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Case Study 3

Global remittances, defined as international fund transfers by migrant workers to their home countries, have gained significant attention, with $414 billion remitted in 2009, primarily to developing nations. The costs associated with these transfers are a concern, prompting initiatives like the G8's '5x5' to reduce fees and improve efficiency. The World Bank's Remittance Prices Worldwide database monitors transaction costs, revealing an average fee of 8.89% as of 2010, with notable high charges in specific corridors.

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19 views6 pages

Case Study 3

Global remittances, defined as international fund transfers by migrant workers to their home countries, have gained significant attention, with $414 billion remitted in 2009, primarily to developing nations. The costs associated with these transfers are a concern, prompting initiatives like the G8's '5x5' to reduce fees and improve efficiency. The World Bank's Remittance Prices Worldwide database monitors transaction costs, revealing an average fee of 8.89% as of 2010, with notable high charges in specific corridors.

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MC3-1 © 2016, Pearson Education, Ltd. All rights reserved.

Global Remittances

• One area within the balance of payments which has received intense
interest in the past decade is that of remittances. The term remittance is
a bit tricky.
• According to the International Monetary Fund (IMF), remittances are
international transfers of funds sent by migrant workers from the country
where they are working to people, typically family members, in the
country from which they came.
• According to the IMF, a migrant is a person who comes to a country and
stays, or intends to stay, for a year or more.
• A brief overview of global remittances would include the followings:
– The World Bank estimates that $414 billion was remitted in 2009, with $316 billion of
that going to developing countries.
– These remittance transactions were made by more than 190 million people, roughly 3%
of the world’s population.
– The top remittance sending countries in 2009 were the United States, Saudi Arabia,
Switzerland, Russia, and Germany. Worldwide, the top recipient countries in 2009 (as
illustrated in Exhibit 1) were India, China, Mexico, the Philippines, and France.
MC3-2 © 2016, Pearson Education, Ltd. All rights reserved.
Exhibit A Global Remittances – World Inflows

MC3-3 © 2016, Pearson Education, Ltd. All rights reserved.


Global Remittances
• Remittances largely reflect the income which is earned by migrant or guest
workers in one country (source country) and then returned to families or
related parties in their home countries (receiving countries).
• The global economic recession of 2009 (largely a result of the global
financial crisis which began the previous year, however, resulted in reduced
remittance cash flows fell in 2009 but rebounded slightly in 2010.
• Most remittances are frequent small payments made through wire transfers
or a variety of informal channels (some even carried by hand).
• A number of organizations have focused on the costs borne by migrants in
transferring funds back to their home countries. The primary concern has
been excessive remittance charges – the imposition of what many consider
exploitive charges related to the transfer of these frequent small payments.
• The G8 countries, in an initiative entitled “5x5" – the reduction of transfer
costs from an average of 10% to 5% in 5 years – seek to use a variety of
market forces such as transparency to improve the efficiency and reduce
remittance prices globally.
• Remittance Prices Worldwide (RPW), initiated by the World Bank in
September 2008, is the primary body which is creating and sustaining a
global database which monitors remittance price activity across geographic
regions.
MC3-4 © 2016, Pearson Education, Ltd. All rights reserved.
Global Remittances

• The Remittance Prices Worldwide (RPW) database, updated twice per


year, collects data on the average cost of transactions conducted
along a variety of country corridors globally (country pairs).
• The most recent survey conducted in the second half of 2010 covered
200 individual corridors – remittances originating in 29 countries
received in 86 countries.
• The average cost of a migrant remittance transaction was 8.89% for
all corridors surveyed for the third quarter of 2010 (most recent data
available).
• The most recent survey found, assuming $200 per transfer, the
highest cost was that of the Tanzania-Kenya corridor (a remittance
from Tanzania to Kenya) at $47.27 per $200 transaction, a 23.6%
charge.

MC3-5 © 2016, Pearson Education, Ltd. All rights reserved.


Global Remittances: Case Questions

1. Where are remittances across borders


included within the balance of payments?
Are they current or financial account
components?

2. Under what conditions are remittances


significant contributors to the economy and
overall balance of payments?

3. What role do remittances play in the


economy of a country like Mexico?

MC3-6 © 2016, Pearson Education, Ltd. All rights reserved.

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