Remittance facts of the day

The FT has a very good exploration of the importance of remittances. It has now overtaken FDI as the largest channel of cross-border capital flows into emerging economies. The World Bank estimates $689 bn in remittance transfers by 270 million migrants this year.

Interesting graphic about India, the largest recipient of remittances - $69 bn in 2017, or 2.7% of GDP.

Remittances are considered a stable source of revenues, thereby making them an automatic stabiliser for the external account.

A less discussed feature is that perhaps remittances have among the highest multiplier of any inflows. Remittances are largely sent back by breadwinners who have migrated in search for better opportunities, and a significant share of their transfers are therefore most likely to be spent. In fact, this would be especially the case with remittances from Middle East, in case of India, given the profile of those working there. 

Notwithstanding its poverty alleviation effects, in the aggregate, there is little evidence of remittances being good for economic growth. On the contrary, there is evidence that remittances contribute to appreciation of exchange rate, and consequent Dutch disease, and is also correlated with making governments less responsive to citizen's needs. 

Large inflows allow governments to be less responsive to the needs of society. The reasoning is simple: families that receive remittances are better insulated from economic shocks and are less motivated to demand change from their governments; government in turn feels less obligated to be accountable to its citizens.

There are also examples of how remittance spawn unproductive investments in large houses etc.

Given all this, a high value global development imperative would be to lower the prevailing prohibitive costs of 7-10% associated with global cross-border money transfers. Even a 1 percentage points reduction puts $7 bn in the pockets of remitters!

The critical drivers of cost are cash handling at both sender and recipient sides, regulatory restrictions especially on the anti-money laundering (AML) side, and anti-competitive behaviour by entrenched firms. The tightening AML regulations in the developed countries have had the effect of closing down several correspondent banking relationships that western financial institutions have had with developing country partners. The number of active correspondent banking relationships fell 16% in the six years to 2018, even as remittance flows multiplied. The effect has been to increase the costs associated with cross-border transfers. 

Fintech has long been considered an important disruption opportunity in this market. But there are limits to how much fintech can be of help with addressing the three critical cost-drivers. More on it in a latter post.

Given the large remittance flows into India, and especially from Middle East, which include large volumes of smaller transfers, and also given the fintech enabling environment in the country, it is surprising that no such fintech disruptor has emerged from the country. One more example of how beyond copy-cat technnovation, the Indian start-up industry has struggled with creating genuine disruptors.