Western Union office in <br>Flagstaff, Arizona. Photo by <br><a href="http://flickr.com/photos/girl-inchoate/752388718/">Dawn M. Armfield</a> (<a href="http://creativecommons.org/licenses/by-nc-nd/2.0/deed.en">CC</a>).
Western Union office in
Flagstaff, Arizona. Photo by
Dawn M. Armfield (CC).

Policy Innovations Digital Magazine (2006-2016): Briefings: Remittances Take a Hit

Oct 14, 2008

Ripples from the still-unfolding U.S. economic crisis are already being felt on distant shores, and not just in credit markets. A weak dollar, a flattening globe, and resurgent inflation are reversing a decade-long upward trend in financial transfers from overseas workers, commonly known as remittances.

The Inter-American Development Bank (IDB) predicts that 2008 will be the first year on record during which the real value of remittances will fall in Latin America and the Caribbean. The central bank of Mexico announced recently that remittances dropped 12 percent in August compared to one year ago. Officials in countries from Ethiopia to the Philippines have publicly expressed concern that a slowing U.S. economy will mean a precipitous drop in remittances.

"We think that the inflow of remittances has been declining since August due mainly to slowdown in employment and soaring living costs worldwide," said an official at the Central Bank of Bangladesh. Remittances to the impoverished Southeast Asian country slipped 4.4 percent from August to September.

In many developing countries, remittance inflows occupy a prominent place in the financial architecture, dwarfing both official aid and foreign direct investment. Financial transfers from overseas workers account for more than twenty percent of gross domestic product (GDP) in Guyana, Haiti, Honduras, Lebanon, Lesotho, Jordan, Moldova, and Tonga. The landlocked Central Asian Republic of Tajikistan relied on remittances for 36 percent of GDP in 2006.

Remittances predate the current phase of globalization, but like many features of the modern world they have been transformed by technology. Sending money home is far safer than it used to be. In the past, foreign workers routinely sent cash home through the mail—a risky proposition. Now, a storefront check-cashing service in New York can wire funds to a bank account in the Caribbean with the click of a mouse.

In one sense, the new way is more efficient—the sender has less to worry about. But security comes at a price. Technology has also made it easier for banks and firms offering money transfer services to take a bite out of remittance transactions, diminishing their real value. What used to cost only the price of a stamp is now subject to hefty percentage fees at both ends.

Remittance transactions often go unrecorded as such, making it hard for economists to analyze and predict trends. But there is no denying that, in the short term at least, a global economic slowdown will require painful readjustments in countries heavily reliant on the earnings of overseas workers.

"People who are already abroad will adapt, looking for new jobs or cutting back on consumption in order to keep sending money home," said IDB President Luis Alberto Moreno. "Industrialized nations will continue to attract migrants but we expect to see an increase in remittances between developing countries, as more people move to places less affected by the global downturn."

In the long term, a remittance time-out could be a net positive for both the developing and the developed world. Remittances can have a questionable effect on development, distorting the value of the home currency and providing an incentive to emigrate. In richer countries, a remittance slowdown could mean that more money stays at home. If this translates into increased consumption or savings, it could ease the pain of a slumping domestic economy.

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