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Economic Implications of Remittances and Migration Dilip Ratha World Bank Global Issues Seminar Series October 11, 2006.

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Presentation on theme: "Economic Implications of Remittances and Migration Dilip Ratha World Bank Global Issues Seminar Series October 11, 2006."— Presentation transcript:

1 Economic Implications of Remittances and Migration Dilip Ratha World Bank Global Issues Seminar Series October 11, 2006

2 Development implications of migration and remittances Migration and remittances continue to increase South-South migration may be as large as South-North migration Migration generates substantial welfare gains and reduces poverty. Benefits to countries of origin are mostly through remittances There is considerable scope for reducing remittance costs faced by poor migrants

3 Development implications of migration and remittances Migration and remittances continue to increase South-South migration may be as large as South-North migration Migration generates substantial welfare gains and reduces poverty. Benefits to countries of origin are mostly through remittances There is considerable scope for reducing remittance costs faced by poor migrants

4 International migration has increased Stock of migrants as share of destination countries population (%) Source: UN

5 Private debt and portfolio equity FDI ODA Recorded remittances Remittances are large, have continued to increase

6 Top recipients of remittances $ billion% of GDP

7 Top sources of remittances, 2004 $ billion % of GDP

8 Development implications of migration and remittances Migration and remittances continue to increase South-South migration may be as large as South-North migration Migration generates substantial welfare gains and reduces poverty. Benefits to countries of origin are mostly through remittances There is considerable scope for reducing remittance costs faced by poor migrants

9 Migration to the South has been significant Source: United Nations

10 South-South migration and remittances - preliminary results South-South migration is almost as large as South-North migration. South-South remittances appear to be between 10-29% of total flows to the South. South-South migrants enjoy much lower increases in income (than South-North migrants), are more likely to be irregular. South-South migration can generate significant welfare gains as these migrants are more likely to be poor, or escaping war or famine. South-South remittances tend to be more costly than North- South remittances. Definition: South = Developing Countries

11 Global migrant stocks (millions) Migrants in South North (HI OECD) North (HI non-OECD) Total Migrants from: South North (HI OECD) North (HI non-OECD) Total Source: World Bank staff calculations based on migration data from University of Sussex, United Nations, and World Bank

12 Destinations of migrants from the South

13 Top migration corridors include several South- South corridors (excluding the FSU) Source: University of Sussex and World Bank

14 Former Soviet Union corridors are among the largest South-South corridors

15 South-South remittances were likely between $19 to $53 billion in 2005 Sources of Remittances to developing countries ($ billion, 2005) By migrant stocks By migrant stocks and host country incomes By migrant stocks, host country incomes, and sending country incomes South North Total181 Source: World Bank Staff estimates

16 Determinants of migration Income differences are a powerful motivation for migration, especially South-North migration Almost 80% of identified South-South migration takes place between neighboring countries Other factors and motivations: Networks, Seasonality, Ecological disasters, Civil conflict, Transit to North, Petty trade

17 Income differences are a powerful motivation for migration Median wage levels for workers in the same occupation, relative to high-income economies ( , adjusted for purchasing power) Source: Freeman and Oostendorp 2000

18 80% of South-South migration takes place between neighboring countries

19 Development implications of migration and remittances Migration and remittances continue to increase South-South migration may be as large as South-North migration Migration generates substantial welfare gains and reduces poverty. Benefits to countries of origin are mostly through remittances There is considerable scope for reducing remittance costs faced by poor migrants

20 Migration boosts welfare for most households Change in real income in 2025 $ billion. Global gains of $356 billion

21 Remittances reduce poverty Evidence from a few household surveys shows that remittances reduce poverty Cross-country evidence shows that a 10% increase in per capita remittances leads to a 3.5% decline in the share of poor people Remittances also finance education and health expenditures, and ease credit constraints on small businesses

22 Remittances tend to rise following crisis, natural disaster, or conflict Remittances as % of private consumption

23 Remittances improve countries access to capital Present value of external debt as % of exports of goods, services, and remittances

24 High-skilled emigration rates are high in some countries # of countries share of developing country population (%)

25 Countries with higher skilled emigration also receive higher remittances Remittances (% of GDP) Skilled emigration rate

26 Socio-Economic Implications South-South migration results in smaller wage increases for the migrants and natives Irregular migration is more common in South-South than in South-North migration Employer exploitation (and trafficking of women) may be common in the South. Migration flows between developing countries may be less stable due to conflict and economic volatility.

27 Large remittance flows may lead to currency appreciation and adverse effects on exports Remittances may create dependency Remittance channels may be misused for money laundering and financing of terror Downside

28 Development implications of migration and remittances Migration and remittances continue to increase South-South migration may be as large as South-North migration Migration generates substantial welfare gains and reduces poverty. Benefits to countries of origin are mostly through remittances There is considerable scope for reducing remittance costs faced by poor migrants

29 Remittance fees are high, and regressive Fee and foreign exchange commission as % of principal Weighted average of fees of four largest money transfer operators in the U.S.-Mexico corridor

30 South-South remittance costs tend to be higher than North-South costs

31 Policy priorities Governments can provide information and regulate intermediaries to reduce risks, costs of migration High remittance costs faced by poor migrants can be reduced by increasing access to banking and strengthening competition in the remittance industry Governments should not tax remittances or direct the allocation of expenditures financed by remittances

32 Policy priorities Governments can provide information and regulate intermediaries to reduce risks, costs of migration High remittance costs faced by poor migrants can be reduced by increasing access to banking and strengthening competition in the remittance industry Governments should not tax remittances or direct the allocation of expenditures financed by remittances

33 Policy priorities Governments can provide information and regulate intermediaries to reduce risks, costs of migration High remittance costs faced by poor migrants can be reduced by increasing access to banking and strengthening competition in the remittance industry Governments should not tax remittances or direct the allocation of expenditures financed by remittances

34 Future work Improving bilateral migration data Understanding impacts (on incomes, inequality, health, gender, and migrant rights) Better management of migration Reducing remittance costs

35 Retail payment systems -Remittance costs -Payment platforms/instruments -Regulation (clearing and settlement, capital adequacy, exchange controls, AML/CFT, disclosure, cross-border arbitration) Financial access -Deposit and saving products -Loan products (mortgages, consumer loans, microfinance) -Credit history for MFI clients -Insurance products Monitoring, analysis, projection -Size, corridors, channels -Counter-cyclicality -Effects on poverty, education, health, investment Capital market access -Private banks and corporates (securitization) -Governments (diaspora bonds) -Sovereign credit rating

36 International investors Remittance payments (foreign currency) Remittance senders Excess cash (foreign currency) Debt service payment Remittance securitization structure Trustee collateral account Correspondent banks Issuing bank credits beneficiarys account in domestic currency Beneficiarys account Message DomesticOffshore Issuing bank

37 Borrowing cost rises exponentially as credit rating deteriorates

38 Remittances can help obtain and improve credit rating Remittances (% of GDP, 2004) Rating excluding remittances Rating including remittances Spread saving (basis points) Lebanon14B+BB-150 Haiti*28CCCB-334 Nicaragua * 11CCC+B-209 Uganda*5B-B161 * Calculated using a model similar to Cantor and Packer (1995), see Ratha and De (2005)

39 Securitization of future remittances can improve credit rating above investment grade YearIssuer Amount (US$ mn) Flow type Transa- ction rating Sover- eign rating 1998 Banco Cuscatlan 50Remit.BBBBB 2004 Banco Salvadoreño 25DPRsBBBBB+ 2002Banco do Brasil 250Remit.BBB+BB-


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