Week 2

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Chapter 3

Mini Case

Global Remittances

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Mini-Case: Global Remittances

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Global Remittances

One area within the balance of payments 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 illustrated by Exhibit A, it is estimated that nearly $600 billion was remitted across borders in 2014.

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, typically developing countries, sometimes more than 25%. In many cases, this is greater than all development capital and aid flowing to these same countries.

And although the historical record on global remittances is short, as illustrated in Exhibit A, it has shown dramatic growth in the post-2000 period. Its growth has been rapid and dramatic, falling back only temporarily with the global financial crisis of 2008–2009, before returning to its rapid growth path once again from 2010 on.

Remittances largely reflect the income that 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.

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Exhibit A Global Remittance Inflows, 1970–2014 (millions of U.S. dollars)

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Global 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 occur as 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 payments statistics, classifies migrant remittances as “current transfers” in the current account.

Wider definitions of remittances may also include capital assets that migrants take with them to host countries and similar assets that migrants bring back with them to their home countries.

These values, when compiled, are generally reported under the capital account of the balance of payments.

However, discerning exactly who is a “migrant,” is also an area of some debate. Transfers back to their home country made by individuals who may be working in a foreign country (for example, an expat working for a multinational organization) but who are not considered residents” of that country, may also be considered global remittances under current transfers in the current account.

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Remittances Prices

A number of organizations have devoted significant effort in the past five years to better understanding 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 launched an initiative in 2008 entitled “5 x 5”, to reduce transfer costs from a global average of 10% to 5% in five years (by 2014).

The World Bank supported this initiative by creating Remittance Prices Worldwide (RPW), a global database to monitor remittance price activity across geographic regions.

It was hoped that, through greater transparency and access to transfer cost information, market forces would drive these costs down.

Although the global average cost had fallen to a low of 7.90% in the fall 2014, the program was still clearly far from its goal of 5%.

Funds remitted from the G8 countries themselves fell to 7.49% in 2014, 7.98% for the G20 countries in the same period.

This was particularly relevant given that these are the source countries of a large proportion of all funds remitted.

Little was known of global remittance costs until the World Bank began collecting data in the RPW database. The database collects data on the average cost of transactions conducted along a variety of country corridors globally (country pairs).

Exhibit B provides one sample of what these cost surveys look like. This corridor transaction, the transfer of ZAR 1370 (South African Rand, equivalent to about USD 200 at that time) from South Africa to Malawi was the highest cost corridor in the RPW.

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Exhibit B Remittance Price Comparison for Transfer from South Africa to Malawi

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Remittances Prices

Remittance costs shown in Exhibit B are of two types:

a transaction fee, which in this case ranges between ZAR 43 and 390; and

an exchange rate margin, which is an added cost over and above the organization’s own cost of currency. The resulting total cost per transaction can be seen to rise as high as 30.6% for this specific corridor.

Given that most transfers are by migrant or guest workers back to their home countries and families, and they are members usually of the lowest income groups, these charges—30%—are seen as exploitive.

It should also be noted that these are charges imposed upon the sender, at the origin.

Other fees or charges may occur to the receiver at the point of destination.

It is also obvious from the survey data in Exhibit B that fees and charges may differ dramatically across institutions.

Hence the objective of the program—to provide more information that is publicly available to people remitting funds thereby adding transparency to the process—is clear.

Other results from the RPW cost survey initiative include the following.

China is the most expensive country in the G20 to send money to, while South Africa continues to be the mostly costly G20 country to send money from.

South Asia is the least costly region to send money to, while Sub-Saharan Africa continues to be the most expensive region to send money to globally.

The five highest cost corridors (always available on the RPW Web site) continue to be intra-Africa.

In 2013, India received foreign exchange remittances worth $70 billion from its migratory workforce to retain the top spot in the world amid a broad slowdown caused by regulatory hindrances on both movement of people and capital.

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Exhibit C Remittance Product Use and Cost

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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 payments, 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 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 payments, 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 the size of the funds remittances received, as well as to whom the income is returning (family or non-family interests).

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Global Remittances: Case/Discussion Questions

Where are remittances across borders included within the balance of payments? Are they current or financial account components?

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

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

What potential do new digital currencies—cryptocurrencies like Bitcoin—have for cross-border remittances?

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