To send, or not to send: that is the question. A review of the literature on workers' remittances.

Abstract

This paper reviews the empirical literature on workers' remittances. Based on the empirical evidence, we are able to assess the facts and myths about the determinants and consequences of remittances. We also discuss the potential implications of our findings for the theoretical literature on remittances and account for the open-ended questions that still remain. The review suggests that there are several motivations to remit and it does not seem that one specific motivation has been consistently selected over the others. The literature also suggests that remittances have the potential to impact a large number of variables related to the recipient country and household.

Introduction

The large increase in remittances (money transfers from migrants to family and friends back home) during the last two decades has stimulated a keen interest in understanding the nature and economic consequences of these flows. Policymakers in developing countries and international organizations around the world have become interested in increasing the flow of remittances, finding ways to channel remittances into productive investments, and diminishing the possible detrimental impacts of these transfers. On the other hand, due to concerns regarding money laundering and terrorism support, policymakers in developed countries are interested in seeing a larger share of remittances sent through official channels. In fact, policymakers and government officials from countries that are host to large communities of migrants are encouraging increased supervision on the part of receiving countries on the use of remittances.

The remittances phenomenon has also drawn attention from the private business sector. Given the potential for profit in the money transfer business, there has been a proliferation of money transfer agencies. Banks have also been encouraged to participate in the remittances market, not only by being more competitive in their fees and processes, but also by recognizing that offering remittance services can help in attracting migrants to open bank accounts in the host country.

In this article we present a review of the empirical literature on remittances. That is, we want to assess the different conclusions that have been drawn from the data and evaluate what can be said with relative confidence about remittances. We also want to highlight the open-ended questions that still remain and ascertain the facts that are still in doubt.

Organization of the Literature Review

The literature on remittances is divided into two main areas of study. The first area investigates the nature and determinants of these flows. We look at questions like: What prompts a migrant to remit? What factors determine the amount of remittances they send? The second area of study is concerned with the impacts and consequences of these money transfers. That is, we look at the impacts of these money flows on the receiving countries and on household behavior. We look at questions such as: How are these flows affecting family composition? What are the consequences for the distribution of labor? What are the impacts on prices, the exchange rate and the overall economy? To answer those and other related questions we review the extant literature and differentiate between the different studies that use data on the migrant, the household (or both) and those that use aggregate economic data.

The literature on the determinants of remittances, our first area of study, is divided into two specific groups. The first group includes those studies that use microeconomic level data to study the determinants of remittance transfers. Most of these studies make use of survey data on the emigrants and/or the receiving households. This type of study is usually interested in the relationship between remittances and individual specific factors such as income (household and migrant), gender, age, time abroad, marital status and household composition, among others. The second group includes those studies that use macroeconomic level data to study the determinants of remittances. This type of study is usually interested on how variables like interest rate differentials, political uncertainty, exchange rates and economic conditions (host and home country) impact remittances. Time series data in one country or a panel of countries are typically analyzed in this literature.

The literature on the impacts and consequences of remittances, our second area of study, is also divided into papers that use microeconomic level data and those that use macroeconomic data. The first group in this area includes those studies that are focused on the impact of remittances on variables related to the household, such as household consumption patterns, migration patterns, labor supply and investment decisions, among others. The other category of study analyzes the impact of remittances on macroeconomic variables of the receiving country such as the exchange rate, GDP growth, income inequality, poverty levels and prices.

It is important to note that this literature review concentrates mostly on articles that use economic theory and econometric techniques to study topics related to remittances. A large number of articles exist in other fields of the social sciences (e.g. sociology, political science, geography, psychology, among others) that study remittances from a different perspective. Those articles, while beyond the scope of this review, contain important results and the reader is encouraged to consult them. Neither is this review a complete list of papers in the remittance literature. We focus on some of the relevant works that we feel represent the general trend of the literature. Finally, we are not doing a comprehensive review of the papers that we cite, but highlight what we think are the most interesting aspects on each of the papers cited. Please refer to the original source for more details on these studies.

An overview of remittance flows

The impact of remittances varies vastly across regions of the world, due to differences in culture, migration patterns and the stage of economic development. According to the Inter-American Development Bank (IDB), remittances received by Latin America Countries (LAC) in 2007 reached over 66 billion U.S. dollars (IDB, 2008). Table 1 contains the share and amount of remittances received by the five largest recipients of remittances in Latin America during that year. The main recipient of remittances (in terms of volume) was Mexico with over 23 billion dollars and 36 percent of the total inflows, followed by Brazil with about 7 billion U.S. dollars. While Mexico and Brazil receive a huge flow of remittance transfers, in terms of GDP the importance of remittances is relatively small (2.9 % for Mexico and .3% for Brazil). In contrast, in at least seven other Latin American countries (El Salvador, Guatemala, Guyana, Haiti, Honduras, Jamaica and Nicaragua) remittances account for more than 10 percent of GDP.

Most of these money transfers originate in the U.S., making remittances an important factor in the economic relationship between the U.S. and Latin America. It is estimated that about 43 billion U.S. dollars were sent from the U.S. to LAC in the year 2006 (IDB, 2008). The information in Table 2 shows that the remittance outflows from the U.S. come mainly from states with large concentrations of Hispanics. Five states alone (California, Texas, New York, Florida and Illinois) sent more than 20 billion U.S. dollars in 2006. In total these five states accounted for about half of the total U.S. remittance outflows.

Table 2 reports only on the aggregate amount of remittances sent from each state. An interesting question is, which state sends more money per migrant? For instance, there is a big gap between remittances sent by immigrants in California and remittances sent by immigrants in other states. Are migrants in California more generous on average? In Table 3 we list the five states that send the most money per migrant. None of the states in Table 2 is included in Table 3. This indicates that those states with large concentrations of Hispanics are not the ones sending more money per migrant.

In the aggregate, remittances are second to FDI as a source of external financing in developing countries. But in many regions and countries remittances have surpassed FDI as a source of external financing. In Africa between the years 2000 and 2003 remittances averaged 17 billion U.S. dollars, while FDI averaged only 15 billion dollars. However, Official Development Assistance (ODA) still remains as Africa's largest external source of financing with about 25 billion U.S. dollars per year (United Nations, 2005). In Latin America, however, not only have remittance flows to the region surpassed FDI flows, remittances are more than ODA in each single country in the region.

Remittances to Asia and Oceania comprise the highest regional total in the world. According to International Fund for Agricultural Development (IFAD) (2006) Asia and Oceania receive more than U.S. 113 billion dollars in remittances annually. Just India and China combined received about 45.6 U.S. billion dollars. It is also the case that remittances to smaller economies like Indonesia, Nepal and Taijkistan, constitute a large portion of their per capita income.

The evidence is quite strong that the large magnitude of remittances flows around the world is critically important for receiving countries. We can now proceed to discuss how the previous literature has studied these flows.

The Nature and the Determinants of Remittances

Microeconomic Determinants of Remittances

There has been considerable debate about the migrant's motivations to remit. The most commonly accepted motivation for remittance transfers is altruism; that is, migrants care about the home household's well-being and remit to improve living conditions. If altruism is a motivation to remit, variables related to household well-being (e.g. household consumption) should enter the migrant's utility function. A change in variables affecting household well-being, for example a decrease in the household's income, should encourage more transfers.

Print Get the Mag Weekly Updates