Workers Remittances. Dilip Ratha. An Important and Stable Source of Development Finance. Poverty Day October 16 th, 2003

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1 Workers Remittances An Important and Stable Source of Development Finance Dilip Ratha Poverty Day October 16 th, 2003

2 Outline 1. Rising importance of workers remittances 2. Pros and Cons 3. Policy issues

3 Remittances have become a key source of global development finance $ billion FDI flows Other private flows 74-4 Official finance Workers remittances 50 88

4 Remittances are larger than official flows in 58 countries private flows in 52 countries both official and private flows in 36 countries

5 Main providers of remittances Outward workers remittance payments To all countries, $ billion 35 United States Saudi Arabia

6 Main providers of remittances Outward workers remittance payments To all countries, $ billion 35 United States Saudi Arabia Remittances rise with migration and income

7 Migration will increase in the long-term! Income gap between source and destination countries is wide! Dependency ratios and pension costs are rising in industrial countries! Temporary, and South-South, migration to increase

8 Near-term challenges! Weak labor market in high-income countries! Security concerns

9 Outline 1. Rising importance of workers remittances 2. Pros and Cons 3. Policy issues

10 Pros: Remittances are stable Capital flows to developing countries $ billion FDI Capital market flows Remittances Official flows

11 And more evenly distributed: Although top recipients are large countries. $ billion, India Mexico Philippines Morocco Egypt

12 Smaller countries receive more remittances as a share of GDP Remittances as % of GDP, Tonga Lesotho Jordan Moldova Samoa

13 Remittances are relatively larger in poorer countries Remittances as % of GDP Low-income Lower middleincome Upper-middle income High income

14 Remittances! do not create liabilities

15 Remittances! do not create liabilities! increase incomes of recipients who usually need funding for consumption or investment

16 Remittances! do not create liabilities! increase incomes of recipients who usually need funding for consumption or investment! finance education, and public infrastructure

17 Remittances! do not create liabilities! increase incomes of recipients who usually need funding for consumption or investment! finance education, and public infrastructure! can promote FDI and bond issuance

18 Cons: Remittances may! finance unproductive spending

19 Cons: Remittances may! finance unproductive spending! promote idleness among recipients

20 Cons: Remittances may! finance unproductive spending! promote idleness among recipients! raise inequality in the middle-income range

21 Cons: Remittances may! finance unproductive spending! promote idleness among recipients! raise inequality in the middle-income range! lead to currency appreciation and Dutch disease

22 Outline 1. Rising importance of workers remittances 2. Pros and Cons 3. Policy issues

23 Policy issues! Remittances are person-to-person flows

24 Policy issues! Remittances are person-to-person flows! Data reporting has to improve

25 Policy issues! Remittances are person-to-person flows! Data reporting has to improve! Encourage flows through formal sector

26 Policy issues! Remittances are person-to-person flows! Data reporting has to improve! Encourage flows through formal sector Alternative channels are popular because they offer speed, low cost, language, anonymity; but they also result from poor investment climate in recipient countries

27 Remittance costs are high, and regressive Charge 21% 13% 10% 9% 8% 7% 6% 5% 4% 4% 4% 4% 3% Principal amount (euros)

28 Improve migrants access to banks

29 Improve migrants access to banks

30 Strengthen financial infrastructure! Clearing house arrangement

31 Strengthen financial infrastructure! Clearing house arrangement! Improve transfers to rural areas tie up with POSBs

32 Strengthen financial infrastructure! Clearing house arrangement! Improve transfers to rural areas tie up with POSBs! Increase transparency and competition

33 Strengthen financial infrastructure! Clearing house arrangement! Improve transfers to rural areas tie up with POSBs! Increase transparency and competition! International cooperation may be needed

34 Facilitate international travel and labor mobility

35 Improve investment climate in recipient countries Remittances as % of GDP, High Low Corruption Inequality M2/GDP Trade/GDP

36 Summary! Remittances have become an important and stable - source of global development finance! Increasing remittances would require strengthening the financial infrastructure and improving the investment climate! Recognize the person-to-person nature of remittances in thinking policy intervention