The widespread impacts of remittance flows Updated

Are remittances good or bad?

Assessing the impact of remittances is difficult. The receipt of remittances is not a random event. Households that receive remittances are likely to exhibit certain characteristics. For instance, they are more likely to have family members abroad and specific needs. As a result, it becomes cumbersome to separate the impact of remittances from that of emigration or other household traits (endogeneity).

Researchers have tried to cope with the challenge in various ways, such as using instrumental variable methods (using variables that do not explain the outcome of interest, but are highly correlated with remittances), exploiting natural experiments, and designing randomized controlled experiments. All these methods have limitations, including identifying valid instruments, financing costly large-scale randomized trials, and extrapolating the findings to other countries and contexts. Because of the distinct methodologies used and the differences in geographic and temporal settings in which the studies take place, conclusions about the pros and cons of remittance flows vary considerably.

What are some of the cons?

Concerns about the economic and social implications of remittance flows can be grouped according to the category of data used in the analysis. Some studies use individual or household level data, while others use country level data.

What are some of the pros?

Some more contentious impacts of remittances

While there is some consensus on the remittance impacts discussed above, there is much debate on the potential impact of remittances on other outcomes, including economic growth, poverty, or inequality. Some studies have found positive impacts of remittance flows on economic growth and poverty, while others remain skeptical. For example, a widely cited study concludes that remittances slow economic growth [7]. However, the study has been criticized for ignoring the intermediate impact of remittances on labor supply and capital formation. It is possible that slower-growing countries experience more outmigration and receive more remittance inflows. Once again, identifying the direction of causality remains an empirical challenge.

Some studies have also argued that remittance inflows reduce inequality by helping people in rural and poor areas. However, the evidence varies widely by country, along with selection into emigration. Remittances may worsen income inequality if international migration is more prevalent for the elite because the money inflows would be confined to those who are better-off, therefore exacerbating income inequality [8].

There is also debate on how remittances impact the environment. Focusing on Guatemala, some authors document how remittances contribute to a loss of forest cover by inducing remittance-receivers and returning migrants to expand agricultural activities [9]. Despite reducing poverty among lower-income households, remittances may expand the burning of solid fuel. In contrast, remittances may promote the use of cleaner energy sources among higher-income households.

While the state of the literature is emerging, of interest to many are the environmental impacts of remittances on recipient nations. There are numerous avenues by which remittances may impact carbon emissions and result in other environmental consequences. For example, by lifting incomes and elevating households into the middle class, remittances facilitate the purchase of automobiles and the consumption of goods and services that require the use of fossil fuels by those receiving the money flows. In an extensive study of Nepal (one of the top remittance-receiving nations when measured as receipts as a share of GDP), one study finds that rising remittances lowered CO2 emissions [10]. The authors speculate that rising energy shortages, along with widespread and lengthy power outages (and the rising electricity prices), have shifted preferences toward appliances and devices that use cleaner and more energy-efficient technologies—a shift facilitated by remittance inflows. The idea that, at least among the less destitute, remittances promote the use of cleaner energy sources has been reported in other countries as well. Such a finding would be predicted by the environmental Kuznets curve—the notion that rising incomes may lead to more pollution at first; however, at higher incomes, there is a turning point and remittances may result in less environmental degradation. This might explain the distinct conclusions of studies on this topic.

Given the diversity of outcomes with respect to the environmental impact of remittances in country-level studies, it is helpful to consider studies that consider multiple countries at once. One such study collects information from 127 countries over the 1971–2012 period and, using a longitudinal panel methodology, tests for the effects of remittances on greenhouse gas emissions [11]. The author concludes that, in the aggregate, remittances lower greenhouse gas emissions. There could be multiple reasons for this finding given what is known from micro-level studies documenting how remittances change household behavior. For example, it is known that remittances often raise household spending on healthcare and education, detracting from the consumption of goods and services that may be pollution-generating. Social remittances, the idea that individuals touched by migration and monetary remittances may acquire new information and learn new habits from their kin abroad, could also contribute to lower pollution levels.

In addition to their environmental impacts, recent research has examined the impact of remittances on crime, arriving at distinct conclusions. Some studies associate them with increases in white-collar crimes and intimate partner violence, allegedly driven by higher alcohol consumption and reduced employment among men [12]. Others document how, fearing being assaulted, remittance recipients appear to be more supportive of vigilantism and crime-fighting measures.

Some nuances: Level versus volatility and predictability

For the most part, the remittance literature has focused on the impact of remittance flows, paying much less attention to other aspects surrounding the receipt of the money inflows, such as their frequency, volatility, and uncertainty. Yet, the ultimate impacts of remittances depend not only on the amount of money received, but also on their regularity and predictability. Studies focusing on Mexico have found that increases in the volatility of remittance income raise the employment likelihood of men and women in receiving households, as well as the hours worked by employed women [13]. To the extent that men are more likely to be working full-time than women, the latter may be more likely to increase their work hours in response to increased remittance income volatility. In other words, female labor supply may be used as a buffer against increases in the volatility of remittance inflows.

Similarly, the decision to use remittance receipts for consumption or investment might depend in part on the regularity and predictability of remittance flows. Households that receive remittances on a predictable basis might be in a better position to coordinate their day-to-day expenditure and consumption needs with the receipt of remittances. In contrast, households that receive remittances more sporadically are more likely to view the inflows as transitory and, therefore, be less likely to include them in their ordinary consumption planning, saving the inflows instead. Studies for Mexico have found that increased uncertainty in remittance income raises household spending on asset accumulation. Hence, both the level and predictability of remittance inflows should receive full attention in the design of policies seeking to maximize the benefits from remittance inflows into developing economies.

Migration versus remittance effects

The impact of remittance flows is closely intertwined with that of migration. The motive for migrating can affect the propensity to remit and amounts remitted home. A way of distinguishing these impacts is to compare the effect of remittance flows for families with migrant household members with the impact of remittance flows in households with no emigrants but who nonetheless receive transfers from distant family members or friends [14]. When doing so, studies have confirmed the positive impact of remittances on the educational attainment of children and the ability of remittances to level the field by providing better educational opportunities for more disadvantaged children. Nevertheless, concerns about the imperfect portability of human capital from one country to another might persist. Specifically, the emigration of other family or community members might lower the incentives for young children to invest in an education at home if they foresee emigrating in the future.

Furthermore, it remains unclear if remittances compensate for the losses incurred due to the emigration of family members. Some studies conclude they do not, with parental health declines that are only minimally compensated by the remittances received or worse housing quality resulting from lack of upkeep, even if housing investments were stimulated by remittance inflows. Yet, in other cases, reductions in subjective well-being due to family emigration are found to be offset by the receipt of remittances.

Policies affecting remittance flows

A range of policies can encourage remittance sending and allow receiving countries to harness the most from such flows:

(i) Relaxing exchange and capital controls, as well as the operation of domestic banks overseas, to facilitate international transactions by emigrants to their home communities through banks and financial institutions.

(ii) Incentivizing the use of formal transfer systems, which can ensure safe transfers, increase transparency in transmission costs, and enable migrants and their families to build a relationship with formal intermediaries. Developing such relationships is key for financial literacy and for accessing credit for investing and asset accumulation purposes. One example of this type of policy is the Bangladesh Cash Incentive program, which rewards transfers into banks by adding 2.5% of the amount transferred.

(iii) Establishing the necessary institutional arrangements to educate, inform, and orient potential migrants before they emigrate to improve their well-being in the host country and facilitate the flow of remittance funds back home in a safe and productive manner.

(iv) Facilitating diversification in migrants’ destinations to diminish the volatility of remittance inflows.

(v) Reducing remitting costs, so that more of the flows go to the intended recipients. While average costs still vary widely (the costs of sending from Sub-Saharan Africa is double that of sending from South Asia) today's global average of about 6.3% is considerably lower than the 2011 average of 9% according to Remittances Prices Worldwide, the database maintained by the World Bank to track the costs of remitting in the various remittance corridors.

Carefully considering how immigration policy impacts migration and remittance flows. For example, first, immigration policies that facilitate the permanent settlement of migrants could strongly affect remittance flows, though the outcome may be ambiguous. On the one hand, legalizing the status of migrants can facilitate their travel back and forth between the home and host countries, allowing migrants to stay in touch with their families back home and facilitating the flow of remittances. On the other hand, remittance flows could drop if migrants no longer envision their migration as temporary and gradually lose touch with their families back home.

In addition, immigration policies that favor high- versus low-skilled migration can also have important consequences for remittance flows. For instance, it has been found that the sponsoring of family members is less likely to occur among high-income families and, overall, appears to be associated with lower remittance sending.

Finally, stringent immigration enforcement, as has occurred in the US since September 2011, can reduce the number of undocumented immigrants, restrict the cyclicality of migration flows, and limit employment opportunities for undocumented immigrants. In that vein, studies have shown how increased enforcement reduces the share of migrants sending money home [15]. However, legal immigrants tend to increase their money outflows enough to offset any reductions in remittances from undocumented immigrants.