Remittances to the Rescue?

By Alissa Thuotte, Dollars and Sense. Posted June 26, 2008.

Remittances -- the money sent home to families by migrants living in foreign countries -- have been gaining attention in the last few years from international institutions such as the World Bank, the Inter-American Development Bank (IDB), and the International Monetary Fund. These organizations and others have begun to study remittances with an eye to their potential for reducing poverty in the poor and near-poor countries to which most of these funds flow. It turns out that remittances are a mixed blessing. They offer a relatively stable source of incoming funds. At the same time, however, they can create an alarming dependence on behalf of their recipients, heightening their vulnerability to shifting political and economic winds in the host countries over which they have no control.

Remittances have been, until very recently, very much on the rise, with about 10% of the world's population now receiving some remittance income. In 2006, 150 million migrants across the globe sent $300 billion in 1.5 billion transactions. Remittances now represent nearly one-third of total financial flows to the developing world -- more than official development assistance and, depending on the country, more even than foreign direct investment. Fifty-nine countries receive more than $1 billion annually in remittances, and 45 receive more than 10% of their GDP. Moreover, remittance flows have tended to be much more stable than foreign direct investment or portfolio (stocks and bonds) investment.

One-third of the money sent originates in the United States; most of the rest is sent from Europe and the Middle East. A significant volume of remittance money circulates within the developing world as well, however: so-called "South-South" flows account for 30% to 45% of total remittances, according to the World Bank.

Latin America and the Caribbean is the region receiving the highest level of remittances per capita, averaging $102 annually, and the region's remittance flows have risen tenfold in real terms over the last 20 years. In 2006 the region received $62.3 billion from migrants abroad -- five times the amount of "official development assistance" it received -- with remittances to Mexico ($24.2 billion) accounting for over a third. After climbing at double-digit rates in the last decade, the flow now appears to be leveling off: a recent survey by an IDB fund estimated 2007 remittances to the region at $66.5 billion, only a 7% increase over the previous year.

Most of the money received in this region is used for everyday living expenses, everything from food and home repairs to school tuition. What interests economists most, though, is the potential for remittances to contribute to economic development -- when, for example, recipients put the money toward new small business ventures that may over time provide employment to others and expand local economies. According to a 2007 World Bank report, the data suggest that remittances do tend to increase bank deposits, reflecting at least some potential for such investment.

Research has generally found that higher remittance flows are, to a modest degree, associated with lower poverty, better health, and higher levels of education in the developing world. In ten out of eleven Latin American and Caribbean countries examined in a 2006 World Bank study, children from families receiving remittances were more likely to remain in school than those whose parents were not supported by such funds.

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Alissa Thuotte is a Dollars & Sense intern.