Workers Remittances An Important and Stable Source of Development Finance Dilip Ratha Poverty Day October 16 th, 2003
Outline 1. Rising importance of workers remittances 2. Pros and Cons 3. Policy issues
Remittances have become a key source of global development finance $ billion 1995 2002 FDI flows 106 135 Other private flows 74-4 Official finance 55 35 Workers remittances 50 88
Remittances are larger than official flows in 58 countries private flows in 52 countries both official and private flows in 36 countries
Main providers of remittances Outward workers remittance payments To all countries, $ billion 35 United States 30 25 20 15 10 Saudi Arabia 5 0 1972 1977 1982 1987 1992 1997 2002
Main providers of remittances Outward workers remittance payments To all countries, $ billion 35 United States 30 25 20 15 10 Saudi Arabia 5 0 1972 1977 1982 1987 1992 1997 2002 Remittances rise with migration and income
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
Near-term challenges! Weak labor market in high-income countries! Security concerns
Outline 1. Rising importance of workers remittances 2. Pros and Cons 3. Policy issues
Pros: Remittances are stable Capital flows to developing countries $ billion 200 180 FDI 160 140 120 Capital market flows 100 80 Remittances 60 40 Official flows 20 0-20 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
And more evenly distributed: Although top recipients are large countries. $ billion, 2002 14 11 7.4 2.9 2.9 India Mexico Philippines Morocco Egypt
Smaller countries receive more remittances as a share of GDP Remittances as % of GDP, 2002 39 29 23 17 16 Tonga Lesotho Jordan Moldova Samoa
Remittances are relatively larger in poorer countries Remittances as % of GDP 2.7 1.3 1.2 0.2 Low-income Lower middleincome Upper-middle income High income
Remittances! do not create liabilities
Remittances! do not create liabilities! increase incomes of recipients who usually need funding for consumption or investment
Remittances! do not create liabilities! increase incomes of recipients who usually need funding for consumption or investment! finance education, and public infrastructure
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
Cons: Remittances may! finance unproductive spending
Cons: Remittances may! finance unproductive spending! promote idleness among recipients
Cons: Remittances may! finance unproductive spending! promote idleness among recipients! raise inequality in the middle-income range
Cons: Remittances may! finance unproductive spending! promote idleness among recipients! raise inequality in the middle-income range! lead to currency appreciation and Dutch disease
Outline 1. Rising importance of workers remittances 2. Pros and Cons 3. Policy issues
Policy issues! Remittances are person-to-person flows
Policy issues! Remittances are person-to-person flows! Data reporting has to improve
Policy issues! Remittances are person-to-person flows! Data reporting has to improve! Encourage flows through formal sector
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
Remittance costs are high, and regressive Charge 21% 13% 10% 9% 8% 7% 6% 5% 4% 4% 4% 4% 3% 40 75 150 225 300 375 560 745 930 1120 1305 1490 1860 Principal amount (euros)
Improve migrants access to banks
Improve migrants access to banks
Strengthen financial infrastructure! Clearing house arrangement
Strengthen financial infrastructure! Clearing house arrangement! Improve transfers to rural areas tie up with POSBs
Strengthen financial infrastructure! Clearing house arrangement! Improve transfers to rural areas tie up with POSBs! Increase transparency and competition
Strengthen financial infrastructure! Clearing house arrangement! Improve transfers to rural areas tie up with POSBs! Increase transparency and competition! International cooperation may be needed
Facilitate international travel and labor mobility
Improve investment climate in recipient countries Remittances as % of GDP, 1996-2000 High Low Corruption 0.5 1.9 Inequality 0.9 1.5 M2/GDP 1.2 0.9 Trade/GDP 1.2 1.0
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