Blog Post

The cost of remittances

Remittances flows are very important for developing countries. In 2009 the G8 pledged to reduce the cost of remittances to 5%, a commitment that was endorsed by the G20 in 2011 and 2014, and included in the UN’s Sustainable Development Goals in 2015. What is the cost today, and what are economists’ suggestions to reduce it?

By: Date: April 30, 2018 Topic: Global Economics & Governance

Stephen Cecchetti and Kim Schoenholtz document the stubbornly high cost of remittances, and look at avenues for cost reduction. Today, remittance flows are triple what they were in 2000 and five times what they were in 1990. Furthermore, the economic importance of inward remittances has increased for low- and middle-income countries, rising from an average of 1.2% of GDP in 1990 to 1.6% of GDP today. However, costs have trended lower only gradually, and with considerable differences across types of transfer agents and across sender countries (see figure below).

While the direct cost is borne by the migrant senders and their family recipients, the burden also falls on poor countries as a whole because remittances enhance growth in poor countries by providing alternative means for financing investment where transactions costs are high. Cecchetti and Schoenholtz believe that there are two major mechanisms for reducing costs: consumer education (about the cost of alternatives available) and competition. Expanding mobile technology is also helping to displace banks, and squeeze remittance costs.

The importance of competition also stems from an early 2009 paper by Thorsten Beck and Maria Soledad Martinez Peria, who analysed published data on remittance fees across 119 corridors from 13 sending to 60 receiving countries – linking them to an array of corridor-specific variables, sending country characteristics, and receiving country characteristics.

Across all corridors and all providers, remittance costs averaged 10.2% – and the average cost among banks was higher than the average for money-transfer operators. Relating remittance fees on the corridor level to an array of corridor-specific variables, sending country characteristics, and receiving country characteristics, they found that the number of migrants was statistically and economically significantly associated with lower average fees across corridors.

This seemed to suggest an important volume effect through scale economies and/or higher competition in a larger market. Corridors with higher income per capita in both the sending and receiving country exhibited – on average – higher costs, which could reflect higher costs of non-tradable goods, such as services, in general. There was strong evidence that competition does matter, as corridors with a larger number of providers exhibited lower fees and bank competition in the receiving country seemed to be negatively associated with the cost of sending remittances. Finally, they did not find evidence that remittance-senders’ literacy matters.

A 2014 paper by Bettin, Presbitero and Spatafora highlights the importance of financial development. They use a new dataset from the Bank of Italy, which provides bilateral information on remittance flows disaggregated across 103 Italian source provinces and 107 recipient countries.

One key result is that remittances are countercyclical with respect to income and output in recipient countries – in particular, increasing in response to exogenous shocks to which developing countries are particularly vulnerable – and procyclical with respect to the macroeconomic situation in the source Italian province. On balance, if the source and the recipient economy are exposed to negative shocks of the same magnitude (for instance, as a result of the global crisis), the anti-cyclical effect stemming from the output contraction in the recipient country prevails.

A second results show a negative correlation between remittances and financial development in the recipient country and a positive correlation with the degree of development of the banking system in the source economy. Lower transaction costs and better access to financial services by immigrants should therefore represent a key element of any policy to encourage remittances.

Doug King at the Federal Reserve Board of Atlanta looks at cost and accessibility of remittances originating from the United States with a focus on the Mexico corridor. The underlying question for the paper is whether the passage in 2010 of the Dodd-Frank Act did alter the landscape of remittances, through section 1073, which created new protections for US consumers sending money abroad.

The paper thus examines how the implementation of the 1073 rules changed the environment for low-value remittance transfers ($200 or less) in the United States, and looks at how these changes have affected the cost of remittance transfers that originate from the United States and travel the United States-Mexico remittance corridor, which accounts for nearly 20% of all US remittances. King concludes that there is no evidence that the issuance in 2012 of section 1073 caused consumer prices of low-value remittance transfers to rise. In fact, the emergence of new service providers and business models, the growth of e-commerce and mobile commerce channels, and increased pricing transparency seem to have actually given consumers access to lower-priced remittance options.

Martin Namaska focuses on Africa, the most expensive continent to send remittances to. He cites research suggesting that digitising the remittance value chain from the sender to the receiver and removing dependency on agents will help reduce the transaction costs of sending money to Africa. Mobile phone technology, mobile money, digital currencies and cryptocurrencies, distributed ledger technology, electronic identification, verification and cloud technology have the capacity to technically make cross-border payments negligible in cost, instant and auditable.

Taking the UK and Africa as an example, Namaska argues that £100 million could be saved each year in transaction costs if people switched to sending money digitally to Africa. If the cost of sending money to Africa was to meet the UN Sustainable Development Goals (SDGs) target of 3% by 2030, then over £300 million a year would be saved. The development of regional automated clearing houses in Africa also presents a channel for improving the efficiency and reducing the cost of low-value cross-border transfers into Africa. But improved trust and comfort with digital money will be required before new technology can reach its full potential and reduce costs.

This is why no single technology can be applied to fix the remittance challenge in Africa: it would be difficult to imagine progress without corresponding financial sector reform, corporate governance and anticorruption efforts. African governments, development agencies and service providers must collaborate to create complete systems that reduce both the risks and costs associated with money transfers.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic More by this author

Blog Post

Reforming the EU fiscal framework

Researchers have often highlighted the problematic nature of the currently very complex EU fiscal framework. Here we review economists’ views on how it should be changed.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: September 17, 2018
Read article More on this topic More by this author

Blog Post

Lehman Brothers: 10 Years After

Ten years after the bankruptcy that shook the world, we review economists’ take on the lessons learned from the global financial crisis.

By: Silvia Merler Topic: Finance & Financial Regulation Date: September 10, 2018
Read about event More on this topic

Upcoming Event

Oct
16
13:45

Competition Policy and Extraterritoriality

An in-depth look at competition policy.

Speakers: Guntram B. Wolff and Jean Pisani-Ferry Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Blog Post

Monetary policy and superstar firms

The yearly Jackson Hole gathering of central bankers has focused this year on the topic of changing market structure, the rise of superstar firms, and the implications of the way they compete for central banks.

By: Silvia Merler Topic: Global Economics & Governance Date: September 4, 2018
Read article More on this topic More by this author

Blog Post

The Turkish Crisis

Financial markets have been very nervous about Turkey for the past few weeks. We review economists’ opinions about the economic, political and geopolitical risks and opportunities of this situation.

By: Silvia Merler Topic: Global Economics & Governance Date: August 27, 2018
Read article More on this topic More by this author

Blog Post

Italy's "Dignity Decree"

The new Italian government pushed through its first legislative act including elements of labour market reform. Presented as an overturn of the previous government’s “Jobs Act”, the estimated effects of the decree are controversial. We review Italian economists’ view on the matter.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: July 23, 2018
Read article More on this topic More by this author

Blog Post

Economy of Intangibles

Economists have been discussing the implications of the rise of the intangible economy in relation to the secular stagnation hypothesis, and looking more generally into the policy implications it has for taxation. We review some recent contributions.

By: Silvia Merler Topic: Finance & Financial Regulation Date: July 16, 2018
Read article More on this topic More by this author

Blog Post

World Cup Economics

As we approach the final rounds of the tournament, here are some recent contributions about the economics and economic impact of the World Cup.

By: Silvia Merler Topic: Global Economics & Governance Date: July 9, 2018
Read article More on this topic More by this author

Blog Post

US tariffs and China's holding of Treasuries

China has the biggest bilateral trade surplus vis-à-vis the US but is also a top holder of US government bonds. While China has started to counteract US trade tariffs, economists have been discussing the case of China acting on its holdings of US Treasuries. We review recent contributions.

By: Silvia Merler Topic: Global Economics & Governance Date: July 2, 2018
Read article More on this topic More by this author

Blog Post

The Meseberg declaration and euro-zone reform

The recent Franco-German Meseberg declaration will set the scene for next week’s summit. We review opinions on this important agreement.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: June 25, 2018
Read article More on this topic More by this author

Blog Post

Demographics and Long Run Growth

Scholars have been investigating the relationship between demographics and long term growth, in the context of the secular stagnation hypothesis. We review recent contributions.

By: Silvia Merler Topic: Global Economics & Governance Date: June 18, 2018
Read article More on this topic More by this author

Blog Post

The Italian mini-BOT debate

Talks of parallel currency are not new in Italy. But one of the proposals – the so called mini-BOT – has made it into the government contract that underpins the current League-M5S coalition. We review what has been said about these proposals.

By: Silvia Merler Topic: Finance & Financial Regulation Date: June 11, 2018
Load more posts