Sending remittances

Remittances made by emigrants and foreign workers have become vital to the national economies of many countries.
According to data published by the World Bank in its World Development Report for 1996, net workers' remittances transferred to developing countries had increased worldwide from US$ 15 billion in 1980 to US$ 30 billion in 1994. Egypt ranked first in the world (just over US$ 5 billion), followed by India (nearly US$ 5 billion) and Mexico (US$ 3,7 billion). Net workers' remittances were also significant in Morocco (US$ 2,061 million), Pakistan (US$ 1,446 million), Jordan (US$ 1,093 million), Bangladesh (US$ 1,090 million) and El Salvador (US$ 969 million). In the cases of Bangladesh and El Salvador, net workers' remittances represented one third of the value of these countries' overall imports. In El Salvador, remittances have overtaken exports as the main source of hard currency. It is also worth noting that 60 per cent of the remittances received by the developing countries of origin were transferred by their migrants working in other developing countries. Figures for 1998 suggest about US$ 10 billion a year is sent by immigrants to the USA back to Latin America.
Remittances have become the second largest capital inflow to developing countries behind foreign direct investments, which are accounting for $180 billion and ahead of official development assistance. By region, remittances (2004 figures) contribute most significantly to total capital flows to the Middle East (72%), North Africa (54%), the Caribbean (51%) and South Asia (51%). For many of the low- and middle-income countries, remittances represent a significant percentage of the total gross domestic product. Compared to FDI, ODA and stock markets, remittances were one of the most stable sources of foreign exchange earnings for developing countries in the 1990s.

The development role of remittances is considerable. The high proportion of remittances indicate that remittances improve the standard of living for households, which triggers a positive effect for the local economy due to increased consumption and investments. However there is no consensus as to what degree remittances contribute to economic growth and employment creation. Most studies reveal that up to 80% of remittances are used for basic household consumption and 5-10% are used to invest in human capital. Remittances are also used to invest in land, housing and livestock, often seen as future assets of the emigrants themselves. For poorer households, remittances can be a source to build up savings. Collective remittances are more often used for investment in the village or town. Risks and possible negative effects of remittances include: higher income of households through remittances can remove pressure from governments to implement economic and social reforms; inequitable growth at the community level; extensive land purchases by remittance recipients can lead to higher prices for land; there is a risk for recipients of remittances to develop a culture of dependence, which does not favour self-initiative.

The market for remittance transfers functions in many ways. The formal channels of money transfer include commercial banks, money transfer operators and to some extent postal banks. Examples of informal channels include Hundi or Hawala transfer systems, which build on trust relationship. Micro finance institutions have a potential to engage in the remittances market for domestic and regional transfers.

Giving money
Inter-American Dialogue
Type Classification:
D: Detailed strategies