Migrant Worker Remittances, Micro-finance and the Informal Economy: Prospects and Issues

The conventional approach to analysing the impact of remittances on the domestic economies of labour-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. There is anecdotal evidence that only a fraction of the unrecorded remittances represent "pure leakages" and that the largest part are remitted through informal channels to finance domestic consumption, investment and foreign trade transactions in the migrants' country of origin.

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

• a 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
• a second-best solution would be to encourage remittance inflows through official channels by using micro-finance tools and improving the existing banking network to effectively compete with informal market arrangements so as to channel the funds into productive investment.

Unrecorded remittances have become one of the most critical dimensions of the remittance systems in many Asian and Arab economies. This paper attempts to disentangle and disaggregate the characteristic features of the web of recorded and unrecorded remittances.

The paper 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 micro-finance with regard to the scope for linking unrecorded remittances and investment is evaluated.