Remittances: Transaction Costs, Determinants, and Informal Flows

By Caroline Freund, Nicola Spatafora. 2005

282 citations recorded by the source corpus.

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".

Subfields: Economics and Econometrics, Sociology and Political Science

View Paper: https://www.semanticscholar.org/paper/07d4107f394a1ad95c31f080e0c74efff8b5c685

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Citations in the corpus

Are Bilateral Remittances Countercyclical? (2011, background): “Indeed Freund and Spatafora (2005) find that it has a powerful effect.24 Figure 1 shows a plot of the relationship between the stock of immigrants and remittances.”
Migrants’ Remittances and Financial Development: Macro‐ and Micro‐Level Evidence of a Perverse Relationship (2013, background): “On the contrary, there is a consistent body of empirical evidence suggesting that migrants generally prefer to use informal channels or non-bank channels to transfer their remittances (Choucri, 1986; Brown, 1992, 1997; Maimbo, 2003, 2004; Freund and Spatafora, 2005).”
International Remittances and Income Inequality: An Empirical Investigation (2006, unknown): “17 Countries with a higher development of financial markets will allow an easier and cheaper transmission of international remittances (Freund and Spatafora, 2005); lower transaction costs will allow poorer households to receive remittances at earlier stages of migration history, compared to how lon”
The Determinants of Remittances: A Review of the Literature (2007, background): “Freund and Spatafora (2005) estimate that a doubling of the stock of migrants would lead to a 75 per cent increase in recorded remittances.”
African Economic Outlook 2012 (2012, background): “Up to 75% of the total remittances sent to Africa go informally, a much higher figure than for other continents (Freund and Spatafora, 2005).”
Determinants and Macroeconomic Impact of Remittances in Sub-Saharan Africa (2009, unknown): “The data were then adjusted according to the country-specific notes in the BOPSY, along the lines of Freund and Spatafora (2005) and Guiliano and Ruiz-Arranz (2005).”
Effect of Remittances on Poverty and Financial Development in Sub-Saharan Africa (2009, background): “Freund and Spatafora (2005) estimate that informal remittances to sub-Saharan Africa are relatively high at 45–65% of formal flows, compared to only about 5–20% in Latin America.”
Labor Supply, School Attendance, and Remittances from International Migration: The Case of El Salvador (2006, background): “Funkhouser (1997) notes that approximately 15% of the population emigrated between 1979 and 1989, mostly for political reasons.”