Dollars Without Borders

Between 2003 and 2008, on the back of a growing world economy, remittances more than doubled, reaching as much as $330 billion in 2008. Now, with the world's largest economies in steep decline, many fear that the flow of remittances will also take a hit, threatening the millions who depend on funds sent by relatives and friends working abroad to meet basic needs.

In fact, remittances are proving to be one of the more resilient pieces of the global economy in the downturn, and will likely play a large role in the economic development and recovery of many poor countries. Remittances provide the most tangible link between migration and development, a relationship that has only increased in importance since the crash. To ensure that these funds can move efficiently and easily around the globe, governments of rich and poor countries should attempt to make remittances as accessible and cheap as possible.

In the economic boom years of the last decade, the amount of remittances to developing countries grew to several times the size of official development aid. For many states, remittances are now the largest and least volatile source of foreign exchange, and for some countries -- such as Lesotho, Moldova, Tajikistan, and Tonga -- they exceed one-third of national income. Meanwhile, in many countries such as El Salvador and Nepal they help anchor the value of the national currency by bringing in the foreign currency required for financing imports and foreign debt. More locally, remittances provide funds for education and health expenses as well as capital for small businesses. In Sri Lanka, for example, the birth weight of children in remittance-recipient households is higher than that of children in other households.

Lant Pritchett, an economist at Harvard University, recently estimated that allowing 3,000 additional Bangladeshi workers into the United States would generate greater income gains than the annual income contribution of Grameen, the pioneering microfinance bank, to Bangladesh. Although private remittances cannot take the place of official aid efforts, this does suggest that an increase in remittance flows could be an effective way to continue development efforts in the face of shrinking national budgets.

Historically, remittances have tended to rise in times of financial crisis or natural disasters because migrants living abroad send more money to help their families back home. For example, remittance inflows increased to Mexico following its financial crisis in 1995, to the Philippines and Thailand after the Asian crash in 1997, and to Central America after Hurricane Mitch in 1998.

But today's global economic crisis is different. The world's wealthier countries are also suffering, which, in turn, is causing employment opportunities for migrant workers to disappear and their incomes to fall. For the first time since the 1980s, remittances to developing countries are expected to decline between seven and ten percent in 2009.

The anticipated drop, however, will not be as dramatic as many fear. Despite growing economic hardship in host countries, many workers are choosing to remain, both because immigration controls have made reentry more difficult and because income levels back home are even lower. In order to continue sending remittances, many migrants are accepting lower compensation, switching jobs, sharing accommodation with other migrants, and cutting back on living costs -- one meal saved in Dubai or New York is worth several in Mumbai or Mexico City.

A shift toward stricter immigration and labor policies means that a large number of these migrants are losing their legal status -- which means they are increasingly forced to rely on unofficial agents to send money, such as couriers; informal traders; bus drivers; airline crew; trading companies; and hawala brokers, who use a paperless remittance system. This is a reversal of a previous trend that began after 9/11, when many countries cracked down on informal remittance channels and pushed migrants to use banks and registered money-transfer operators. With the return to unofficial means, official data may be understating the true size of global remittance flows by as much as 10-50 percent.

As the crisis deepens, a lack of jobs will force some workers home. But they will return with savings that are typically recorded in official statistics as remittance inflows. During the Persian Gulf War in 1991, for example, a large number of Indian migrants came back home from the Gulf, driving up the amount of remittances to India. Migrants not only bring back savings but also business skills. Jordan's economy performed better than many observers had expected between 1991 and 1993 because of the return of relatively skilled workers from the Gulf.

Return migration in the current crisis appears to be negligible so far, but if it happens, the workers coming back home should be provided with help in setting up small businesses and reintegrating into their communities, instead of being the object of envy or fear of job competition.

In the global downturn, fluctuations in currency rates have led to some surprising increases in remittance levels -- especially between India and the United States. Remittances meant for consumption will likely fall as the U.S. dollar appreciates against the Indian rupee, because the same basket of local goods and services in India can now be purchased with fewer U.S. dollars. However, the remittances meant for investment -- or the purchase of goods with long-term payoffs -- will rise as the depreciation of the rupee produces a "sale effect" for housing and other assets in India.