A New MPI Policy Brief: „The impast of remittances on economic growth and poverty reduction” by Dilip Ratha


Executive Summary:

Migrants’ remittances to their country of origin — which totaled US $401 billion in 2012 and are growing fast — represent a major vehicle for reducing the scale and severity of poverty in the developing world. Besides pure monetary gains, remittances are associated with greater human development outcomes across a number of areas such as health, education, and gender equality. This money acts as a lifeline for the poor, increasing income for individuals and families. Research on the impact of remittances in particular settings shows such effects as lower school dropout rates and increased average birth weights for children born to remittance-receiving families.

There are also positive spillover effects, with some of the expenditures and investments made by remittance-receiving households accruing to entire communities. And unlike other monetary flows, remittances are countercyclical — family members abroad are likely to be even more motivated to give in times of hardship, even if their own financial situation has deteriorated as well. In this way, remittances are a form of insurance, helping families and communities weather external shocks.

For many countries, remittances dwarf official international aid. The inflow of foreign exchange from migrants increases the home country’s creditworthiness and may allow them to secure more favorable terms of debt service, as lenders perceive a lower risk of default. Since 2009, the World Bank has revised its analysis of how much debt a country can carry at various levels of risk to include remittances, so that countries with high remittances inflows can borrow more.
  1. While migration can have both positive and negative economic, social, and cultural implications for countries of origin, remittances are the most tangible and least controversial link between migration and development. Policymakers can do much more to maximize the positive impact of remittances by making them less costly and more productive for both the individual and the country of origin. Migrants pay transaction costs, on average, of 9 percent of the amount they remit.
  2. While increased competition among institutions that provide money transfer services has produced substantial progress in reducing these costs in high-volume remittance corridors, prices remain high in low-volume corridors, such as between Japan and Peru.
  3. Beyond reducing costs, which puts more money directly into the hands of migrants who send and/or families who receive remittances, measures to ensure that the recipients of these funds have access to other financial services, such as micro insurance (especially health) or education financing would go a long way to boosting development outcomes. The technology for linking remittances directly to such programs exists, but practice has fallen behind because of public policy barriers. While governments cannot tell migrants and their families how to spend their own money, policymakers can put in place sufficient incentives and mechanisms for migrants and their families to invest remittances in capital-accumulation projects (involving both human and physical capital) that are beneficial to the whole economy.