Remittances from migrant workers constitute a key source of finance for developing countries: in 2013, they stood at more than $ 410 billion, more than three times the size of official development assistance (World Bank, 2013). For many economies, remittance inflows exceed 10 percent of GDP. During the recent global financial crisis, remittances also proved much less volatile than other sources of finance, such as bank loans or portfolio investment. Remittances can therefore play an important role in pulling and keeping millions out of poverty.
But what precisely are they key factors driving remittances? For instance, how do they depend on macroeconomic and structural conditions in the migrants’ host country and country of origin? And what are the main barriers to remittances? There already exists a voluminous theoretical and empirical literature on these issues. However, it remains inconclusive, largely owing to limited data, as well as problems in establishing the direction of causality.
In a new paper and presentation, we use a new, rich dataset from the Bank of Italy, providing bilateral information on remittance outflows from Italy since 2005, disaggregated across 103 Italian source provinces and 107 recipient countries. Combined with bilateral information on the stock of migrants, this allows us to analyze in detail the characteristics and determinants of remittances, avoiding many of the problems with the existing literature.
One key result is that remittances act as a macroeconomic stabilizer in recipient economies (Figure). Remittances are counter-cyclical with respect to income and output in recipient countries, increasing during times of recession. In particular, remittances increase in response to large, adverse exogenous shocks (such as natural disasters, conflicts, and large terms-of-trade deteriorations), to which developing countries are particularly vulnerable.
Figure: Determinants of Remittances.
Conversely, remittances are pro-cyclical with respect to macroeconomic developments in the source economy. Nevertheless, when source and recipient economies are exposed to negative shocks of similar magnitudes (for instance, as a result of the global financial crisis), remittances still increase.
There are also important links between remittances and financial development. In particular, all else equal, remittance inflows are larger in less financially developed economies (Figure). Put differently, remittances represent an important alternative source of capital for financially underdeveloped economies, and can be a key element in reducing financial constraints.
Conversely, remittance outflows are significantly larger in economies with a more developed, lower-cost banking system. Reducing barriers to international migrations and ensuring better access to financial services for immigrants should therefore represent a key element of any policy to encourage remittances. These results are in line with the explicit commitment of international institutions and G-20 governments “to reduce the average cost of transferring remittances from 10 percent to 5 percent by 2014."