Econ 490 Ivan Camacho
Professor Castillo Arthur Cho
What Is Remittance?
The transfer of money by a foreign worker to
his/her home country.
Major roles of remittances Microeconomic Determinants
Key statistics Macroeconomic Determinants
Global Impact Macroeconomic Impacts
Advantages/Disadvantages Microeconomic Impacts
Trend of Remittance flows
Causes of Remittances
Major roles of remittances
Count as the 2nd largest source of capital inflow to many developing
Only foreign direct investment account for more sources of external finance.
Remittances exceeds inflows that come from international aid.
Receiving countries become more dependent on global economies rather
than sustaining their own local economies.
Promotes economic growth in developing countries.
Key Statistical Data
Developing countries receive the highest amount of remittances.
One-third of remittances to the developing world go to India, China, and
In the past, remittances received little attention from governments and
financial markets because they were usually sent in small amounts.
Now they are large in the aggregate and are important to developing
World Bank estimates $240 billion in total remittances in 2007, a
staggering jump from only $31.2 billion in 1990.
Remittances exceed all other imports of private and public capital in 36
Finance much needed investment in recipient countries to contribute to
Believed to reduce poverty. Mainly due to the poor that migrate and send
Increase of income in households also increase consumption.
Remittances do not have to pay interest.
More stable than foreign direct investment or foreign portfolio investments.
These are highly volatile in developing countries.
Unskilled workers may return to their home countries with useful skills
Recipients have a higher propensity to own bank accounts.
Promotes idleness among the recipients.
May cause appreciation of receiving country’s currency. Thus leading to
lower net exports and negative economic growth.
Some emigrants may be educated or highly skilled causing what commonly
known as “brain drain”.
Loss of human capital lowers productivity and economic growth.
Home country invested time, effort and money on their education.
Migration of skilled workers worsens the distribution of income between rich and
Policymakers in developed host countries have become interested in the
large flow of remittances.
Channel remittances into productive investments
Encourage banks to offer remittance services to migrants in host countries
Supervise and push remittances to be sent through official channels.
Increases in remittances have spawned many private money transfer
Trend of Remittance Flows
Most of the developing world has been increasing flows of remittances by
double digits annually between 1990-2005.
Source: Global Economic Prospect 2006, and World Development Indicators, 2007, Washington DC: World Bank.
Causes of Remittance Growth
15.1% growth in Eastern Europe and Central Asia
1990s changed to free market economies
Permitted labor migrations to oil-rich Middle East and industrialized Western
17.3% growth in East Asia and Pacific Region
Expansion of economic activity caused labor shortages in Japan, South Korea,
Hong Kong, Taiwan and Singapore in the 1990s
Increased migrant labor originating from Thailand, the Philippines and Indonesia
Causes of Remittance Growth (cont.)
12.2% growth in South Asia
Implementation of an economic liberalization program in India.
Lifted regulations to foreign exchange and travel abroad for work
Explosion of information technology industry in the US attracted large numbers
of South Asians, mostly Indians.
14.0% growth in Latin America and Caribbean
The implementation of NAFTA and the economic boom of the 1990s sharply
increased the demand for workers in the US and Canada.
Migrants care about the households well being and remit to improve living
conditions (Altruism). Ex: Household Consumption
Self interest motives. Ex: Investment in home country
Insurance purposes. Ex: Emigrant/Household income risk.
Implicit loan arrangement. Ex: Emigrant is paying back to the household for
the investment made.
Depreciations of the home currency can increase the purchasing power of
remittances in the home country. Ex: Migrants who settle in the U.S. earn money in
U.S. dollars, but their transfers to family and others back home are usually
converted into the domestic currency.
Take of advantage of the depreciation by investing more in the home country if the
immigrant has investments in both countries, but plans to return eventually to the
Augmentation of the capital stock through financing investment are conducive to
Decrease in labor supply and a negative impact on the tradable sector have
adverse consequences for the receiving country.
Economic development is that remittances are often used for investment in the home
Inflationary pressures or cause a phenomenon. This can appreciate the local
currency and crowd-out exports.
Distribution of income increases inequality.
Increase in remittances shifts the receiving household’s budget constraint outward by
the amount of the transfer and therefore should have a positive impact on
Remittance receiving households spend more on education, health, and housing.
Remittance-receiving households devote a larger proportion of current expenditures
to investment and savings, and have lower income elasticities for current consumption
and for durable goods.
It is possible that after receiving remittances the labor supply of some household
Remittances can give the household the initial capital necessary to start a small
May increase the education of children in the household.
Impact of Economic Downturn
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