-25

25

75

125

175

225

275 $ billionPrivate debt and portfolio equity

FDI

ODA

Recordedremittances

Remittances are large, have continued to increase

22 21

18

1312

India China Mexico France Phili-ppines

Top recipients of remittances - 2004

31

27 26 2523

Tonga Moldova Lesotho Haiti Bosnia-Herz.

$ billion % of GDP

39

14 1310

6

U.S.A. SaudiArabia

Switzer-land

Germany Russia

Top sources of remittances, 2004

0.3

0.2

0.7

0.3

Low-income Lowermiddle-income

Uppermiddle-income

High incomeOECD

$ billion% of GDP

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

5148

11

78

91

22

45

29

5

South (Developingcountries)

North (High-IncomeOECD)

North (High-Incomeexcl. OECD)

Number of migrants in millions

1965 1965 19651985 1985 19852005 2005 2005

Migration to the South has been significant

Source: United Nations

Global migrant stocks (millions)

Migrants inSouth North

(HI OECD)North

(HI non-OECD)Total

Migrants from:

South 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

Source: World Bank staff calculations based on migration data from University of Sussex, United Nations, and World Bank

Destinations of migrants from the South

South47%

North (HI-non-OECD)

13%

North (HI-OECD)

40%

0 1 2 3 4

Cuba-USBurkina Faso-Cote

Malaysia-SingaporeIndia-Bangladesh

Vietnam-USChina-USIndia-US

Pakistan-IndiaEgypt-Saudi ArabiaIndia-Saudi Arabia

Algeria-FranceAfghanistan-Iran

Philippines-USIndia-UAE

Turkey-GermanyBangladesh-India

Mexico-US

South-South

South-North

10.4

millions of migrants

Top migration corridors include several South-South corridors (excluding the FSU)

Source: University of Sussex and World Bank

0 1 2 3 4 5

Russia-Kazakhstan

Kazakhstan-Russia

Ukraine-Russia

Russia-Ukraine

millions of migrants

Former Soviet Union corridors are among the largest South-South corridors

South-South remittances were likely between $19 to $53 billion in 2005

Sources of Remittances to developing countries

($ billion, 2005)By migrant

stocksBy 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 181 181 181Source: World Bank Staff estimates

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

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

0.5

1.2

1.7

1.4

2.0 2.0

1.0

2.0

1.8

Indonesia Mexico Thailand

year before

year of crisis

year after

Remittances improve countries’ access to capital

0

100

200

300

400

500

600

700

800

Excluding remittances

Including remittances

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

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

Remittance fees are high, and regressive

16

9

76

5 5

$100 $200 $300 $400 $500 $600

Fee and foreign exchange commission as % of principal

Weighted average of fees of four largest money transfer operators in the U.S.-Mexico corridor

$10

$12

$27

$29

$35

$13

$23

$24

London-Lagos

Cotonou-Lagos

Singapore-Jakarta

Kuala Lumpur-Jakarta

Jakarta-Kuala Lumpur

Los Angeles-Mexico City

Guatemala City-Mexico City

Mexico City-Guatemala City

South-South

North-South

Fee and FX commission $

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

Policy prioritiesGovernments 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 prioritiesGovernments 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 prioritiesGovernments 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

Future work

Improving bilateral migration data

Understanding impacts (on incomes, inequality, health, gender, and migrant rights)

Better management of migration

Reducing remittance costs

Retail payment systems- Remittance costs- Payment platforms/instruments- Regulation (clearing and settlement, capital

adequacy, exchange controls, AML/CFT, disclosure, cross-border arbitration)

Financial access- Deposit and saving products- Loan products (mortgages,

consumer loans, microfinance)

- Credit history for MFI clients- Insurance products

Monitoring, analysis, projection- Size, corridors, channels- Counter-cyclicality - Effects on poverty, education, health,

investment

Capital market access- Private banks and

corporates (securitization)- Governments (diaspora

bonds)- Sovereign credit rating