International remittances, or monies and goods sent by migrant workers to their home countries, now represent the second most important source of external funds after foreign direct investment for all developing economies, including those in Asia.

But what impact, if any, are they having on reducing poverty?

A recent Asian Development Bank Institute working paper takes an in-depth look at the affect international remittance flows are having on poverty in the region.

The paper first notes the upward trend in both international migrants and global remittance flows, with East Asia and Pacific and South Asia accounting for the first and second largest share of remittances on a subregional basis.

* Data from 2015 and 2016 are predicted.

India and the People’s Republic of China are the two economies with the highest emigrant populations in the world and they have also received the largest amount of remittances, with India alone accounting for more than a quarter of the Asian total.

Remittances are especially critical to South Asia, where they make up the largest source of external resource inflows, and in the case of Nepal were equivalent to 25% of the country’s GDP in 2013.

At the same time as flows of remittances have grown, the number of people in Asia living below the World Bank poverty line of less than $1.90 a day at 2011 international prices (the poverty headcount number) has dropped sharply in recent decades.

Determining whether remittances have a direct bearing on poverty reduction, however, requires going beyond the headcount to consider other indicators which measure the depth and severity of poverty more effectively – the poverty gap ratio which measures how far on average the poor are from the poverty line, and the poverty severity index, a measuring tool that allows users to vary the weight put on the income or expenditure levels of the poorest members of society.

These two ratios more accurately capture reductions in poverty and the effect from remittance inflows.

The paper, using data from 10 Asian countries between 1981 to 2014, concludes that a 1% increase in international remittance flows as a percentage of GDP can lead to a 22.6% decline in the poverty gap ratio and a 18.3% decrease in the poverty severity ratio.

It also examines the impact of several variables on poverty, noting that increases in per capita GDP and greater trade openness can decrease poverty, while conversely, higher inflation can expand it.

The finding that remittance levels actually do help reduce poverty has clear implications for policymakers, one of which is how to reduce transaction costs for migrant workers sending money to their home countries.

These fees vary significantly depending on where money is being sent from and what payment method is used. The data shows that costs are typically higher when funds are sent from wealthy to developing economies while Internet payment systems typically incur higher charges than other payment methods.

Note: The total average cost is calculated as the fee charged to senders plus the exchange rate margin.

In response, the paper says policymakers should support cooperation and partnerships between international banking services and remittance transfer operators, and the creation of a dedicated Internet-based remittance transfer network.

These measures would reduce costs, boost incomes and ultimately help speed up poverty reduction in countries with substantial migrant worker populations.