Did remittances really increase during the pandemic?

When the COVID-19 lockdown measures began in March 2020, international organizations predicted a massive decline in remittances to developing countries. This raised concerns for the millions of remittance-receiving households who stood to lose an essential source of income during an already unprecedented economic crisis. But when countries across the world started releasing their official 2020 figures, a surprising finding emerged defying all predictions: remittances were rather stable or even grew in several countries. 

This finding was hard to reconcile considering the large declines in economic activity and record unemployment levels experienced by rich economies. As well, because of their immigration legal status, many migrants were not eligible for the generous stimulus and unemployment insurance payments, further eroding their economic situation.  

In contrast, high-frequency phone surveys conducted during the pandemic showed that households did suffer a large decline in remittances in 2020–consistent with the early predictions. The official household surveys for several Latin American countries were released in 2020 confirming these patterns. Figure 1 shows that monthly registered remittances for select countries in Latin America, the Caribbean, and other regions, grew between April and September 2020 after experiencing a temporary decline at the beginning of the crisis . 

Figure 1. Remittance inflows, 2019-2020 growth 

^{Source: Dinarte et al. (2022)} 

What explains these divergent patterns? 

In the household surveys, remittance inflows estimates included both formal and informal channels, such as sending cash through relatives or friends traveling across the border or by mail; in-kind remittances such as shipping essential goods —such as clothing and electronics—and migrants paying certain bills directly on behalf of their families at home. In contrast, official statistics rely almost exclusively on recorded financial transactions.   

In a new paper, we find that the increase in electronic (official) remittances in 2020 could be partially driven by a shift from informal to formal channels . A very particular characteristic of the 2020 economic crisis compared to the 2008-09 financial crisis, when electronic remittances did fall significantly, is the sharp decline in geographic mobility due to the COVID-19 lockdowns. These mobility restrictions made it much harder for migrants and their families to carry cash across borders, as well as within host countries. As a result, sending digital payments became the only option for many.  

Testing this hypothesis is far from straightforward since informal remittances are very difficult to measure. They consist of millions of small transactions that are not recorded and–in the case of in-kind remittances–often do not have a clear monetary value. So, we instead used an indirect approach.  

Taking advantage of a very large and rich dataset of official remittances in Mexico, we asked ourselves: Which Mexican households were more likely to depend on informal remittances before the pandemic? This is an important question because these were the very households that would have been more likely to experience an increase in recorded remittances during the pandemic, as migrants shifted from informal to formal channels. 

Intuitively, we argued that the closer to a US border crossing the recipient households lived, the lower the cost of sending and receiving remittances informally would be. We found evidence consistent with this assumption—the number of remittances received before 2020 tended to be relatively higher for near-the-border communities, especially when using a measure of remittances that includes informal ones as described in the household surveys. 

We then tested our hypothesis. Using several alternative specifications and control variables, we found a strong and robust link between a Mexican municipality’s distance to a border crossing with the remittances received after the lockdowns were implemented. We found that a 10 percent increase in distance to the nearest border crossing was associated with a 0.36 percent decline in remittances in 2020. This is consistent with the finding that households near the border were more likely to receive informal remittances when mobility was not restricted but switched to formal channels at the start of the pandemic. 

We discarded a host of alternative explanations, such as pre-existing trends across municipalities by distance to the border, changes in a municipality’s exposure to US unemployment, and unemployment insurance generosity levels, and increased altruism from migrants towards Mexican municipalities hardest hit by the crisis. 

We also found that there was a disproportionate increase in opening bank accounts among municipalities near a border crossing. This is consistent with previous evidence showing that remittances foster financial development and with the hypothesis that recipient households at the border opened bank accounts at the outset of COVID-19 so they could receive remittances through formal channels that previously might have been sent via informal ones—such as through a border crossing. 

Finally, while we found robust evidence consistent with an informal-to-formal shift at the local level, we cannot assess the magnitude of such shift at the aggregate level. More importantly, our findings contribute to the growing literature assessing the potential long-term impacts of the COVID-19 crisis, such as working-from-home arrangements and educational achievement. The rapid formalization of remittances since 2020 is another example.