Remessa

What Is Remessa?

"Remessa," a Portuguese term, refers to a remittance, which is a transfer of money by a foreign worker to an individual in their home country. These cross-border payments represent a significant component of International Finance, serving as a crucial source of Household income for millions of families globally. Remessas are typically sent by migrants to support their relatives, covering essential expenses such as food, healthcare, education, and housing.

The flow of remessas is often recorded in a country's Balance of payments and can have a substantial impact on the recipient nation's Gross Domestic Product (GDP). Unlike other forms of Capital flow, such as foreign direct investment, remessas tend to be more stable and resilient, especially during economic downturns in recipient countries. They play a vital role in poverty reduction and economic development, particularly in Developing economies.

History and Origin

The practice of sending money home by migrant workers has existed for centuries, evolving with the global movement of people in search of economic opportunities. Historically, these transfers might have involved carrying cash or goods, but with advancements in banking and communication, the formalization of remittance channels began to take shape. The modern era of remessas gained prominence with increased global labor migration in the 20th century.

The resilience and growing volume of remessas, particularly to low- and middle-income countries, became a notable phenomenon in the early 21st century. For instance, officially recorded remittance flows to developing countries reached $325 billion in 2010, marking a significant recovery from an earlier decline and highlighting their importance as a stable source of external finance.⁹,⁸ International organizations, such as the World Bank and the International Monetary Fund (IMF), have increasingly focused on remessas due to their substantial economic impact and their role in global development. The World Bank, for example, publishes regular "Migration and Development Briefs" to track and analyze global remittance trends.⁷,⁶

Key Takeaways

• Remessa is a financial transfer made by a person working abroad to their home country.
• These transfers are a significant source of income for recipient households and contribute to national economies.
• Remessas are generally more stable and resilient than other forms of international financial flows.
• They play a crucial role in poverty reduction and supporting economic development in many nations.
• The global volume of remessas has steadily increased, making them a key focus in international finance discussions.

Formula and Calculation

While there isn't a single universal "formula" for a remittance itself, the amount a recipient receives is determined by the initial amount sent, minus any fees charged by the remittance service provider, and adjusted for the prevailing Exchange rate between the sending and receiving currencies.

The calculation can be expressed as:

Where:

• Amount Sent is the principal amount of money the sender wishes to transfer.
• Transfer Fees are the charges levied by the money transfer operator or bank for facilitating the transfer. These fees can vary significantly depending on the service provider, the amount sent, and the corridor (sending and receiving countries).
• Exchange Rate is the rate at which the sender's currency is converted into the recipient's local currency. Fluctuations in Foreign exchange markets directly impact the final amount received.

Interpreting the Remessa

The interpretation of remessas extends beyond simple financial transactions, offering insights into economic conditions and social dynamics. For recipient households, remessas are often seen as a lifeline, enabling greater Consumption and improved living standards. At a macroeconomic level, a high inflow of remessas can signify several things:

• Economic Dependence: A large volume of remessas relative to a country's Gross Domestic Product (GDP) may indicate a significant reliance on the diaspora for economic stability. While beneficial, this can also raise concerns about vulnerability to external economic shocks or changes in migration patterns.
• Human Capital Export: Sustained remessa flows often correlate with a country experiencing significant labor emigration, which can sometimes lead to "brain drain" if skilled workers leave.
• Support for Financial Inclusion: The mechanisms through which remessas are sent and received, including mobile money and digital platforms, can foster greater Financial inclusion for individuals who might not have access to traditional banking services.
• Counter-Cyclical Nature: Remessas often exhibit a counter-cyclical pattern, meaning they may increase during periods of economic hardship in the home country, as migrants send more money to support their struggling families.

Hypothetical Example

Consider Maria, who works in the United States and regularly sends money to her family in Mexico. Suppose Maria wants to send 500 U.S. dollars (USD) to her parents.

1. Choosing a Service: Maria chooses a money transfer service. The service charges a flat fee of $10 USD for the transfer.
2. Exchange Rate: On the day of the transfer, the Exchange rate is 1 USD = 18.50 Mexican Pesos (MXN).
3. Calculation:
   • Amount after fee: (500 \text{ USD} - 10 \text{ USD} = 490 \text{ USD})
   • Amount in MXN: (490 \text{ USD} \times 18.50 \text{ MXN/USD} = 9,065 \text{ MXN})

Maria's parents will receive 9,065 MXN. This hypothetical example illustrates how the fee and exchange rate directly affect the final amount of the remessa received by the beneficiary, impacting their available Household income.

Practical Applications

Remessas have wide-ranging practical applications and impacts across various economic and social spheres:

• Poverty Alleviation: For many families in Developing economies, remessas serve as a critical safety net, pulling households out of poverty and ensuring basic needs are met.
• Economic Development: These funds often contribute to local Economic growth by boosting domestic consumption and, in some cases, being channeled into Investment in small businesses or education.
• Financial Market Development: The sheer volume of remessas has spurred innovation in cross-border payment systems, including mobile money platforms and digital wallets, enhancing financial access for millions.
• Sovereign Debt and Creditworthiness: For some countries, stable remittance inflows can improve their external debt sustainability and credit ratings, as these flows provide a reliable source of Foreign exchange.
• Regulation and Consumer Protection: Given the importance of remessas, governments and international bodies have introduced regulations to protect consumers, ensure transparency in pricing, and reduce transfer costs. The Consumer Financial Protection Bureau (CFPB) in the United States, for instance, has a "Remittance Rule" to provide protections for consumers sending money abroad.⁵,⁴

Limitations and Criticisms

Despite their significant benefits, remessas are not without limitations or criticisms:

• Dependency Risks: Over-reliance on remessas can create a dependency, potentially discouraging local production or leading to a decline in labor force participation within the recipient country. Some economists express concern that this could hinder long-term, sustainable Economic growth if not managed alongside other development strategies.
• Volatile Exchange Rates: The value of a remessa can be significantly eroded by adverse Exchange rate movements or high Inflation in the recipient country, reducing the real purchasing power of the transferred funds.
• Informal Channels: A substantial portion of remessas still flows through informal channels, which can be riskier for senders and recipients, lack transparency, and are not captured in official statistics, thus complicating policy formulation and economic analysis.
• Cost of Transfers: While efforts are being made to reduce them, the costs associated with sending remessas can still be prohibitively high, especially for smaller amounts or to certain corridors, thereby reducing the net amount received by families. The IMF has highlighted that reducing transaction costs can significantly increase the money available to recipients.³
• Lack of Productive Investment: Critics sometimes argue that remessas are predominantly used for consumption rather than productive Investment, thus limiting their long-term impact on a country's development capacity. However, even consumption can stimulate local economies and improve human capital through better health and education outcomes.

Remessa vs. Capital Flow

While a remessa is a specific type of financial transfer, it is important to distinguish it from the broader concept of Capital flow.

The key distinction lies in purpose and stability. Remessas are typically person-to-person transfers driven by family support, making them less susceptible to the speculative swings that can characterize other forms of Capital flow, such as foreign direct investment or portfolio investment. While both contribute to a country's external financing, remessas are often seen as a more resilient and direct form of support for recipient economies and households, often surpassing official development assistance.²

FAQs

How do remessas impact a country's economy?

Remessas significantly boost Household income, leading to increased Consumption and stimulating local demand. They also provide a stable source of Foreign exchange, which can help improve a country's balance of payments and support its national currency.

Are remessas always sent through formal channels?

No, remessas are sent through both formal channels (banks, money transfer operators, mobile money services) and informal channels (e.g., carrying cash across borders). While formal channels offer more security and transparency, informal channels may be used to avoid fees or due to lack of access to formal financial services.

What are the main challenges associated with remessas?

Challenges include high transfer fees, fluctuations in Exchange rates that can reduce the value received, and the potential for over-reliance on these flows, which might affect a country's long-term Economic growth strategies if not complemented by other development initiatives.

How are governments regulating remessas?

Governments and regulatory bodies, such as the Consumer Financial Protection Bureau (CFPB), implement rules to increase transparency, protect consumers, and reduce the cost of sending remessas. These regulations often focus on disclosure requirements for fees and exchange rates, and error resolution procedures for international money transfers.¹