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Lesson on remittances

Two IDB experiments shed light on policies to increase savings and remittances of migrants

Remittances from migrants bring substantial benefits for countries in Latin America and the Caribbean, a review by the Inter-American Development Bank (IDB) shows. Money sent home increases consumption, investments and lowers poverty rates. However, little has been done to gather evidence on how to increase these beneficial transfers.

The IDB has supported two randomized experiments that were carried out among Salvadorian migrants in Washington, D.C. These experiments have helped shed light on possible policies that could increase savings and remittances of these migrants.

The first experiment tackled the fee charged by money-transmission institutions. Fee reductions were randomly assigned on transactions up to $1,500, which accounts for the vast majority of transactions. The impacts were assessed by tracking remittance frequency and amounts using administrative data of the partner institution. A follow-up survey of migrants was also conducted to establish impacts on the use of other remittance channels, total remittance flows, and savings.

The results suggest that fee reductions lead to large increases in remittances, which occurred through an increase in the frequency of transactions, rather than in their size.

In a second experiment, the IDB looked into the potential impact of policies that give migrants more control over how remittances are used. The IDB partnered with Banco Agrícola in El Salvador to create or facilitate access to various savings mechanisms.

Migrants were randomly assigned to one of three treatment groups or a comparison group. The comparison group was visited by a marketer who encouraged them to remit their money to savings accounts in El Salvador. The migrants that were not selected for the comparison group were randomly assigned to one of three groups that were offered accounts with different levels of control over the use of their remittances.

Surveys were administered both to migrants in the United States and their corresponding families in El Salvador. The results suggest that migrants are more likely to save than their families back home. This experiment shows that demand for savings accounts and savings levels were higher when migrants had the option of greater control over the accounts.

These experiments demonstrate that it is possible to conduct policy-relevant field experiments among cross-border migrant households and partnering with the private sector. Given the magnitude of remittance flows to the region and their importance for development, insights in this area may provide important guidance for policy.

The findings support initiatives to reduce the cost of sending remittances, such as policies raising competition in the money-transmission industry or providing migrants information about costs to send their money home. The second experiment suggests that providing assistance to financial institutions to develop financial products that offer migrants more control over remittance uses can lead to higher savings.

The findings are in the IDB’s 2010 Development Effectiveness Overview, which discusses the development impact of several ongoing IDB projects in Latin America and the Caribbean and reports on the progress the Bank is making to boost transparency and accountability.