The impact of remittances on investment and development
There are more than 287mn migrants in the world today. Many of them consistently send money back home to the families they leave behind because they know how much of a difference that economic support can make. The money they send – remittances – has a powerful impact not only on the individuals and families who receive it but also on entire economies, contributing significantly to the GDP of many developing countries. In fact, remittances have surpassed foreign direct investment as a source of funding for low and middle-income countries since 2015, reaching US$626bn last year.
Beyond basic needs, remittances go a long way to help families prosper and to promote longer-term development in entire communities. Their potential as a source of investment is increasingly being recognized.
What is the importance of remittances?
Remittances have exceeded foreign direct investment to low and middle-income countries for the past seven years, reaching US$626bn in 2022. Over 60 countries rely on remittances for more than 4% of GDP.
The money that migrants send to their loved ones is used to keep food on the table and to pay for healthcare. It can also mean that young family members don’t have to work to help out at home and that there is more money to spend on their schooling.
About 75% of remittances are used to cover essentials like food, healthcare, educational fees and basic expenses. The remaining 25%, more than US$150bn per year worldwide, is going to savings or investments in activities that generate income and jobs. That’s more than what the US government spent on transportation infrastructure last year.
Connecting diaspora with investment at home
The governments of many low and middle-income countries are well aware of how important remittances can be for local economies. Many of them have created departments dedicated to their diaspora, such as the Philippine Department of Migrant Workers or Senegal’s Haut Conseil des Sénégalais de l’Extérieur, to provide support and services to their citizens living and working abroad. Fewer than 1mn Senegalese citizens live abroad, but the remittances they send home contribute nearly 10% to the country’s GDP, well over US$2bn each year.
More countries are beginning to see the benefits for their economies of trying to direct more remittance flows toward investment and are stepping up their efforts to help make those connections. One example is the Uganda Investment Authority, which encourages diaspora investors to take advantage of incentives such as tax exemptions for new investments and free land to set up business in its industrial parks.
Others are taking it a step further by actively seeking diaspora investors and offering to help with financing, such as the government of the state of Jalisco in Mexico, which launched a programme just over a year ago to encourage remittance receivers in the state and senders living in the US to team up to launch businesses that will generate employment and contribute to economic development in the region. The government offers guidance on the ventures and credit lines for projects that qualify.
Ghana has also been encouraging its diaspora to take an active role in the country’s future. In 2019 the government launched a “Year in Return” initiative to this end that boosted visitors from the US by 26%. In January, Ghanaian-born comic Michael Blackson opened the school he built in his hometown, Agona Nsaba, which offers free education to all. He told the press that perhaps, if more of Africa’s diaspora played a role, “Africa can be a better standard”.
Investing in the future: remittances support education
The most important investment decision many remittance senders make is to support education. Migrants understand that the money they send may help change the lives of the youngest members of their families back home, not just by allowing them better food and medicine but by providing resources to pursue educational opportunities that may not be possible otherwise. In fact, remittances received from abroad boost spending on education by recipient families an average of 35%.
Having a chance at a more productive and prosperous future starts with education. If all students in low-income countries could read, the UN estimates that 171mn people could escape extreme poverty. If all adults finished secondary school, the global poverty rate could be cut by more than half. The UN has made quality education one of its Sustainable Development Goals for 2030 for this reason: education helps reduce poverty. And reducing poverty is the first step towards building more productive and more prosperous communities everywhere.
Remittances help support agricultural investment
Remittances also boost investment in critical areas such as agriculture. Additional funds from abroad can help farmers improve productivity by making it easier to buy equipment, seeds and fertiliser, as well as reduce risk by purchasing insurance. It also helps bring them closer to financial planning and establishing creditworthiness, opening the door to accessing credit that can help them expand. Remittances help support the sector that employs the most people in developing economies: agriculture.
The remittances received from family members working abroad keep food on the table, improve access to healthcare for families and educational opportunities for children, and expand the resources available to small farmers. They also support small businesses whose opportunities to grow are limited due to credit constraints. The potential of remittances to help foster development in the communities that migrants leave behind is just beginning to be explored.
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