This year, migrants from emerging economies are sending more than 300 billion US dollars to relatives in their countries of origin. The scale of such remittances is growing apace. Where ten years ago, migrants sent home some USD 100 billion, the amount is likely to touch USD 400 billion in 2013, the World Bank estimates. For some countries, remittances have been a very important souce of income: over 10% of their GDP. Examples are Nepal (24%), Haïti (21%) and the Philippines (12%). But other countries, too, receive substantial contributions from migrant citizens. Morocco, for instance, receives some USD 6.5 billion from overseas migrants – some 7% of GDP. All in all, remittances are a factor of consequence to local economies. If the Netherlands, for instance, were to receive 10% of its GDP in remittances from overseas migrants, the amount involved would be some EUR 60 billion.
A stable factor
Migrant remittances are one of the most stable capital flows. Usually, they are less volatile than, say, foreign direct investments. A company in the dolldrums is likely to cancel or postpone an investment. For migrants, the situation is different. They know their families at home need the money badly and are counting on them. So even in leaner times, migrants will still show themselves to be constant providers.
Countries that receive more migrant remittances are more inclined towards financial openness, recent research has shown. The remittances have a statistically and economically significant effect on a country’s financial openness. When the ratio of remittances to GDP increases by one percentage point, this reduces the probability of a closed financial regime by 3 percentage points.
Financial openness, in turn, benefits the migrants and their families as well as the local economy. After all, such openness implies fewer barriers to international money flows and lower transaction costs, so that more of the remitted cash actually reaches the relatives at home.
If remittances are processed through official channels, the formal economy stands to profit: higher growth and higher tax revenues. It is not that governments tax on these financial flows at source, but as remittances lead to greater prosperity, governments’ tax revenues will also rise. Another benefit is the fact that foreign exchange may be used to import goods such as food and medicine. And, last though not least, long-term economic growth is also supported. Thus remittances create a double benefit, for migrants and their dependants and for their country as well.
Hidden from view
Whether it concerns minor remittances by migrants or billion dollar transactions carried out by multinationals, the financial supervisor likes capital flows to run through official channels such as banks and money transfer offices. That way, the supervisor may keep a sharp eye on such cash flows – a substantial boon in the fight against money laundering and other illegal transactions. Therefore it is important that enhanced supervision should not lead to higher costs. For then remittance agents, individuals and companies will be tempted to use unofficial channels such as hawala systems – concealing the international money flows from the supervisor’s view.