Thoughts on Remittances

Felix Salmon writes on remittances, over at Reuters, citing a 2013 World Bank report. He discusses how big banks were eager to enter the remittances markets, but how these are pulling back, even while the markets are becoming more competitive. He also notes that, although the World Bank has pushed to reduce prices, remittances have become more expensive in recent years. Finally, he observes that the volume of remittances have been falling where they’re cheaper, and rising where they’re pricier.

Some scattered thoughts,

(1) Salmon, and the World Bank report, cite anti-laundering regulations and interventions as a reason for the contraction of some of the larger banks’ participation in these markets. An alternative explanation is that external economies dominate internal economies of scale, increasing the number of firms, and decreasing the size of larger, individual firms. Or, maybe large banks simply over-estimated the demand for remittances services to certain countries, originally over-expanding, and now contracting.

(2) I wonder how remittances, especially the involvement of large banks, have affected foreign credit markets. Presumably, by drawing large banks’ investment, and creating a financial industry around remittances, this opens the door for cheaper, easier access to credit.

(3) When the financial industry around remittances was relatively undeveloped, demand for remittances services for most countries was probably low. When this industry grew, there was a growth in demand for its services, targeting other countries. This increase in demand has pushed prices for these specific markets up (even while other in markets, such as remittances to Mexico, the price has fallen).

(4) I’m not convinced by Salmon’s theory as to why the volume of remittances to countries with cheaper rates has fallen. He suggests that maybe, when prices are lower, firms are not as interested in providing their customers the service, so they discourage clients from sending remittances. But,

  • A firm lowers its price to remain competitive, and discouraging people from using that service is essentially a move in the opposite direction, and the firm forgoes an opportunity to profit.
  • Maybe sellers have been pushing clients towards pricier alternatives. But, short of fraud, one would have a hard time explaining why a customer will choose the more expensive option for the same end.
  • Factors which reduce supply should push up the price, not down.

Also, remember the rule of thumb: never reason from a price change. My guess is that the causes of a reduced volume of remittances to Mexico are on the demand-side. But, I wouldn’t be able to provide a theory, only speculation. Pew Research suggests that the U.S. recession, which impacted industries that historically employ large numbers of migrant workers (e.g. construction), is a major reason. But, according to the World Bank, migrant employment, in the U.S., has a faster rate of growth than native employment. I suppose that if remittances to Mexico were to continue falling during the next couple of years, it would be difficult to use the Great Recession as an explanation for the cause in the decline.

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