Remittance refers to the portion of migrant income that, in the form of either funds or goods, flows back into the country of origin, primarily to support families back home.
The greater share of these largely monetary flows benefits developing countries. In the last few decades the volume of migrants' remittances worldwide has risen steadily (in nominal and relative terms) and currently represents a substantial source of revenue for many poor states.
How does the money flow?
From the use of banks, credit institutions or money transfer companies like Western Union and MoneyGram to the personal transportation of cash or goods during trips back home, various means exist for transferring remittances to the recipient country. Information concerning cross-border money flows is only available on funds sent through formal channels, as these are the only channels that national banks are able to monitor. Experts estimate that undocumented transactions via informal channels are, in fact, well above officially documented figures.
Informal methods of transferring money differ from country to country. In addition to the personal transport of funds, money can be sent through the mail or via a third party. One variant of a transfer system involving third parties is the professionally-run Hawala system in South and Southeast Asian countries. In this system, middlemen, so-called Hawaladars, residing in both source and recipient countries use a code to communicate a sum of money, which is then given to the payee in the country of origin, without the money actually being transferred. Instead of payments being made between both Hawaladars, the account is usually settled through other means of compensation. For migrants and their relatives back home, this method is advantageous for two reasons. First, it allows for an immediate transfer of funds to the home country without having to register the transaction officially. Unregistered channels are often pursued, either because undocumented immigrants generally do not have access to banks, or because many developing countries lack nationwide banking networks, making it difficult to transfer money to outlying areas.
The second reason for relying on such an informal channel is the lower cost. Money transfer via Hawala costs the remitter a mere 1 to 2% of the transaction sum, whereas banks charge an average of 7%, and Western Union up to 12%, in the form of commission or fees. The fixed base fee charged by money transfer companies is made even more disadvantageous by the fact that many migrants send money in small monthly instalments, on average US$200, instead of sending a higher amount annually. The unofficial niche markets are comprised of countless independent, small providers and can thereby cover a wide geographical radius. For example, a current study by the International Labour Organisation (ILO) estimates that, in Bangladesh, 40% of all remittances are transferred through Hawala.
Why do migrants remit?
It is difficult to explain migrants' motives for remitting, as few reliable sources of information on these migrants exist. Furthermore, the scope of family support varies greatly according to culture and the economic conditions in source and recipient communities.
Though three apparently separate motivating factors can be observed, in reality, these often overlap. The main driving force is often considered to be altruism, in other words, concern on the part of migrants toward family members still in the country of origin. It is still usually the case that only one family member migrates; spouses, children and parents are left behind and rely on the support of this migrant, who assumes the role of provider. Beyond the altruistic care of relatives, self-interest can also be a significant motive to remit. Family may, for example, look after any property the migrant has left behind, compensating them in this way for any remittances. Also, the migrant may hope to become the beneficiary of an inheritance. In addition to these two motives, an implicit agreement can exist between migrants and the relatives they leave behind. Relatives often cover the high cost of moving and settling abroad and are later repaid once the migrant has established himself in the destination country. This arrangement can be considered an informal loan agreement or as a kind of co-insurance. This theory follows the observation that financial assistance increases in cases of economic or natural crises back home. This anti-cyclical behaviour is supported by the findings of a Botswanan study showing that allowances to households with migration connections were considerably higher during periods of drought.
Which factors determine the remittance amounts?
A strong correlation can be drawn between a migrant's duration of stay abroad and the size of payments. Temporary migrants who leave their families in the country of origin tend to remit the highest sums relative to their incomes. Permanent emigrants, in contrast, generally migrate with their family members; over time, they have less and less contact to remaining relatives at home, which gradually results in reduced remittances. Residency permit status directly influences the amount remitted. A change in status from undocumented to legal often leads to a rise in the value of remittances, due to improved wage levels. However, this increase in remittances declines again as the migrants integrate themselves into the host society.
Gender and education level are sometimes considered factors that affect remittance amounts. Women, especially, are attributed with the tendency to provide stronger support to relatives back home. This hypothesis, however, cannot be generalised. A study of Filipino migrant behaviour, for example, drew a contrary conclusion and showed that men remit higher sums, because they are paid better wages.
With regard to educational background, it is often assumed that workers with lower qualifications send back a higher percentage of their (lower) incomes. This assumption is due to the fact that, as a rule, less qualified migrants only stay abroad temporarily, leaving their entire families behind to rely on their support (see above). Highly skilled migrants, on the other hand, tend to settle permanently in the host country, along with their dependents (spouses/children). For this reason, they could be expected to remit less. However, the highly skilled may owe greater debts to their families (parents/relatives) on account of higher education costs, which may lead them to repay the debt through higher remittances. Clear remittance patterns based on gender or education level are, therefore, not identifiable, because they vary from case to case and are dependent on the immigration and integration policies of host countries as well as the cultural backgrounds of the migrants and families in question.
Stefanie Hertlein studies Geography, Economic Policy and Ethnology at the University of Freiburg.
Florin Vadean is a member of the Migration Research Group at the Hamburg Institute of International Economics (HWWI), a Ph.D. candidate in economics at the University of Hamburg and a Research Fellow at the Research on Immigration and Integration in the Metropolis (RIIM), Vancouver, Canada.
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