What drives remittance costs? Hope in sight for millions of migrants? (Part II)

— Author of this guest blog entry —
Jan de Graaf graduated this year from the Lee Kuan Yew School of Public Policy at NUS. He recently finished an internship with the Peacekeeping Department of the United Nations in New York.

The topic is remittances – a subject that deserves attention given its potential to help migrants and their families. The volume of remittances that is sent by migrants around the world to their countries of origin is huge. In fact, the remittance flows to developing countries are more than three times as high as the level of Official Development Assistance to these countries. Still, the money transfer is often a painfully expensive undertaking. And yet, the issue does not receive the policy attention one would expect. I wrote my master thesis on this topic and promised to share some of the final results. They were at times unexpected and truly fascinating:

As was mentioned in the earlier blog-post, I did not observe correlations between the level of remittance costs and almost any factor that related to receiving countries. Market conditions in sending country seemed to be much more influential. It was hard to determine what such correlations imply, but I found that it was mostly economic factors – which I proxied by looking at:

• the GDP per capita levels,
• the inflation levels and
• the exchange rate regimes of the sending countries –

rather than demographic factors that were correlated with remittance costs. I had also hypothesized that geographic proximity would be associated with lower costs in remittance corridors, since the alternative of physically transferring money would increase the price elasticity of demand in the formal market and thus push down the prices. But I did not find such a correlation. In other words, much remained unexplained by my initial results and thus I decided to add a more qualitative approach.

Singapore proved to be an excellent case study because it has some of the least costly corridors in the world (See remittanceprices.worldbank.org). One immediate explanation may be that Singapore’s financial industry is tightly regulated. Regulations range from education- and financial requirements for license holders to bookkeeping and receipt standards to enforce transparency. But, that all would still at most be a partial explanation. This is evident from the fact that within Singapore there is still a large variation in remittance costs. The corridor from Singapore to Bangladesh has arguably the world’s lowest transaction costs in the formal remittance markets[1] at 1.81 %, but the corridors from Singapore to China and Pakistan have average costs above 10 % – which is more than the global average. One particularly interesting finding was that the remittance costs for sending money to Bangladesh are exceptionally low while the number of Bangladeshi migrants in Singapore and the volume of remittances that they sent home are still less than the number of Philippine migrants in Singapore and the volume of remittances going from Singapore to the Philippines.

Why would transaction costs be lower despite lower volume of remittances and a smaller number of migrants?

I think the answer lies in the well-established Bangladeshi hundi networks. These informal transfer networks, which are also common among some other migrant groups, are highly attractive to Bangladeshi migrants since the money is collected and delivered at home without any fees charged. The mechanism relies on trust and on the practice of using migrant money to buy electronic and other goods in Singapore in order to sell them in Bangladesh. The same principle is repeated for the return journey from Bangladesh to Singapore, with local Bangladeshi products that are popular among the migrants in Singapore. The profit margins that result from the difference between buying and selling the goods make it possible not to charge any service fees. This attractive alternative form of payment forces the service providers in the formal market to offer more competitive prices, in fact,the lowest in the world.

Each migrant group turned out to have its own particularities and only by looking beyond prices and formal markets I started to understand a little bit more about the fascinating world of migrants and remittances.

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