Mini Case

Global Remittances

“Remittances are a vital source of financial support that directly increases the income of migrants’ families”，said Hans Timmer， director of development prospects at the World Bank. “Remittances lead to more investments in health， education， and small business. With better tracking of migration and remittance trends， policy makers can make informed decisions to protect and leverage this massive capital inflow which is triple the size of official aid flows”， Timmer said.

One area within the balance of payment that has received intense interest in the past decade is that of remittances. The term remittance is a bit tricky. According to the International Monetary Fund （IMF）， remittances are international transfers of funds sent by migrant workers from the country where they are working to people， typically family members， in the country from which they originated. According to the IMF， a migrant is a person who comes to a country and stays， or intends to stay， for a year or more. As shown in Table 2.3， a brief overview of global remittances would include the following.

（1）The World Bank estimates that 414 billion was remitted in 2009， with 316 billion of that going to developing countries. These remittance transactions were made by more than 190 million people， roughly 3% of the world’s population.

（2）The top remittance sending countries in 2009 were the United States， Saudi Arabia， Switzerland， Russia， and Germany. Worldwide， the top recipient countries in 2009 were India， China， Mexico， the Philippines， and France.

（3）Remittances make up a very small， often negligible cash outflow from sending countries like the United States. They do， however， represent a more significant volume， for example as a percent of GDP， for smaller receiving countries， developing countries， sometimes more than 25%. In many cases， this is greater than all development capital and aid flowing to these same countries.

The historical record on global remittances is short. As illustrated in Figure 2.1， it has shown dramatic growth in the post-2000 period， until suffering its first real decline since 1985 in the 2009 global economic slowdown. Remittances largely reflect the income which is earned by migrant or guest workers in one country （source country） and then returned to families or related parties in their home countries （receiving countries）. Therefore， it is not surprising that although there are more migrant worker flows between developing countries， the high-income developed economies remain the main source of remittances. The global economic recession of 2009 resulted in reduced economic activities like construction and manufacturing in the major source countries； as a result， remittance cash flows fell in 2009 but rebounded slightly in 2010.

Most remittances are frequent small payments made through wire transfers or a variety of informal channels（some even carried by hand）. The United States Bureau of Economic Analysis （BEA）， which is responsible for the compilation and reporting of U.S. balance of payment statistics， classifies migrant remittances as “current transfers” in the current account. Wider definitions of remittances may also include capital assets which migrants take with them to host countries， and similar assets which they bring back with them to their home countries. These values， when compiled， are generally reported under the capital account of the balance of payment exactly who a “migrant” is， is also an area of some debate. Transfers back to their home country made by individuals who maybe working in a country （for example， an expat working for an MNE，which is mutinational enterprise）but not considered “residents，” may also be considered global remittances under current transfers in the current account.

Remittance Prices

Given the development impact of remittance flows， we will facilitate a more efficient transfer and improved use of remittances and enhance cooperation between national and international organizations， in order to implement the recommendations of the 2007 Berlin G8 Conference and of the Global Remittances Working Group established in 2009 and coordinated by the World Bank. We will aim to make financial services more accessible to migrants and to those who receive remittances in the developing world. We will work to achieve in particular the objective of a reduction of the global average costs of transferring remittances from the present 10% to 5% in five years through enhanced information， transparency， competition and cooperation with partners， generating a significant net increase in income for migrants and their families in the developing world.

Some organizations have focused on the costs borne by migrants in transferring funds back to their home countries. The primary concern has been excessive remittance charges—the imposition of what many consider exploitive charges related to the transfer of these frequent small payments. The G8 countries， in an initiative entitled； 5×5 the reduction of transfer costs from an average of 10% to 5% in five years seek to use a variety of market forces such as transparency to improve the efficiency and reduce remittance prices globally. Remittance Prices Worldwide （RPW）， initiated by the World Bank in September 2008， is the primary body that is creating and sustaining a global database which monitors remittance price activity across geographic regions.

Little was known of global remittance costs until the World Bank began collecting data in the Remittance Prices Worldwide （RPW） database. The database， updated twice yearly collects data on the average cost of transactions conducted along a variety of country corridors globally （country pairs）. The most recent survey conducted in the second half of 2010 covered 200 individual corridors—remittances originating in 29 countries and received in 86 countries. The average cost of a migrant remittance transaction was 8.89% for all corridors surveyed for the third quarter of 2010 （most recent data available）. The most recent survey found， assuming 200 per transfer that the highest cost was that of the Tanzania-Kenya corridor （a remittance from Tanzania to Kenya） at 47.27 per 200 transaction， a 23.6% charge.

The cost of remittances is a combination of the fees charged at any stage of the transaction and the exchange rate used to convert the local currency into the currency of the destination country. Fees charged may occur at the origin （for transactions， transaction size， currency conversion）， while fees at the destination may include many of the same. One relatively simple example is that presented in Table 2.4，a transaction described by a major RSP （remittance service provider） in Mexico. In this case， the transfer cost comprises two components， a transaction fee which differs by RSP， and a calculated foreign exchange charge based on the exchange rate used in the transaction compared to an official reference rate for that date. In this case—as opposed to the rates quoted globally in the World Bank project—the full cost percentage of remittance is quite small and competitive.

As opposed to the remittance costs quoted by PROFECO in Table 2.4， the World Bank’s survey of global remittances across multiple corridors unveiled a number of individual transfer corridors where the costs were by all indications， exploitive. The most expensive are noted in Figure 2.2.

Growing Controversies

With the growth in global remittances has come a growing debate as to what role they do or should play in a country’s balance of payment， and more importantly， economic development. In some cases， like India， there is growing resistance from the central bank and other banking institutions to allow online payment services like PayPal to process remittances. In other countries， like Honduras， Guatemala， and Mexico， there is growing debate on whether the remittances flow to families or are actually payments made to a variety of Central American smugglers—human trafficking smugglers.

In Mexico for example， remittances now make up the second largest source of foreign exchange earnings， second only to oil exports. The Mexican government has increasingly viewed remittances as an integral component of its balance of payment， and in some ways， a “plug” to replace declining export competition and dropping foreign direct investment. But there is also growing evidence that remittances flow to those who need it most， the lowest income component of the Mexican population， and therefore mitigate poverty and support consumer spending. Former President Vicente Fox was quoted as saying that Mexico’s workers in other countries remitting income home to Mexico are “heroes.”Mexico’s own statistical agencies also disagree on both the size of the funds remittances received， as well as to whom the income are returning （family or non-family interests）.

Case Questions

（1）Where are remittances across borders included within the balance of payment？ Are they current or financial account components？

（2）Under what conditions—for example， for which countries currently—are remittances significant contributors to the economy and overall balance of payment？

（3） Why is the cost of remittances the subject of such intense international scrutiny？