From PGP's Raj Nallari.
India alone is estimated to have over 40 million migrants outside the country. When migrants send home part of their earnings in the form of either cash or goods to support their families, these transfers are known as workers' or migrant remittances. The size of remittance flows are hard to estimate because such transfers take place by hand-to-hand, via official channels (checks and draft from banks, western union money orders etc) and through unofficial channels (Hundi system in South Asia). Official estimates are supposed to be only about 50 percent of the transactions. (officially recorded international migrant remittances are projected to exceed $232 billion in 2005, with $167 billion flowing to developing countries). In 2004, recorded remittances were the second largest source of external financing in developing countries, after foreign direct investment, and amounted to more than twice the size of official aid. Rich countries, such as the United States, Germany, Switzerland, and Saudi Arabia are the major source of remittances.
Remittances are especially important for low-income countries. Based on household surveys, the World Bank estimates that remittance receipts helped lower poverty (measured by the proportion of the population below the poverty line) by nearly 11 percentage points in Uganda, 6 percentage points in Bangladesh, and 5 percentage points in Ghana. Generally, poorer households may finance the purchase of basic consumption goods, housing, and children's education and health care. In richer households, they may provide capital for small businesses and entrepreneurial activities and also pay for imports and external debt service.
Remittance flows tend to be more stable than capital flows, and they also tend to be counter-cyclical—increasing during economic downturns or after a natural disaster in the migrants' home countries, when private capital flows tend to decrease. But, the unit cost of remittances tends to be higher despite progress in use of technology for wiring transfers.
Governments have often offered incentives to increase remittance flows and to channel them to productive uses. But such policies are more problematic than efforts to expand access to financial services or reduce transaction costs. Tax incentives may attract remittances, but they may also encourage tax evasion. Matching-fund programs to attract remittances from migrant associations may divert funds from other local funding priorities, while efforts to channel remittances to investment have met with little success. Fundamentally, remittances are private funds that should be treated like other sources of household income. Efforts to increase savings and improve the allocation of expenditures should be accomplished through improvements in the overall investment climate, rather than targeting remittances. Similarly, because remittances are private funds, they should not be viewed as a substitute for official development aid.
An editorial from the Washington Post yesterday has sparked the debate about this. There seems to be agreement: remittances aren't charity, remittances aren't aid.
