Migrant Worker Remittances, Microfinance and the Informal Economy: Prospects and Issues

Encouraging remittance inflows through official channels by using microfinance tools

The conventional approach to analyzing the impact of remittances on the domestic economies of labor-sending countries focuses exclusively on officially recorded flows and their effects on the various economic aggregates in the formal economy. While it is widely acknowledged that officially recorded remittances usually fall short of actual overseas savings (potential remittances) of migrant workers and that the difference is of particular significance in countries which have trade and exchange-rate restrictions and unstable domestic economies, the true magnitude of unrecorded remittances and their economic implications have received comparatively little attention.

A major finding of this paper is that remittance leakages are, to a significant extent, a reflection of the macroeconomic policy regimes of labor-sending countries. Therefore:

  • First-best solution to the problem of increasing their developmental significance would be to implement wide ranging policy reforms aimed at setting the macroeconomic house in order;
  • Second-best solution would be to encourage remittance inflows through official channels by using microfinance tools and improving the existing banking network to effectively compete with informal market arrangements so as to channel the funds into productive investment.

This paper attempts to disentangle and disaggregate the characteristic features of the web of recorded and unrecorded remittances. It reviews various systems that seek to channel unrecorded remittances through formal banking channels. It also looks at policy measures geared to influence and optimize their use in the domestic economy of these countries. Finally, the potential role of microfinance with regard to the scope for linking unrecorded remittances and investment is evaluated.

About this Publication

By Puri, S. & Ritzema, T.