Global Policy Forum

Do Remittances Reduce Poverty?


By Richard H. Adams, Jr.*

ID21 Insight
Januray 2006

International remittances to developing countries will total around US$167 billion in 2005, more than twice official aid flows. Despite the ever-increasing size of international remittances, little attention has been paid to their effect on poverty and income distribution in developing countries and many policy questions remain unanswered.

What is the impact of international remittances on the level of poverty (the share of the population living below the poverty line) and the depth of poverty (how far the income of the average poor person is below the poverty line)? How do remittances from abroad enable households to escape from poverty in large labour-exporting countries such as Mexico, Guatemala, the Philippines and Ghana?

New research by the World Bank's International Migration and Development Research Programme shows that:

• International remittances reduce the level and depth of poverty. For example, a 10 percent increase in international remittances from each individual migrant will lead to a 3.5 percent decline in the share of people living in poverty.

• While remittances reduce poverty, countries with higher levels of poverty are not necessarily receiving more remittances. Countries with the highest levels of poverty - such as those in sub-Saharan Africa - do not produce many international migrants and therefore receive fewer remittances.

• In general, the largest effects of remittances on poverty are observed in countries located close to major labour-receiving areas. Developing countries close to the United States or Europe tend to receive more remittances which are usually spread evenly among the population. In Guatemala, for example, international remittances reduce the level of poverty by 1.6 percent and the depth of poverty by 12.6 percent; remittances account for over 60 percent of household income for the poorest 10 percent of the population.

Income Inequality

It is sometimes thought that international remittances go mainly to rich people and that therefore remittances will tend to increase income inequality in developing countries. However, the World Bank research finds that international remittances have little impact on income inequality. For instance, in Guatemala and Ghana, including remittances in household income leads to only a slight increase in income inequality. This means that most of the positive impacts of remittances on poverty come from increases in household income, rather than any changes in the level of income distribution in a country.

To increase the positive impact of international remittances on poverty, it would be useful for the international community to:

• Reduce the high transaction costs of remitting money to developing countries. The present high transaction costs act as a type of regressive tax on international migrants, who tend to be poor and to send small amounts of money home.

• Pay more attention to integrating 'migration policy' within the larger global dialogue on economic development and poverty reduction. In the past much attention has been paid to the movement of goods and finance between countries. It is now time to pay more attention to the movement of people between labour-importing and labour-exporting countries.

• Improve efforts to collect data on international remittances in developing countries. In particular, better data is needed on the large amounts of remittances flowing through unofficial and informal channels.

About the Author: Richard H. Adams, Jr. is working for the Development Research Group (DECRG) of the World Bank

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