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Remittances : transaction costs, determinants, and informal flows

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  • Freund, Caroline
  • Spatafora, Nikola

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 total remittances. The primary motivation of the authors is to develop the first empirical methodology to estimate informal flows. They use insights from the literature onshadow economies and empirically estimate informal remittances for more than 100 countries using historical data on the balance of payments (BOP), migration, transaction costs, and country characteristics. Their 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. The results also shed light on the determinants of recorded remittances and the associated fees in the formal sector. The authors 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."

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3704.

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Date of creation: 01 Sep 2005
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Handle: RePEc:wbk:wbrwps:3704

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Related research

Keywords: Economic Theory&Research; Poverty Assessment; Economic Conditions and Volatility; Environmental Economics&Policies; Fiscal&Monetary Policy;

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References

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  1. Mohammed El Qorchi & Samuel Munzele Maimbo & John F. Wilson, 2003. "Informal Funds Transfer Systems," IMF Occasional Papers 222, International Monetary Fund.
  2. repec:idb:brikps:7499 is not listed on IDEAS
  3. Samir Jahjah & Ralph Chami & Connel Fullenkamp, 2003. "Are Immigrant Remittance Flows a Source of Capital for Development," IMF Working Papers 03/189, International Monetary Fund.
  4. Philip Cagan, 1958. "The Demand for Currency Relative to Total Money Supply," NBER Chapters, in: The Demand for Currency Relative to Total Money Supply, pages 1-37 National Bureau of Economic Research, Inc.
  5. Thomas, Jim, 1999. "Quantifying the Black Economy: 'Measurement without Theory' Yet Again?," Economic Journal, Royal Economic Society, vol. 109(456), pages F381-89, June.
  6. Ravallion, Martin, 2001. "Measuring aggregate welfare in developing countries - How well do national accounts and surveys agree?," Policy Research Working Paper Series 2665, The World Bank.
  7. Phillip Cagan, 1958. "The Demand for Currency Relative to the Total Money Supply," Journal of Political Economy, University of Chicago Press, vol. 66, pages 303.
  8. Dean Yang, 2004. "International Migration, Human Capital, and Entrepreneurship: Evidence from Philippine Migrants’ Exchange Rate Shocks," Working Papers 531, Research Seminar in International Economics, University of Michigan.
  9. de Luna Martinez, Jose, 2005. "Workers'remittances to developing countries : a survey with central banks on selected public policy issues," Policy Research Working Paper Series 3638, The World Bank.
  10. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
  11. Philip Cagan, 1958. "The Demand for Currency Relative to Total Money Supply," NBER Books, National Bureau of Economic Research, Inc, number caga58-1, May.
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