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THIS Sending Money Home: PICTURE

VER the past fifteen years, international migrant remittances have become increasingly prominent— exceeding $232 billion in 2005, with $167 billion flowing to developing countries. This amount, how- Oever, reflects only transfers recorded in the balance of payments. Unrecorded flows through informal channels are believed to be at least 50 percent higher than recorded flows. In 2004, recorded While capital flows tend to rise during upswings of remittances were the second largest source of external financing in economic cycles and decline in bad times, remit- developing countries, after foreign direct investment, and tances tend to be countercyclical relative to recipient amounted to more than twice the size of official aid. Remittances countries’ economies. They tend to rise when the are less volatile than most other sources of foreign exchange earn- recipient country suffers an economic downturn fol- ings for developing countries. lowing a financial crisis, natural disaster, or political conflict, as migrants transfer more funds during Remittances are the second largest source of finance hard times to help their families and friends. for developing countries. Not surprisingly, remittances rise during (billion dollars) 200 financial crises. Foreign direct investment 175 Private debt and portfolio equity (percent of private consumption) 150 2.5 125 Remittances 2.0 100 1.5 75 1.0

50 0.5

25 0.0 Official development assistance Indonesia Mexico Thailand 0 1990 91 92 93 94 95 96 97 98 99 2000 01 02 03 04 05 Before Year of crisis After est. est.

The top three recipients of remittances in 2004 were India, China, and Mexico. But it is smaller countries, such as Tonga, Moldova, and Lesotho, that top the list when controlling for the size of the economy—for example, as a share of GDP. On aver- age, the share of remittances in GDP is twice as large in low-income countries as in middle-income countries.

Larger countries tend to receive more . . . but, in terms of GDP, smaller countries remittances in dollar terms . . . receive the most.

(billion dollars, 2004) (percent of GDP, 2004) 25 35 30 20 25 15 20 10 15 10 5 5 0 0 na oa ico ria i aica India ex nammbia atesge Tonga sotho Haitiov ordan Nepal ibati China FranceppinesSpain enegrokistanBrazil Ni g J banonSam Albania Kir Yemen M Belgium ingdomMoroccot Pa PortugalViet d St MoldovaLe Jam onduraslippines Le Tajikistan GermanyK angladeshArab Rep. Colo H Phi n Republic Nicaragua Phili ed B , El Salvador ypt Unite d Herze Unit Eg and Montenegro rbia and Mon Dominica Se Bosnia an Serbia

44 Finance & Development December 2005 ©International Monetary Fund. Not for Redistribution Trends in Migrant Remittances

Rich countries are the main source of remittances. The United States is by far the largest source, with $39 billion in outward flows. Saudi Arabia (classified as a high-income country in 2005) is the second largest, followed by Switzerland and Germany. But when expressed as a share of GDP, outward remittances were the largest in the upper middle-income countries (0.7 percent of GDP compared to 0.2–0.4 percent of GDP in other countries). Although it is conventionally believed that migration flows are South-North and remittance flows North-South, South-South migration is estimated to be at least as large as South- North migration, and South-South remittances are 30–45 percent of the remittances received by the South.

Rich countries are the largest sources of . . . but, in terms of GDP, upper middle- remittances in dollar terms . . . income countries are the largest.

(billion dollars, 2004) (percent of GDP, 2004 estimates) 40 0.8 35 0.7 30 0.6 25 0.5 20 0.4 15 0.3 10 0.2 5 0.1 0 0 y Low-income Lower middle- Upper High-income High-income ates an Italy dom SpainFrance KuwaitIsraelAustria OmanChina countries income middle-income OECD countries Germ deration Malaysia Belgium Australia countries countries countries Switzerland Korea, Rep. UnitedSaudi St Arabia Luxembourg Netherlandsted King Uni Russian Fe

Household survey data show that remittances have Remittances can improve a country’s creditworthiness and reduced the poverty headcount ratio significantly in sev- enhance its access to international capital markets. The eral low-income countries—by 11 percentage points in ratio of debt to exports, a key indebtedness indicator, Uganda, 6 percentage points in Bangladesh, and 5 in decreases significantly when remittances are included. Ghana. For the very poor, remittances may not provide more income than could have been earned locally. For the . . . and lower recipients’ debt service ratios. very rich,remittances may even be smaller than the loss of income due to migration. But for the middle-income (present value of external debt as a percent of exports of goods, services, groups, they enable recipients to move up to a higher and remittances, 2003) 800 income group. In Sri Lanka, for example, households from 700 Excluding remittances the third through the eighth income decile moved up the 600 Including remittances income ladder thanks to remittances. 500 400 300 Remittances help reduce poverty . . . 200 100 (percent of Sri Lankan households that moved to a higher income decile after 0 receiving remittances, 1999–2000) la rdan ador 25 kistan rocco Jo Lebanon Ecuador Pa Jamaica Mo 20 Philippines El Salv Guatema 15 10 5 Prepared by Dilip Ratha, Senior Economist, Development 0 (income decile) Prospects Group, and Task Manager, Global Economic –5 Prospects 2006: Economic Implications of Remittances and –10 12345678910 Migration, World Bank.