Remittances will prove more resilient than capital flows or official aid between now and 2010, researchers say
Remittances are being viewed as an important source of finance for development
Developing countries should consider issuing diaspora bonds to raise capital
WASHINGTON, November 24, 2008—Poverty fell during Nepal's decade-long civil war, largely thanks to money sent home from Nepalese living abroad.
While the number of people living below the poverty line decreased by 11 percent, by 2005, infant mortality, life expectancy, maternal mortality, and health services all improved dramatically in South Asia's poorest country during a time of great political and economic turmoil, according to the Bank's report, Nepal: Resilience Amidst Conflict.
Researchers say the money sent home by migrant workers made the difference.
Today, as developing countries around the world face severe fall-offs in financing and investment amid the global financial crisis, remittances are increasingly being viewed as an important source of finance for development, says World Bank economist Dilip Ratha.
Ratha's Migration and Remittances team at the World Bank thinks remittances will prove more resilient than capital flows or perhaps even official aid between now and 2010.
This year, some 200 million migrants around the world will likely send home $283 billion, up from $265 billion in 2007, according to a new World Bank brief on migration and remittances(pdf).
While the growth in remittances is slowing down and is expected to fall from 6.7 percent to 0.9 percent in 2009, remittances will still dwarf official development aid, which averages $100 billion a year.
Ratha says developing countries should consider tapping the wealth of their often large overseas diasporas through bonds or other financing instruments to raise capital.
Impact of Crisis
The relative strength of remittances has prompted many to look to this source of funding as a way to weather the crisis. Ratha says requests for data and projections on remittances have "skyrocketed" in the last three months.
Podcast: Remittances What is one of the oldest business in the history of humanity? Well find out with our guest Dilip Ratha in part one of our mini series.
Remittances already make up a large share of GDP in several countries, such as Tajikistan (45%), Moldova (38%), Tonga (35%), Lesotho (29%) and Honduras (25%).
Some sectors and corridors are expected to be more affected by the crisis, such as construction related remittances moving from the United States to Mexico or from the Gulf states to South Asia, Africa or other Middle Eastern countries.
Mexico, along with India and China, is likely to continue to be among the top three recipients of remittances, but is expected to see a decline in remittances of 4.4 percent in 2008, according to World Bank estimates.
Remittance flows to South Asia will slow sharply from over 16 percent growth in 2008 to zero growth in 2009, while flows to the Middle East and North Africa are expected to decline by nearly 7 percent.
Migration Facts
Fewer people migrate today than at the turn of the 19th Century.
About half of migrant workers from developing countries work in other developing countries.
Global remittances more than doubled between 2002 and 2007.
Remittances' Purchasing Power Increases
It is true that migrants' incomes are affected by the economic slow down. But Ratha says falling commodity prices and the rising US dollar have increased the purchasing power of remittances, allowing migrant workers to send less home with similar impact.
"Despite a decline in the share of remittances in GDP, the contribution of remittances to the external position of developing countries will increase significantly during 2009-10," the Migration and Remittances Brief predicts.
Studies show that migrant workers even in hard-hit sectors like construction continue to send money home even if their own earnings are reduced. The average value of remittances sent by Mexican migrants has remained in the $340-$350 range per transaction since 2005, according to the brief.
In addition, smaller numbers of migrant workers from Latin America and the Caribbean have lost construction jobs than native non-Hispanic workers during the US slowdown in 2007-08.
Around the world, doctors, nurses, care-givers, in particular, are in demand and unlikely to lose their jobs, says Ratha.
But Outlook Is Uncertain
The outlook, however, is "as uncertain as the outlook for global growth, oil and other commodity prices, and currency exchange rates," notes the brief.
One unknown is whether countries will shift policies to shut out migrant workers or force them to return home.
"Labor law changes are already happening,' says Ratha. "Anti-immigration sentiments are stronger in an economic crisis."
"One of the effects of tighter immigration controls is that migrant workers are staying longer in the country - about 18 months for Mexican migrants, for example compared to 6 months five years ago," he adds.
"I don't believe that the number of migrants that are forced to go back will be any more than the recent arrivals, because those that already have been abroad probably have regular jobs and housing. They will probably be less affected by the economic crisis than the native workers."
Diaspora Bonds Potential Source of Funds
Ratha says developing countries could tap this relatively stable population, which often has a higher income than their home country's GDP.
Israel has issued diaspora bonds for more than 50 years, raising about $800 million a year. India has issued three such bonds and raised $15 billion.
Ratha recently urged the Philippines, Kenya, Pakistan, and Ghana to offer diaspora bonds to its overseas workers. "If remittances are a way for tapping into the income stream of the migrants, diaspora bonds are a way for tapping into the considerable wealth of the diaspora overseas."
The advantage of such bonds, he says, is migrants and diasporas have "a different risk perception of the home country than investors."
Whereas the goal of foreign investors is to make money, migrants generally send money home to help support relatives or for philanthropic reasons. "For the migrant, the act of remitting is the goal," says Ratha.
"There are patriotic, nostalgic reasons the diaspora might buy such bonds. They view the country in a more positive light than others. They also have a need for local currency. The risk of devaluation (of the currency) does not affect them as much as it does other investors."
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