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Can Financial Literacy Help Migrants Save on Remittance Costs?

Bilal Zia's picture

In a new working paper published in the World Bank Working Paper Series, John Gibson, David McKenzie, and I look at exactly this question.

While much of migration policy has been focused on reducing costs of remittances and introducing new and inexpensive transmission channels, relatively little attention has been paid to educating customers on such benefits. After all, this could be pretty low hanging fruit – tell migrants about a cheaper way of remitting and they will switch.

With this thought in mind, we designed an information dissemination experiment for migrant workers in both Australia and New Zealand who had migrated from the Pacific Islands, East Asia, and Sri Lanka. 

The Most Effective Development Intervention We Have Evidence For?

David McKenzie's picture

Ask most people to name the most effective means of raising incomes of people in poor countries, and what would they say?

Microfinance? Perhaps not after the recent experimental assessments.

Deworming? It increased primary school participation and improved health, but in the short-term at least seems unlikely to raise household income.

Conditional cash transfers? This might be a popular answer, with evidence from a number of countries that they have increased household expenditure , schooling, and health outcomes. But even though Governments devote significant resources to such programs, the absolute annual increases in household income and expenditure are still at most US$20-40 per capita for participating households.

I bet that facilitating international migration is not very high up the list of interventions people think of. But it should be. In a new working paper, John Gibson and I evaluate the development impacts of New Zealand’s new seasonal worker program, the RSE. The figure below compares the per-capita income gain we estimate to those from microfinance, CCTs, and from my previous research giving grants of $100-200 to microenterprises. It is simply no contest!

What Do We Know About the Impact of Remittances on Financial Development?

Maria Soledad Martinez Peria's picture

Remittances, funds received from migrants working abroad, to developing countries have grown dramatically in recent years from U.S. $3.3 billion in 1975 to close to U.S. $338 billion in 2008. They have become the second largest source of external finance for developing countries after foreign direct investment (FDI) and represent about twice the amount of official aid received (see Figure 1). Relative to private capital flows, remittances tend to be stable and increase during periods of economic downturns and natural disasters. Furthermore, while a surge in inflows, including aid flows, can erode a country’s competitiveness, remittances do not seem to have this adverse effect.

Figure 1: Inflows to developing countries (billions of USD), 1975-2008

As researchers and policymakers have come to notice the increasing volume and stable nature of remittances to developing countries, a growing number of studies have analyzed their development impact along various dimensions, including: poverty, inequality, growth, education, infant mortality, and entrepreneurship. However, surprisingly little attention has been paid to the question of whether remittances promote financial development across remittance-recipient countries. Yet, this issue is important because financial systems perform a number of key economic functions and their development has been shown to foster growth and reduce poverty. Furthermore, this question is relevant since some argue that banking remittance recipients will help multiply the development impact of remittance flows.

What Drives the Price of Remittances?: New Evidence Using the Remittance Prices Worldwide Database

Maria Soledad Martinez Peria's picture

Remittances to developing countries reached U.S. $338 billion in 2008, more than twice the amount of official aid and over half of foreign direct investment flows.1 Numerous studies have shown that remittances can have a positive and significant impact on many aspects of countries’ economic development. Hence, monitoring the market for remittance transactions has become critical for understanding the development process in many low-income countries.

Remittance transactions are known to be expensive. The Remittance Prices Worldwide database collected by the World Bank Payment Systems Group shows that, as of the first quarter of 2009, the cost of remittances averaged close to 10 percent of the amount sent.2 At the same time, the data also reveal a wide dispersion in the price of remittances across corridors, ranging from 2.5 percent to 26 percent of the amount sent (see Figure 1 below the jump).