Blog Post

The cost of remittances

Remittances flows are very important for developing countries. In 2009 the G8 pledged to reduce the cost of remittances to 5%, a commitment that was endorsed by the G20 in 2011 and 2014, and included in the UN’s Sustainable Development Goals in 2015. What is the cost today, and what are economists’ suggestions to reduce it?

By: Date: April 30, 2018 Topic: Global Economics & Governance

Stephen Cecchetti and Kim Schoenholtz document the stubbornly high cost of remittances, and look at avenues for cost reduction. Today, remittance flows are triple what they were in 2000 and five times what they were in 1990. Furthermore, the economic importance of inward remittances has increased for low- and middle-income countries, rising from an average of 1.2% of GDP in 1990 to 1.6% of GDP today. However, costs have trended lower only gradually, and with considerable differences across types of transfer agents and across sender countries (see figure below).

While the direct cost is borne by the migrant senders and their family recipients, the burden also falls on poor countries as a whole because remittances enhance growth in poor countries by providing alternative means for financing investment where transactions costs are high. Cecchetti and Schoenholtz believe that there are two major mechanisms for reducing costs: consumer education (about the cost of alternatives available) and competition. Expanding mobile technology is also helping to displace banks, and squeeze remittance costs.

The importance of competition also stems from an early 2009 paper by Thorsten Beck and Maria Soledad Martinez Peria, who analysed published data on remittance fees across 119 corridors from 13 sending to 60 receiving countries – linking them to an array of corridor-specific variables, sending country characteristics, and receiving country characteristics.

Across all corridors and all providers, remittance costs averaged 10.2% – and the average cost among banks was higher than the average for money-transfer operators. Relating remittance fees on the corridor level to an array of corridor-specific variables, sending country characteristics, and receiving country characteristics, they found that the number of migrants was statistically and economically significantly associated with lower average fees across corridors.

This seemed to suggest an important volume effect through scale economies and/or higher competition in a larger market. Corridors with higher income per capita in both the sending and receiving country exhibited – on average – higher costs, which could reflect higher costs of non-tradable goods, such as services, in general. There was strong evidence that competition does matter, as corridors with a larger number of providers exhibited lower fees and bank competition in the receiving country seemed to be negatively associated with the cost of sending remittances. Finally, they did not find evidence that remittance-senders’ literacy matters.

A 2014 paper by Bettin, Presbitero and Spatafora highlights the importance of financial development. They use a new dataset from the Bank of Italy, which provides bilateral information on remittance flows disaggregated across 103 Italian source provinces and 107 recipient countries.

One key result is that remittances are countercyclical with respect to income and output in recipient countries – in particular, increasing in response to exogenous shocks to which developing countries are particularly vulnerable – and procyclical with respect to the macroeconomic situation in the source Italian province. On balance, if the source and the recipient economy are exposed to negative shocks of the same magnitude (for instance, as a result of the global crisis), the anti-cyclical effect stemming from the output contraction in the recipient country prevails.

A second results show a negative correlation between remittances and financial development in the recipient country and a positive correlation with the degree of development of the banking system in the source economy. Lower transaction costs and better access to financial services by immigrants should therefore represent a key element of any policy to encourage remittances.

Doug King at the Federal Reserve Board of Atlanta looks at cost and accessibility of remittances originating from the United States with a focus on the Mexico corridor. The underlying question for the paper is whether the passage in 2010 of the Dodd-Frank Act did alter the landscape of remittances, through section 1073, which created new protections for US consumers sending money abroad.

The paper thus examines how the implementation of the 1073 rules changed the environment for low-value remittance transfers ($200 or less) in the United States, and looks at how these changes have affected the cost of remittance transfers that originate from the United States and travel the United States-Mexico remittance corridor, which accounts for nearly 20% of all US remittances. King concludes that there is no evidence that the issuance in 2012 of section 1073 caused consumer prices of low-value remittance transfers to rise. In fact, the emergence of new service providers and business models, the growth of e-commerce and mobile commerce channels, and increased pricing transparency seem to have actually given consumers access to lower-priced remittance options.

Martin Namaska focuses on Africa, the most expensive continent to send remittances to. He cites research suggesting that digitising the remittance value chain from the sender to the receiver and removing dependency on agents will help reduce the transaction costs of sending money to Africa. Mobile phone technology, mobile money, digital currencies and cryptocurrencies, distributed ledger technology, electronic identification, verification and cloud technology have the capacity to technically make cross-border payments negligible in cost, instant and auditable.

Taking the UK and Africa as an example, Namaska argues that £100 million could be saved each year in transaction costs if people switched to sending money digitally to Africa. If the cost of sending money to Africa was to meet the UN Sustainable Development Goals (SDGs) target of 3% by 2030, then over £300 million a year would be saved. The development of regional automated clearing houses in Africa also presents a channel for improving the efficiency and reducing the cost of low-value cross-border transfers into Africa. But improved trust and comfort with digital money will be required before new technology can reach its full potential and reduce costs.

This is why no single technology can be applied to fix the remittance challenge in Africa: it would be difficult to imagine progress without corresponding financial sector reform, corporate governance and anticorruption efforts. African governments, development agencies and service providers must collaborate to create complete systems that reduce both the risks and costs associated with money transfers.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read about event More on this topic
 

Past Event

Past Event

Academic lecture: International technology competition

Bruegel Annual Meetings, Day 3 - On the final day of the Annual Meetings, our Director Guntram Wolf sits with Keyu Jin to discuss international competition policy.

Speakers: Keyu Jin, J. Scott Marcus and Guntram B. Wolff Topic: Innovation & Competition Policy Location: Palais des Académies, Rue Ducale 1, Brussels Date: September 3, 2021
Read article Download PDF More on this topic
 

Working Paper

Stability of collusion and quality differentiation: a Nash bargaining approach

How do incentives to collude depend on how asymmetric firms are? For low levels of differentiation, an increase in quality difference makes collusion less stable. The opposite holds for high levels of differentiation.

By: Thanos Athanasopoulos, Burak Dindaroglu and Georgios Petropoulos Topic: Innovation & Competition Policy Date: June 15, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

New kid in the playground: China's antitrust push

How is China’s antitrust push being weaponised to counter western sanctions?

By: The Sound of Economics Topic: Global Economics & Governance Date: May 12, 2021
Read article Download PDF More on this topic More by this author
 

Working Paper

Research and innovation policies and productivity growth

Can research and innovation policies power growth? The answer currently can only be a timid yes. Too little is known of what drives the actual effects of R&I policies.

By: Reinhilde Veugelers Topic: Innovation & Competition Policy Date: May 10, 2021
Read about event More on this topic
 

Past Event

Past Event

Declining competition: a transatlantic challenge

Join us for a discussion of transatlantic competition with Kristalina Georgieva, Margrethe Vestager and Amy Klobuchar among others.

Speakers: Romain Duval, Kristalina Georgieva, Greg Ip, Amy Klobuchar, Nancy Rose, Tommaso Valletti, Margrethe Vestager, David Wessel and Guntram B. Wolff Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 15, 2021
Read article More on this topic
 

Blog Post

Europe is losing competitiveness in global value chains while China surges

The European Union owes much of its economic weight to its regional value chain and integration into the global value chain. But the EU’s global value chain role is shrinking, and while EU trade integration with China is increasing, it is mainly to China’s benefit, undermining the EU’s external competitiveness.

By: Alicia García-Herrero and David Martínez Turégano Topic: Global Economics & Governance Date: November 27, 2020
Read about event More on this topic
 

Past Event

Past Event

Digital Platforms, Regulation and Competition: What's next for Europe?

Will the new rules of the internet go far enough for consumers and creators? Should we regulate platforms or will a code of conduct suffice?

Speakers: Diane Coyle, Jorge Padilla, Georgios Petropoulos and Alex A. Saliba Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: November 26, 2020
Read article Download PDF More on this topic
 

Working Paper

Digital platforms and antitrust

The market power of online platforms raises concerns that they may engage in anti-competitive practices, but traditional (ex-post) antitrust intervention will be less effective in markets driven by network effects unless it is combined with a proper (ex-ante) regulatory framework. Intervention should not reduce value creation, should focus on fair sharing of value, and should eliminate incentives for anti-competitive strategies.

By: Geoffrey Parker, Georgios Petropoulos and Marshall Van Alstyne Topic: Innovation & Competition Policy Date: November 23, 2020
Read about event More on this topic
 

Past Event

Past Event

How to keep a competitive environment while engaging with non market economies?

How can we ensure fair competition between European firms and Chinese state-backed players?

Speakers: Julia Anderson, Helge Berger, Michiel Boots, Alicia García-Herrero, Carles Esteva Mosso, Frédéric Jenny, Georgios Petropoulos, Cian Ruane, Hylke Vandenbussche and Guntram B. Wolff Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: November 19, 2020
Read article More on this topic More by this author
 

Blog Post

Not all foreign investment is welcome in Europe

A new plan to tackle foreign subsidies would empower the European Commission to investigate foreign investments in the European Union, with Chinese investment particularly in the spotlight. This increased scrutiny could deter some investors. Overall however, fairer competition is worth some lost opportunities.

By: Julia Anderson Topic: Global Economics & Governance Date: November 10, 2020
Read article More on this topic More by this author
 

Podcast

Podcast

The impact of Covid-19 on emerging markets with Barry Eichengreen

Without a robust healthcare system and lack of medical equipment, emerging market economies are vulnerable to the current COVID-19 pandemic. How can developed countries help tackle the issue? Is international cooperation more needed than ever? This week, Giuseppe Porcaro and Guntram Wolff are joined by Barry Eichengreen to discuss the impact of COVID-19 on emerging markets.

By: The Sound of Economics Topic: Global Economics & Governance Date: April 29, 2020
Read about event More on this topic
 

Past Event

Past Event

The Sound of Economics Live - The Brussels effect: How the European Union rules the world

This was a live recording of an episode of the Sound of Economics, Bruegel's podcast series. The discussion centered around the book of Anu Bradford, The Brussels Effect.

Speakers: Anu Bradford, Ashoka Mody, Giuseppe Porcaro and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 3, 2020
Load more posts