Remittances from the United States in Context

This Spotlight examines the growing impact that remittances from the United States are having in countries around the world, and especially in Latin America. Unless otherwise noted, this discussion measures remittances as the sum of "compensation of employees abroad," "workers' remittances" and "migrant' transfers" as reported by the International Monetary Fund. Read the definitions.

Click on the bullet points below for more information:

• Remittances are extremely difficult to measure.
• Remittances are an important source of income for many developing countries.
• Remittances are growing on both an absolute and a per migrant basis.
• Remittances from the United States are particularly important to Latin America and the Caribbean.
• The cost of sending remittances is a major loss of income for the developing world.
• U.S. policies have a powerful effect on the volume of remittances and the ways in which they are sent.

Remittances are extremely difficult to measure.

Migrants send money back to their country of origin in a variety of ways. Where available, they may use formal channels such as banks and money transfer services. In other instances they may use informal channels, carrying it home or sending cash and in-kind goods home with returning migrants. For a variety of reasons, remittances are extremely difficult to measure. On the one hand, official figures may underestimate the size of remittance flows because they fail to capture these informal transfers. However, over-counting occurs as well. Other types of monetary transfers — including illicit ones — cannot always be distinguished from remittances. Furthermore, remittances may also be transferred via a third country, complicating estimates of remittance data by the source and destination countries. Remittance figures, thus, are general estimates at best, but new estimates do demonstrate the enormous impact that remittances from the U.S. and elsewhere have on developing countries.

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Remittances are an important source of income for many developing countries.

According to the World Bank, $111 billion was remitted worldwide in 2001. Of this, about 65 percent went to developing countries, with half of that money going to countries considered to be "lower-middle income countries." For some countries, remittances are a major source of foreign exchange and are an important addition to their gross domestic product. For example, the United Nations reported that in 2000, remittances augmented GDP by over 10 percent for countries such as El Salvador, Eritrea, Jamaica, Jordan, Nicaragua, and Yemen.

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Remittances are growing on both an absolute and a per migrant basis.

Worldwide, remittances to developing countries increased from $54.6 billion in 1995 to $72.3 billion in 2001, representing a 32 percent increase over the six-year period. It is unknown how much of this increase is explained by a growth in total remittances and how much represents an increase in the proportion moving through formal channels. Remittances to Latin America in particular have grown quickly in recent years, accounting for 60 percent of worldwide growth in remittances in the past three years. Remittances to the region grew 17.6 percent in 2002, according to the Inter-American Development Bank.

According to the Pew Hispanic Center, estimated remittances to Central America per migrant in the U.S. were $1,260 per year in 2001, up from an average of $950 per year over the period 1995 to 2001. The estimated rate of growth of remittances per migrant for that period was 8.7 percent per year, which exceeds growth in overall per capita income in both the U.S. and Central America. Remarkably, this growth is continuing despite an economic downturn in the U.S. that has led to slowing income growth and rising unemployment among immigrants.

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Remittances from the United States are particularly important to Latin America and the Caribbean.

Because of the lack of disaggregated remittance data, it is impossible to know with great precision the final destination of remittances sent from the United States. We do know that the countries of Latin America and the Caribbean contribute half of the U.S. foreign-born population and receive almost one-third of the world's remittances. According to Inter-American Development Bank estimates, over three-quarters of remittances to Latin America and the Caribbean originate in the United States.

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The cost of sending remittances is a major loss of income for the developing world.

The cost of sending money home varies greatly from country to country and by the method used. The cost of transferring money can represent a significant loss to immigrants and their families. For example, the Inter-American Development bank estimates that the total cost of sending remittances to Latin America and the Caribbean reached $4 billion in 2002, or about 12.5 percent of the remittance total for the region. The Pew Hispanic Center has estimated that the total cost of the average remittance transfer ranges between 15 and 20 percent of the total. Latin American immigrants in particular pay a high percentage of their remittances in the form of fixed, pre-transfer fees because they tend to remit frequently and send small amounts in each transfer (an average of $200, sent seven times per year).(See article by Robert Suro.)

Competition is key to reducing remittance costs, and in many countries it has been inhibited by a lack of banks serving poor and rural populations, lack of confidence in formal channels because of graft, or costly financial services markets. In many cases, informal remittance channels reduce these costs and provide more efficient and trustworthy services than banks or formal money-sending services. New services being introduced by banks and credit unions have the potential to cut costs and introduce migrants and their families to the formal banking system. Citibank, Bank of America, and First Bank of the Americas, among others, offer remittance services that use ATM cards and charge less than major money-sending services. These companies have been forced to cut their fees in response to the increased competition; Western Union now charges $10 for any transaction to Mexico up to $1,000, less than 50 percent of what it charged in 1999.

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U.S. policies have a powerful effect on the volume of remittances and the ways in which they are sent.

Current U.S. policies that affect remittances include:

• Anti-money laundering and counter-terrorism financial regulations. Recorded official remittances to Pakistan from the U.S. increased from $80 million in 2000 to $779 million in 2002. Financial controls implemented after the September 11 attacks disrupted the informal but highly efficient "hawala" (transfer) network that many migrants used to send money home, leading them to switch to formal remittance channels. Remittances to Indonesia and the Philippines were also strongly affected by the new regulations.
• Consumer banking and identification policies. U.S. policy thus far allows banks to accept individual taxpayer identification numbers and foreign government identification documents (most notably, the Mexican matrícula consular) as valid identification when opening bank accounts. This has allowed banks to market their services to undocumented immigrants, intensifying competition in the remittance sending market.
• Immigrant inflows and legal status. The number of immigrants and temporary workers admitted to the U.S. is the single most important factor affecting remittances. Policies that change the legal status of migrants already living in the U.S. also affect remittances by influencing how much migrants earn and how long they stay in the United States. One such policy with a particularly important effect on remittances has been temporary protected status (TPS), which allows migrants who are in the U.S. at the time of a crisis or disaster in their home country to work in the U.S. until the situation improves. Current beneficiaries of TPS include El Salvador, Honduras, and Nicaragua, where remittances are a significant percentage of GDP.