Remittances: Transaction Costs, Determinants, and Informal Flows

42 Pages Posted: 21 Sep 2005

See all articles by Caroline L. Freund

Caroline L. Freund

World Bank - Macro, Trade and Investment

Nicola Spatafora

International Monetary Fund (IMF)

Date Written: August 2005

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 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.

Suggested Citation

Freund, Caroline L. and Spatafora, Nikola, Remittances: Transaction Costs, Determinants, and Informal Flows (August 2005). World Bank Policy Research Working Paper No. 3704. Available at SSRN: https://ssrn.com/abstract=803667

Caroline L. Freund (Contact Author)

World Bank - Macro, Trade and Investment ( email )

1818 H Street, N.W.
MC3-329
Washington, DC 20433
United States
(202)458-0847 (Phone)

HOME PAGE: http://econ.worldbank.org/staff/cfreund

Nikola Spatafora

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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