Karina Cordova, PhD Economics
© International Foundation for World Freedom
Remittances are commonly defined as the amount of money immigrants send to their families and friends back to in their home country. As an additional source of income for the families in the recipient countries, remittances affect consumption and investment decisions of the receiving households, and they can have a positive impact in economic development. Income from remittances can relax the budget constraints of the immigrants’ families or might be the only way to overcome the restriction in the access to credit for investment in human and fixed capital or entrepreneurial endeavors.
It is important to distinguish that although some countries have the highest flows of remittances (in 2022, India, Mexico and China received US $111 billion, $61 billion, and $26 billion, respectively ), for other countries with significantly lower flows, remittances represent a high percentage of their GDP: in 2021, Toga received US $216 million representing 46.9% of their GDP, and Lebanon received $6.35 billion that represents 27.5% of their national GDP, while in 2022, Tajikistan received $2.19 billion that was 50.9% of their GDP (World Bank Data), which might reflect a higher dependency on remittances from abroad.
While it is discussed that there can be potential negative effects from remittances (e.g., additional income can disincentivize own saving decisions, or could make it easier for other family members to migrate), there is evidence that in many countries, remittances might contribute to increase the long-run Gross Domestic Product via higher private investment and less so via higher consumption (see, for example, Francois et al, 2022). This is no surprise when in many countries remittances flows are higher than the total amount of official development aid, and in some countries, they are higher than the foreign direct investment (World Bank Group and Knomad, 2022, p. 3).
Such an encouraging environment was threatened during the public health emergency due to the COVID-19 pandemic during 2020-2022. However, except for only one region (East Asia and the Pacific), remittances flow to Europe, Central and South Asia, Latin America and the Caribbean, Middle East, North and Sub-Saharan Africa recovered or increased more than expected (World Bank Group and Knomad, 2022). This was an unexpected trend.
Despite how the crisis has affected the world economy, many immigrant workers traditionally are employed in economic sectors that were considered essential businesses and remained active (agriculture, construction, care services, food industry, to mention some). Consequently, their labor condition was not as affected as workers in other sectors, allowing them to keep their ability to send remittances. In many cases, immigrants in their host country are able to save more, and these savings could have been the source of remittances even during a slowdown in the economy. This high level of remittances shows their increasing purchasing power in their host countries, their financial discipline, and their commitment to support their loved ones, especially during tough times.
Due to the positive role that remittances can have for economic development in low- and middle-income countries, efforts have been made to reduce the cost of sending remittances safely. Many countries and financial institutions have been proactive in creating programs to facilitate the sending of remittances at a low cost, along with the increasing use of electronic payments and transfers. More can be done, however, as international conflict and war can affect the financial infrastructure for payments. Moreover, economic conditions post-pandemic, including higher inflation rates and a slow recovery in some parts of the world, might affect the flow of remittances. However, current data show that remittances continue to grow but at a slower rate (World Bank Group and Knomad, 2023).
References and Recommended Readings:
World Bank Group and Knomad, A War in a Pandemic. Implications of the Ukraine crisis and COVID-19 on global governance of migration and remittance flow, Migration and Development Brief 36, May 2022.
World Bank Group and Knomad, Remittances Remain Resilient But Are Slowing, Migration and Development Brief 38, June 2023.
John Nana Francois, Nazneen Ahmad, Andrew Keinsley, Akwasi Nti-Addae, “Heterogeneity in the long-run remittance-output relationship: Theory and new evidence”, Economic Modelling, Volume 110, 2022.
Data retrieved from World Bank Data:
World Development Indicators, Personal remittances, received (% of GDP), indicator code: BX.TRF.PWKR.DT.GD.ZS, retrieved on July 20th, 2023, https://data.worldbank.org.
World Development Indicators, Personal remittances, received (current US$), indicator code: BX.TRF.PWKR.CD.DT, retrieved on July 20th, 2023, https://data.worldbank.org/.