Efficient remittance services for development in the Pacific

Abstract

Capital inflows to the Pacific islands from aid, foreign investment and remittances are an important source of development finance. Remittances are the fastest growing; they now total US$ 400 million per year and can be expected to grow even further as labour mobility is used to deal with seasonal labour shortages in Australia and New Zealand and limited job opportunities in the Pacific. The transaction costs of sending remittances to the Pacific islands are very high for the most widely used methods. This paper examines the New Zealand-Tonga remittance corridor, where typical transactions involve costs in the order of 15 to 20 per cent for bank drafts and transfers through money transfer companies such as Western Union. Cheaper transfer methods using automated teller machines (ATMs) are feasible and have transaction costs of less than 5 per cent but are not widely used. This spread of 10 percentage points between the most popular and the cheapest remittance methods means a potential loss for Tonga of the equivalent of 4 per cent of GDP. Extrapolating from this remittance corridor to the rest of the Pacific, avoidable transaction costs may total US$ 40 million per year. Hypotheses about the continued reliance on high transaction cost methods are examined and implications for development policy are discussed.

Migrants' Remittances, Poverty and Social Protection in the South Pacific: Fiji and Tonga

“…With lower transaction costs, it is to be expected that remittance flows will increase, given the findings of Gibson et al . () of a relatively high responsiveness of remittances to the price of transfers.…”

“…In Tonga and Samoa, where financial illiteracy has not been an issue, mobile transfers have contributed a little bit more. With lower transaction costs, it is to be expected that remittance flows will increase, given the findings of Gibson et al (2007) of a relatively high responsiveness of remittances to the price of transfers.…”

“…Such caution should not detract from the need for appropriate policies to make more effective use of remittances by leveraging additional financial resources from other sources, public and private, especially if these could be linked to existing community-level organisations and institutions, such as those involved in the provision of micro-credit, and by reducing very high transaction costs (Gibson et al, 2007). However, it remains essential that whatever policies are considered in relation to remittance flows and their uses, it is imperative that the functioning of the existing informal social protection system they provide should not be undermined.…”

Remittances and Economic Growth: Empirical Evidence from Bangladesh, India and Sri Lanka

“…Other factors, such as remittance costs, also play a role in influencing remittance flows. In a survey of Tongan migrants in New Zealand, Gibson et al (2007) find that remittances sent would rise by 0.22 per cent if costs fell by 1 per cent. Freund and Spatafora (2008) report that recorded remittances depend negatively on transfer costs and the parallel market premium, as migrants may prefer to send money through informal channels when transfer costs are high or when the official exchange rate is unattractive.…”

Migration and household finances: How a different framing can improve thinking about migration

“…What remittance products might help households save more (Ashraf, Aycinena, Martínez A., & Yang, 2015;Somville & Vandewalle, 2018) or invest more (Ambler, Aycinena, & Yang, 2015)? What is the potential for government policy-at the destination and origin-to make remittances cheaper and easier for households (Gibson, Boe-Gibson, Rohorua, & McKenzie, 1997)? How do migrants' remittances respond when remittances get cheaper (Gibson, McKenzie, & Rohorua, 2006;Aycinena, Martinez A., & Yang, 2010;Ambler, Aycinena, & Yang, 2014;Jack & Suri, 2014)?…”