Money Sent Home by Migrants Buffers Income Shocks

IMF Blog, February 28, 2018

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Worldwide, 250 million people, or 3 percent of the global population, live outside their country of birth.
In 2015, migrants sent home $441 billion – almost three times the total value of official development assistance.
About 45 percent of these remittances flow from advanced economies to emerging market and developing economies.
Photo caption: Credit Singapore, Singapore - September, 23th 2012: Indian people are standing outside of Western Union bank office for opening hour. Capture is taking in Little India of Singapore. Western Union, Singapore: In 2015, migrants sent home $441 billion – almost three times the total value of official development assistance (photo: iStock by GettyImages).

Poorer countries are often weakly integrated into global markets and cannot rely on borrowing and lending in capital markets to smooth consumption.
The October 2017 World Economic Outlook study calculates the extent to which remittances can fulfill the role of smoothing income shocks, under what circumstances, and with what country characteristics.
Recipients in developing countries often do not have bank accounts or access to credit, limiting domestic mechanisms for smoothing (example: a coffee farmer in Ethiopia cannot easily borrow when coffee prices fall).

Remittances are the least volatile component of balance-of-payments inflows.
Volatility of the current account is significantly lower for countries receiving high net remittances than for countries without significant remittances.

On a broad basis across countries, about 30 percent of income variation is not reflected in consumption or is smoothed, consistent with partial risk-sharing.
Interpretation: for any extra dollar of income that is lost in the home country, consumption falls by only 70 cents because of consumption-smoothing.
Of the income variation that is smoothed, about 27 percent is due to remittances.
The 27 percent estimate holds regardless of whether a country receives a high or a low level of remittances and regardless of the extent to which the country is financially integrated.
The smoothing effect can be somewhat larger as a proportion of the total smoothed component during major country-specific financial crises.
The consumption-smoothing effect is more pronounced for commodity-exporting countries, especially during periods of low commodity prices.

Remittances act like a global insurance policy for economic shocks.
Measures that promote remittances, preserve correspondent banking relationships, and reduce the cost of remittances can significantly enhance worldwide risk-sharing – making everyone better off.

Source: Money Sent Home by Migrants Buffers Income Shocks, Kimberly Beaton and Zsoka Koczan, February 28, 2018 (IMF blog).