How remittances promote consumption stability

Our essay on remittances in the latest Global Economic
Prospects (released yesterday) examines cyclical characteristics
of remittances and explores the counterbalancing and
consumption-smoothing potential of remittances. Remittances to
developing countries are significant both as a share of GDP and
compared to foreign direct investment (FDI) and official
development assistance. Since 2000, total remittances have
averaged about 60 percent of the size of total FDI. For a large
number of developing countries remittances constitute the single
largest source of foreign exchange.
The relative importance of remittances as a source of external
finance is expected to increase further if capital inflows to
developing countries slow down as interest rates in advanced
economies normalize, or if growth in developing economies
remains weak. Remittances are associated with significant
development impacts such as accelerated poverty alleviation,
improved access to education and health services, and enhanced
financial development, as well as multiplier effects through
higher household expenditures. In sum, the contribution of the
study is three folds:
Remittances are relatively stable and a-cyclical, and
therefore, can play a stabilizing role during economic
fluctuations in most receiving countries. In almost
four-fifths of our sample countries, remittances
receipts are not significantly related to the business
cycle compared with the pro-cyclical debt flows
and foreign direct investment.
Remittances have been stable during episodes of
financial volatility when capital flows fell sharply. It is
therefore argued that remittances help counter-
balance fluctuations caused by the weakening of
capital inflows to developing countries. For
example, while capital inflows to emerging markets
on average declined about 25 percent during the
initial year of a sudden stop episode, remittances
increased by 7 percent during the same year. The
contrast was even more evident during the crisis of
2008 when remittances increased over 10 percent
even as capital inflows fell by over 80 percent
(Figure 1 and Figure 2). The analysis suggests that
the stabilizing effects are greater for remittance-
receiving countries with a more dispersed migrant
population.
This article is published in collaboration with The World Bank’S
People Move Blog . Publication does not imply endorsement of views
by the World Economic Forum.
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Author: Dilip Ratha is Manager, Migration and Remittances Unit and
CEO, Global Knowledge Partnership on Migration and Development
(KNOMAD) in the Development Prospects Group of the World Bank.
Image: An employee counts Indian rupee currency notes inside a
private money exchange office in New Delhi July 5, 2013. REUTERS/
Adnan Abidi.