Remittances, or the money migrant workers send home to their countries of origin, are finally recovering to pre-crisis levels. In 2010, remittance flows to developing countries reached $325 billion, and they are poised to continue growing sustainably through 2013, according to the World Bank's latest Outlook for Remittance Flows 2011-13.
This is very good news for developing countries. For many of them, money sent by their migrant workers living abroad is a very important source of external financing -- sometimes even higher than the revenues obtained from oil exports or tourism. Thanks to the money being made in the U.S. by their relatives, millions of Mexican families can put food at their tables, just as Indians and Filipinos benefit the same way from the remittances sent from rich and oil producing countries in the Middle East.
But there is no time to be complacent. Individuals dependent on remittances are not out of the woods yet. For example, remittance flows to Latin America and the Caribbean, as well as to Eastern Europe and Central Asia, remained almost flat in 2010 because of the economic troubles in the U.S. and Western Europe. And although these flows started growing again in the first quarter of 2011, threats to the recovery remain.
One of them is currency appreciation, which tends to decrease the purchasing power of remittances. What this means is that when local currencies gain value against the U.S. dollar, migrants have to send more money in dollars to simply maintain the purchasing power of their families back home. So while remittances grew 5.6 percent in U.S. dollar terms in 2010, they only grew by 3.9 percent after accounting for exchange rate changes, and fell by 2.7 percent after adjusting for inflation. Latin America and the Caribbean has been one of the most affected regions, along with South Asia. Just to give an example, the currency of Mexico appreciated by 22 percent relative to the U.S. dollar between March 2009 and March 2011, and India's by 14 percent.
At a time of currency appreciation in many large developing countries, it is crucial to reduce the cost of sending money back home. Intermediation costs for sending US$200 from a source country vary from $13 to South Asia and $14 to Latin America to the incredibly expensive $23 to Sub-Saharan Africa.
Remittance flows are sometimes the most important source of income that families in developing countries can rely on. Unless the transfer costs can be reduced -- by expanding the market to post offices and mobile phone companies, for instance -- their impact on reducing poverty will not reach its full potential.
This blog was originally posted on the World Bank Institute Growth and Crisis website.