Remittances : Transaction Costs, Determinants, And Informal Flows

Abstract

Recorded workers' remittances to developing countries have grown rapidly, to more than $100 billion in 2004, bringing increasing attention to these flows as a potential tool for development. But even these statistics are likely to significantly understate true remittances, as a large share is believed to flow through informal channels. Estimates of the importance of the informal sector vary widely, ranging from 35 percent to 250 percent of recorded flows. The primary motivation of the study is to develop the first empirical methodology to estimate informal flows. We use insights from the literature on shadow economies and empirically estimate informal remittances for more than 100 countries, using historical data on workers' remittances from the Balance of Payments (BOP), as well as data on migration, transaction costs, and various country characteristics. Our results imply that informal remittances amount to about 35-75 percent of official remittances to developing countries. There is significant regional variation: informal remittances to Sub-Saharan Africa and Eastern Europe and Central Asia are relatively high, while those to East Asia and the Pacific are relatively low. These estimates are supplemented with detailed household survey data on remittance receipts in a number of countries.Our results also shed light on the determinants of recorded remittances and the associated fees in the formal sector. We find that the stock of migrants in OECD countries is the primary determinant of remittances. In addition, money transfer fees and the presence of dual exchange rates reduce the share of remittances reported in national accounts. In turn, transaction costs are systematically related to concentration in the banking sector, lack of financial depth, and exchange rate volatility. There is also evidence that remittances are misrecorded in the BOP as "Errors and Omissions".

Remittances and public finances: Evidence from oil-price shocks

“…Inflowing remittances, just as any 4 Remittances are often transmitted in cash (through mailed envelopes) or via untraceable bank transfers. Freund and Spatafora (2005) López et al 2008). …”

“…The latter is the income earned by workers in economies where they are not resident (or from nonresident employers) and transfers is from residents of one economy to residents of another. Although some cross-country heterogeneity may exist in the quality of data, the general expectation is that these figures are likely to underestimate the true amount of remittances because a good share of these payments are done through informal channels (Freund and Spatafora 2005;Freund and Spatafora 2008). The data on total tax revenue and its structure comes from the International Center for Tax and Development.…”

Do Workers' Remittances Promote Financial Development ?

“…Officially recorded remittances are known to be measured with error. 5 Estimates of unrecorded remittances range from 20 to 200 percent of official statistics on remittances (Freund and Spatafora, 2005). Reverse causality is also a concern since better financial development might lead to larger measured remittances either because financial development enables remittance flows or because a larger percentage of remittances are measured when those remittances are channeled through formal financial institutions.…”

International Remittances and Income Inequality: An Empirical Investigation

“…9 The data available on our dependent and independent variables finally leaves us with a sample that covers 78 countries for the period 1970-2001. 10 7 For example, Freund and Spatafora (2005) estimated that informal remittances are equivalent to between 35 percent and 70 percent of the amount of oficial remittances. This difference is explained by the development of the local financial sector.…”