# **1 Introduction**

Following the implementation of lockdown policies in March 2020 in response to the COVID-19 pandemic, governments and international organizations predicted a massive decline in remittances. As of April 2020, remittances to developing countries were expected to fall by 20 percent during the year due to the unprecedented slowdown in economic activity in remitting countries and a disproportionate increase in unemployment among migrants (World Bank, 2020; Capps et al., 2020; Garrote Sanchez et al., 2020; Caruso et al., 2021). Instead, formal remittances to several developing countries grew at unprecedented rates.<sup>1</sup> Given the high unemployment rates in remitting economies since the start of the pandemic, these patterns are difficult to reconcile with the literature about the determinants of remittance flows (Ratha et al., 2007; Frankel, 2011; Gupta, 2006). In contrast, household survey data show that most recipient households in Latin America reported a drop in remittances during 2020.<sup>2</sup> Unlike official estimates, these survey data more likely capture the change in both formal (also known as “registered,” “recorded,” and “electronic”) and informal remittances, since they rely on actual individual responses rather than only on data from electronic transfers.

In this paper, we suggest that a shift from informal to formal channels during the economic crisis caused by COVID-19 partly explains the increase in formal remittances coupled with the decline reported in household surveys. Since official remittance data sources often struggle to accurately measure informal remittances—that is, cash carried by hand or sent through other informal channels—a shift in the composition of remittances from informal to formal may be misleading as to the actual change in total remittances. It is challenging to estimate the number of informal remittances as they involve many transactions of minor value that are not recorded anywhere and thus easily go undetected.<sup>3</sup> However, scholars have argued that trends in formal remittances could be informative regarding changes in informal ones. In particular, the long-term growth in formal remittances suggests informal ones are still sizable but slowly yielding over time to formal ones. This is due to a reduction in the cost of sending remittances through formal channels and to a crackdown on informal remittance providers in several destination countries (Clemens and McKenzie, 2018). We propose that COVID-19 lockdown policies accelerated this formalization process by increasing the costs of sending and receiving informal remittances to prohibitive levels.

To test our hypothesis that a shift from informal to formal channels partially explains the increase in formal remittances observed at the municipality level, as opposed to a real gain in remittance flows, we exploit the variation induced by the dramatic slowdown in geographic mobility caused by the pandemic.

> 1As shown in Figure A1, monthly formal remittances for a group of selected countries grew between April and September 2020 after declining at the start of the crisis.

> 2See Table A1 in the Appendix.

> 3Several articles have used indirect methods to assess the magnitude of these flows. For example, Freund and Spatafora (2005) estimate that informal remittances amount to 35–75 percent of the value of formal ones. In Latin America, Page and Plaza (2006) estimate that informal remittances represent 73 percent of the total.

1