PRESS RELEASE: World Bank Releases Report on Remittances in Latin America, Warns of Connection to Spread of US Economic Slowdown

Original press release available in English and Spanish.

WASHINGTON, April 8, 2008 – The World Bank today urged governments and remittance service providers to put in place a new set of measures to facilitate the flow of remittances to countries in Latin America that are threatened by the US economic slowdown. Some of the actions recommended include: increasing competition and transparency among service providers in order to reduce the costs of remittance transfers, and increasing access to banking services among migrants and recipients to enhance the development impact of remittances.

A new World Bank report entitled “Remittances and Development: Lessons from Latin America” shows that the money migrant workers send back to their home countries is linked to lower poverty levels and improvements in education and health indicators. Remittances also contribute to higher growth and investment and are associated with lower economic volatility. The size of remittances flows, however, could be compromised by the US economic slowdown, which increases the urgency of actions to facilitate remittances flows and to maximize their development impact.

“In 2007, remittances to Latin America amounted to almost USD 60 billion, making it the top recipient region in the developing world,” said Pamela Cox, World Bank vice president for Latin America and the Caribbean.

“The role of remittances in the region cannot be overlooked when they represent about 64 percent of foreign direct investment flows to the region. They help poor families increase their savings and keep children in school.”

Remittances to Latin America grew only 6 percent in 2007, compared to an annual average growth rate of 19 percent between 2000 and 2006. The authors observe that the slowdown of the US economy is putting the brakes on the flow of remittances to the region, which could potentially impact the ability of poor recipient households to deal with negative economic shocks, such as the recent increases in food prices.

“Although remittances are a private flow of money between two parties, policymakers and service providers can take an active role when it comes to improving the regulatory framework for facilitating remittance transfers,” said Pablo Fajnzylber, World Bank senior economist for Latin America and the Caribbean, and co-editor of the book.

“Reducing the cost of transfers is more important now than ever given the fall in remittances’ growth rates observed since 2007,” added Humberto López, World Bank lead economist for Central America, and co-editor of the publication. “In addition, linking remittances to financial services is crucial for improving the long-term impact of remittances on development.”

In order to address these challenges, Remittances and Development explores three main issues and makes the following specific recommendations:

1 – Developing the Banking Sector

Remittances have a positive impact on financial development in Latin America, but access to physical banking outlets is more limited than in other countries, and the costs of banking are higher in the region. In the case of Latin America, the large majority of remittances are sent through money transfer operators, with banks maintaining a relatively small share of the market.

Linking remittances to the provision of financial services is crucial for improving the long-term impact of remittances on development. To that end, the authors suggest that governments could create incentives for financial institutions to lower costs and tailor their products to meet the needs of migrants and their families.

Such efforts will increase the likelihood that migrants send their remittances through bank accounts, increasing the impact of remittances on local financial development. They also point out that governments could promote competition in the banking sector by minimizing the regulatory costs of opening branches and other outlets to serve these communities.

2 – Facilitating Remittance Flows

For migrants who send money home, remittance services are still expensive, with fees of up to 20 percent of the principal sent, depending on the size and type of the transfer, as well as on its origin and destination. Within this scope, regulatory concerns should be aimed at facilitating services at the lowest cost possible to as many users as possible.

The report recommends that governments and remittance service providers facilitate transparency through the collection and publication of comparative prices and conditions of service among different providers. The authors note the example of the Mexican Government, which introduced a Web portal where people can compare costs, levels of security and location of money transfer points to send money from the United States to Mexico: http://www.condusef.gob.mx. These efforts can be complemented by providing basic financial literacy to users.

The Bank also suggests that authorities in recipient countries enable the participation of a greater number of financial institutions in the remittances market by ensuring that there are no excessively burdensome regulatory constraints to their participation. In particular, savings and loans, credit unions and microfinance companies may be well positioned to act as disbursing agents, as their networks may be closer to the usual recipients of remittances than those of large commercial banks.

3 – Reducing Macroeconomic Effects

While remittances have a number of beneficial effects, they may lead to an appreciation of the exchange rate, potentially reducing the international competitiveness of the respective economies.

In this context, the report recommends that governments consider a menu of fiscal and microeconomic interventions to increase productivity and labor supply.

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