Sending Money Home: Trends in Migrant Remittances

• Author: Dilip Ratha
• Position: Senior Economist, Development Prospects Group, and Task Manager, Global Economic Prospects 2006: Economic Implications of Remittances and Migration, World Bank

Over the past fifteen years, international migrant remittances have become increasingly prominent-exceeding $232 billion in 2005, with $167 billion flowing to developing countries. This amount, however, reflects only transfers recorded in the balance of payments. Unrecorded flows through informal channels are believed to be at least 50 percent higher than recorded flows. In 2004, recorded remittances were the second largest source of external financing in developing countries, after foreign direct investment, and amounted to more than twice the size of official aid. Remittances are less volatile than most other sources of foreign exchange earnings for developing countries.

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While capital flows tend to rise during upswings of economic cycles and decline in bad times, remittances tend to be countercyclical relative to recipient countries' economies. They tend to rise when the recipient country suffers an economic downturn following a financial crisis, natural disaster, or political conflict, as migrants transfer more funds during hard times to help their families and friends.

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The top three recipients of remittances in 2004 were India, China, and Mexico. But it is smaller countries, such as Tonga, Moldova, and Lesotho, that top the list when controlling for the size of the economy-for example, as a share of GDP. On average, the share of remittances in GDP is twice as large in low-income countries as in middle-income countries.

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Rich countries are the main source of remittances. The United States is by far the largest source, with $39 billion in outward flows. Saudi Arabia (classified as a high-income country in 2005) is the second largest, followed by Switzerland and Germany. But when...