Remittances and vulnerability in developing countries: Results from a new dataset on remittances from Italy

Giulia Bettin, Andrea F Presbitero, Nikola Spatafora 10 February 2014

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Remittances from migrant workers currently represent one of the most important financial flows to developing countries. They can play an important role in pulling millions of families out of poverty. It is therefore critical to identify the key factors affecting remittances, as well as the barriers to these flows (Beck and Martinez Peria 2009 ). In particular, it is important to understand how remittances depend on macroeconomic conditions in the migrants’ host country and country of origin, and how they were affected by the global financial crisis.

Remittances: Global trends

Remittances to developing countries in 2013 stood at more than $410 billion – more than three times the size of official development assistance (World Bank 2013). Remittances have proved much less volatile than international capital flows (bank loans, portfolio investment, and FDI) during the recent global financial crisis. In absolute terms, the largest amounts of remittances flow to large countries – India, China, and The Philippines. However, some small economies receive far more remittances relative to their GDP – in some cases, the ratio exceeds 25%.

Many open questions

Do these remittances play an active role in promoting growth and reducing the vulnerabilities of developing countries? The issue is topical, especially given the large macroeconomic shocks they have faced in recent years (Essers 2013). And how are remittances affected by, and how do they influence, key structural conditions in the source and recipient economy, including the degree of financial development?

There already exists a voluminous theoretical and empirical literature on these issues.1 However, it remains inconclusive, largely owing to limited data, as well as problems in establishing the direction of causality.

A new dataset

In a recent paper (Bettin et al. 2014), we use a rich new dataset from the Bank of Italy, which provides bilateral information on remittance flows disaggregated across 103 Italian source provinces and 107 recipient countries, allowing us to analyse in detail the characteristics and determinants of remittances.2

Overall, remittances from Italy are significant – they doubled between 2005 and 2011, reaching almost €7 billion (Figure 1), despite the slowdown due to the 2008–2010 crisis. This trend reflects the increase in the foreign-born population, which reached 4 million by the end of 2011 (Istat 2013).

Figure 1. Remittances from Italy and the stock of foreign residents, 2005–2011

Source: Authors’ estimates, based on data from the Bank of Italy.

Remittances and the business cycle: Cyclical or anticyclical?

We use the above data to analyse how remittances respond to the economic cycles in the source and in the recipient economy. One key result is that remittances act as a macroeconomic stabiliser in the recipient country (Figure 2). Remittance flows are countercyclical with respect to income and output in recipient countries, and in particular increase in response to exogenous shocks – adverse natural disasters, conflicts, terms-of-trade deteriorations – to which developing countries are particularly vulnerable.

Figure 2. Determinants of remittances

Source: Authors’ estimates, based on data from the Bank of Italy.
Notes: The Figure illustrates the percentage change in remittances in response to a 1% change in some of their determinants. The economic cycle is expressed as the logarithm of the ratio between actual and potential GDP. Financial development in the source Italian province is expressed as the logarithm of the number of provincial bank branches per thousand inhabitants. Financial development in the recipient country is expressed as the logarithm of credit to the private sector as a percentage of GDP.

The analysis also shows that remittances are procyclical with respect to the macroeconomic situation in the source Italian province. That said, 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 anticyclical effect stemming from the output contraction in the recipient country prevails.

Remittances and financial development

A second distinctive aspect of our work is the analysis of the link between remittances and the degree of financial development. The results show a negative correlation between remittances and financial development in the recipient country (Figure 2). Remittances represent an important alternative source of capital, and can be a key element in reducing the financial constraints faced by millions in developing countries.

In addition, remittances are positively correlated 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 to developing countries (see also Freund and Spatafora 2008, Beck et al. 2009, and Clemens and Ogden 2013). These results are in line with the goal of international institutions and G20 governments of reducing the average cost of remittances to 5% in the period 2009–2014.3

In conclusion, remittances are less volatile than other types of international capital flows, and contribute significantly to macroeconomic stability in the recipient country. Efforts to reduce barriers to remittance flows will therefore prove critical to reducing the vulnerability of the world’s poorest economies to external shocks.

Editor’s note: The views expressed are those of the authors and do not represent those of the IMF and the World Bank.

References

Beck, T and M S Martinez Peria (2009), “What explains the cost of remittances?”, VoxEU.org, 28 September.

Bettin, G, A F Presbitero, and N Spatafora (2014), “Remittances and Vulnerability in Developing Countries”, IMF Working Paper 14/13.

Clemens, M and Ogden T (2013), “Migration as a Strategy for Household Finance: A Research Agenda on Remittances, Payments, and Development”, Financial Access Initiative Working Paper 10/2013, New York University.

Essers, D (2013), “Developing country vulnerability in light of the global financial crisis: Shock therapy?”, Review of Development Finance, 3: 61–83.

Freund, C and N Spatafora (2008), “Remittances: Transaction Costs, Determinants, and Informal Flows”, Journal of Development Economics, 86: 356–366.

Istat (2013), “La popolazione straniera residente in Italia – Bilancio demografico”.

Rapoport, H and F Docquier (2006), “The economics of migrants’ remittances”, in S Kolm and J Mercier Ythier (eds.), Handbook on the Economics of Giving, Altruism and Reciprocity, 2, Elsevier: 1135–1198.

Singh, R J, M Haacker, K-w Lee, and M Le Goff (2011), “Determinants and macroeconomic impact of remittances in sub-saharan Africa”, Journal of African Economies, 20(2): 312–340.

World Bank (2013), “Migration and Remittance Flows: Recent Trends and Outlook, 2013–2016”, Migration and Development Brief, 21, October.

Yang, D (2008), “Coping with disaster: The impact of hurricanes on international financial flows, 1970–2002”, BE Journal of Economic Analysis & Policy, 8(1).


1 See for instance Rapoport and Docquier (2006), Yang (2008), and Singh et al. (2011).

2 The data cover all remittances sent through official channels (money transfer operators, banks, and the Italian Post Office), but exclude those sent through informal channels.

3 See the final document of the Summit of the G8 Heads of State, held in L’Aquila in June 2009.

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Topics:  Development Migration

Tags:  Italy, migration, global financial crisis, financial development, Remittances

Assistant Professor in Economics, Università Politecnica delle Marche

Andrea F Presbitero

Economist, International Monetary Fund; Assistant Professor (on leave), Università Politecnica delle Marche

Nikola Spatafora

Lead Research Economist for East Asia & the Pacific, World Bank