2.1 Remittance Defined
Each year, the IMF (International Monetary Fund) publishes Balance of Payments Statistics Yearbook, which gives the three streams of monetary transfers flowing into
countries. These are workers’ remittances, compensation of employees and migrant transfers and their sum is what the IMF uses to calculate the remittance flow (Baruah, 2007).
Remittances are broadly defined as the monetary transfers that a migrant makes to the country of origin and this paper is limited to the monetary transfers of Taiwan migrants.
It is widely acknowledged by scholars and organizations such as The World Bank and IMF that procedures, definitions, policies and collection of information have been vague and difficult to obtain. In September of 2008, the IMF released a 108 page guide called,
INTERNATIONAL TRANSACTIONS IN REMITTANCES: GUIDE FOR COMPILERS AND USERS, to help countries define remittance and help shape the way data is collected and reported.
Remittances generate both micro and macroeconomic effects. In microeconomic terms, remittances:
• make an important welfare contribution to the receiving household and often provide emergency stopgap monies;
• tend to increase during an economic downturn or following natural disasters;
• improve the standard of living through funds that are typically
• Invested in human and social capital (e.g., health care, nutrition, education) and in building assets (e.g., real estate, business, savings); and
• Generate ripple effects that impact the extended family and community beyond the receiving households, due in part to the increased consumption.
In macroeconomic terms, remittances:
• provide a stable flow of funds that is often counter-cyclical (they increase during times of economic downturn);
• offer an important source of foreign exchange for many countries; and
• create upward pressure on the value of the local currency in cases of high inflows of remittances.
(International Fund for Agricultural Development, 2006)
2.2 How Does Remittance Work?
The remittance process involves multiple money transfer actors: the money transfer company, the agent that the company contracts to sell remittance transfers, the agent that provides the distribution on the receiving side, and the financial institution used by the
money transfer company to make transactions. Thus, in order to guarantee the transmission of money, data and money streams need to flow from a point of sale into a point of delivery, passing through a series of stages and players that ensure the success of the remittance (Orozco D. M., 2004).
An agent typically collects a commission from the fee charged to the customer in the transaction. Usually, there is also a fee added to cover the cost of currency exchange risk.
The cost structure of a money transfer business thus depends on the number of agent contracts and the commissions paid to each or in the case of firms that dispatch remittances from their own offices or branches, the costs of maintaining and staffing those establishments.
In some cases, expanding the number of company-agent agreements to cover a large geographic area may lead to an increase in costs. Also, agents may bargain for higher commissions if their business becomes a magnet for remittance transfers. One method that agents might employ to increase their commissions is to take advantage of a profitable foreign exchange differential by bargaining for a percent of the differential instead of the fee.
Remittances can be sent and received at widely different types of establishments.
Formal remittance economy involves MTOs (i.e. include Western Union, Money-gram, and Foreign Exchange Bureaus), commercial banks, and credit unions among others. For example, money dispatched by an agent for a wire transfer service operating out of a butcher shop in Ireland might be picked up at a bank in Taipei. Recipient country distributors also play an important role in pricing and in defining the nature of the competitive landscape. In many cases, distribution agents have agreements with more than one company. Agents thus compete to attract companies to utilize their distribution networks, and in doing so also influence pricing. They charge a commission on the fee and exchange rate charges; should these players raise their commissions, costs to customers would increase, too (Maumbe &
Owei, 2006).
Moreover, banks also play a direct and indirect role in money transfers, not simply by functioning as agents, but also because they serve as intermediaries; they operate as
depositories for the money transfer companies and distributor agents. Banks likewise charge to keep money deposited in an account owned by the company or distributing agent. If a bank raises the cost for the deposit transaction, the company ultimately will pass on the costs to the sender (Orozco D. M., 2004).
2.3 Formal vs. Informal
Remittances can be sent through either formal or informal channels. We define informal remittances as money transfer services that do not involve formal contracts and hence are unlikely to be recorded in national accounts. Formal channels include money transfer services offered by banks, post office, non-bank financial institutions, foreign exchange bureaus, and money transfer operators (MTO’s) like Western Union and MoneyGram (Baruah, 2007). Informal channels include cash transfers based on personal
relationships, carried by unofficial courier companies, friends or relatives. This channel, known as “underground banking” and often operates on both sides of the law.
2.4 Scale of Global Remittance
Although it is widely acknowledged that the global flows of remittances are
increasing, a reliable estimate of the country-to-country flows, and consequently of the global value of remittances, remains elusive. Officially reported statistics on remittances seriously underestimate total flows. Migrants use various methods to remit their money and many transfers are informal and unrecorded. But even for those transfers made through formal channels and recorded, there are incompatibilities and inconsistencies among the available data sets that impede data disaggregation, comparative analysis and in-depth research (Orozco, 2007).
The latest World Bank data reveals that remittance flows to developing countries reached $251billion in 2007, up 11% on 2006 and more than double those of 2002. Mexico and the Philippines, which are among the top four remittance recipients in the developing world, reported remittance inflows for 2007 of $25billion and $17.2 billion (Timewell, 2008).
These numbers are seen by some scholars as conservative since the informal market is so difficult to calculate. Other estimates put the 2007 global remittance flow around $300 billion USD (Orozco, 2007).
According to the World Bank’s Neil Ruiz, “More than 8.2 million native Filipinos work or live abroad, equivalent to almost 25% of the total labor force. About 75,000 Filipinos are deployed for overseas employment every month. Filipinos also comprise 30% of all sea-based workers in the world. Remittances from these migrants amounted to about $17bn or 13% of GDP in 2007 (Timewell, 2008). “
The World Bank states that international remittances accounted for 60 percent of income for households in the lowest income bracket. Remittances primarily pay for health services, education and food in such impoverished homes. The benefits and impact of remittance is beyond the scope of this paper.