Rapidly growing workers' remittances can boost development

• Pages: 212-213

Page 212

Workers' remittances are a large and rapidly growing source of foreign exchange for many developing countries, but surprisingly little is known about their economic effects, what determines their size and growth rate, and what policymakers can do to maximize their benefits.

To address this analytical void, the IMF's April 2005 World Economic Outlook (WEO) undertook a systematic crosscountry analysis of remittances. One key lesson is that more can be done to reduce the cost of sending remittances. Nikola Spatafora (IMF Research Department and author of the WEO study) outlines this and other findings.

Remittance flows to developing countries-defined as the transfers made by migrant workers to family and friends in their home country-have grown steadily over the past 30 years. In 2003, remittance inflows for 90 developing countries analyzed in the WEO study amounted to about $100 billion- the equivalent of 50 percent of total capital inflows or 1.4 percent of aggregate GDP (see chart).

For many developing countries, remittances constitute the single-largest source of foreign exchange, exceeding export revenues, official aid, foreign direct investment (FDI), and other private capital inflows. Mexico, for instance, currently receives about $15 billion in remittances a year. In smaller economies, such as many Caribbean countries, remittances often exceed 10 percent of GDP. On the sending side, the United States remains the main source of remittances, providing over $30 billion in 2003. Indeed, outflows from the United States have almost quadrupled over the past 15 years, partly reflecting the recent rapid increase in immigration into the United States.

Overall, remittances have proved remarkably resilient in the face of economic downturns, displaying greater stability and lower pro-cyclicality than, say, exports or private capital flows. Over time, remittances are also likely to continue growing as populations in industrial countries continue to age and as pressures for migration from developing to advanced economies intensify.

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Not surprisingly, given all this, interest in remittances and their impact on developing economies is rapidly growing, whether in policy circles including the Group of Eight, in the research community, or indeed among potential remittance- service providers. Remittances are increasingly viewed as a relatively attractive source of external...