November 16, 2005—Migrants officially sent home more than US$167 billion dollars to their families in developing countries this year – a figure more than twice the level of international aid.
That’s one of the findings of the World Bank’s annual Global Economic Prospects report for 2006, titled The Economic Implications of Remittances and Migration.
But the report says the US$167 billion figure – double that of five years ago - does not disclose the full extent of remittances to the developing world, as many migrants send money home through unofficial channels.
The report says remittances through informal channels could add at least 50 percent to the official estimate, making remittances the largest source of external capital in many developing countries.
Overall, in both developed and developing countries, remittances worldwide exceeded US$232 billion dollars this year.
“In dollar terms, the official records show India received the most in remittances, followed by China, Mexico, France and the Philippines, “says Dilip Ratha, one of the co-authors of the report.
“But as a percentage of gross domestic product (GDP), it is smaller countries like Tonga,
Moldova and Lesotho that are the largest recipients of remittances.”
A Powerful Force
Bank Chief Economist and Senior Vice President for Development Economics, Francois Bourguignon, says with the number of migrants worldwide now reaching almost 200 million, “their productivity and earnings are a powerful force for poverty reduction.”
“Remittances in particular are an important way out of extreme poverty for a large number of people,” he says.
Drawing on household surveys, Ratha says the report shows remittances have led to reduced poverty levels in low income countries.
“The analysis shows that remittances may have reduced poverty in Lesotho by about 11 percentage points; in Ghana by five points and in Bangladesh by six percentage points,” he says.
The report says greater emigration of low skilled emigrants from developing to industrial countries could make a “significant contribution” to poverty reduction.
It says an increase in migrants which raises the work force in high income countries by three percent by the year 2025, could increase global real income by 0.6 percent or US$356 billion.
And it says the gains would then be high for developing countries – so much so that they would rival the potential gains from global reform of merchandise trade.
The report argues the most feasible means of increasing such emigration would be through managed migration programs between the developing and developed countries, which combine temporary migration of low skilled workers with incentives for return.
“Managed migration programs, including temporary work visas for low skilled migrants in industrial countries, could help alleviate problems associated with a large stock of irregular migrants, and allow increased movement of temporary workers,” says Uri Dadush, Director of the Bank’s Development Prospects Group which produces the GEP.
“This would contribute to significant reductions in poverty in migrant sending countries, among the migrants themselves, their families and as remittances increase, in the broader community.”
The report says temporary migration programs have several advantages including easing social tensions by limiting permanent settlement as well as limiting potential burdens on the public purse as immigrants are guaranteed a job.
And the report advocates strategies to help some countries avoid suffering from brain drain – the loss of large numbers of highly skilled workers who emigrate to rich countries.
It says countries can help to retain key workers by improving working conditions in public jobs, and investing in research and development. To encourage educated emigrants to return home, the report says countries should identify job opportunities for them, allow dual nationality, and help to ensure social insurance benefits are portable.
Given the sizeable amount of money migrants are sending home to the developing world, the report calls for cuts to the costs of sending remittances. The fees charged by remittance service providers are often as high as 10 to 15 percent for small transfers typically made by poor migrants.
“These high fees are a significant drain on the savings of the migrants and also a significant drain on the funds that are flowing to essentially poor people, “Ratha says.
“Reducing remittance costs can increase migrants’ savings and result in increased flows to developing countries – to poor people.”
The report argues that reducing remittance costs will also led to fewer people using unofficial means to send money home and would be more effective than trying to regulate the so-called informal services.
It says while regulations are necessary to curb money laundering and terrorist financing, they must be done in a way that doesn’t interfere with the aim of reducing remittance costs.
And the report opposes efforts by governments to tax remittances. Instead it advises governments to treat remittances like other private income.
“Remittances are hard earned income that, in most cases, has already been taxed,” Bourguignon says. “They should not be taxed again and governments should not try to count them as development aid.”