It wasn’t until my early 20s that I made the decision to leave my home in Bulgaria and seek work abroad. Until that point I’d imagined finding work at home, close to my friends and family. “One day when you get rich, you’ll send me some money to help me, won’t you?” my mother would ask.
Last year I started my first real job – in Germany. I still wanted to help my mother out from time to time, so I began sending a small amount of money home each month – a day’s wage for me is roughly equal to a third of her monthly loan repayments. On the day that I sent the first payment it struck me how little it takes to change a human life – and this is Europe we’re talking about. What about Africa?
According to the World Bank, in 2010 the total remittance flows (the money sent by migrants to their families and relatives at home) added up to $325.5bn. That’s roughly the same as the world’s richest countries spend on Foreign Direct Investment (FDI) in developing countries every year, and more than three times the level of Official Development Assistance (ODA). So they’re clearly a potent force, but in the context of a dynamic global economy, can remittances be a sustainable means for socioeconomic development in the South?
Remittances: Remedy for the Global South?
There’s no doubting that the money I send home to my mother each month makes her life considerably better. But what does the bigger picture look like? Many argue that instead of increasing human wellbeing, remittances contribute to growing inequality within countries, causing increased migration away from the developing world and encouraging a lack of international competitiveness.
Seen in this light, globalization has left the world more divided than ever. In developing countries, instability, corruption and poor governance hinder economic progress and limit opportunities for the young. At the same time, population growth in many of those regions has led to a dramatic oversupply of (mostly unqualified) labor, resulting in steadily increasing migration outflows, mainly to developed countries but also to other low- or middle-income countries – the so-called ‘South-South Migration’.
So while remittances fight poverty in the short-term, some experts believe they increase the social divide in many countries because the poorest are seldom among those on the receiving end of any benefits. Meanwhile, this constant inflow from abroad creates a culture of dependency in recipient households in particular, and the country in general.
Then there’s the impact on the labor market – why look for a job when you can stay at home and wait for a cheque? The end result is that the country becomes more vulnerable to external developments, such as the economic situation in the host country. According to World Bank experts, this is more likely if the major part of the diaspora of a given country resides predominantly in one and the same economy – as in the case of Mexico (USA) and Tajikistan (95% of Tajik emigrants work in Russia).
But that’s not to say that these short-term gains should be overlooked entirely. Remittances increase access to basic needs and play a significant part in reducing poverty in many regions, especially during economic downturns or natural disasters in the country of origin. Just look at the financial crisis in Mexico in 1995, or the Asian crash in the Philippines and Thailand in 1997 – in both cases, remittances were vital in alleviating the depression that followed in those territories.
And since the amount of money sent back is likely to increase in times of serious need, remittances can represent a more stable financial source than capital flows and FDI. For example, while the volume of remittances to developing countries fell by 5.5% in 2009 as a result of the financial crisis, FDI and equity investment flows dropped by 40% and 46% respectively.
So the big question is, do remittances pay for themselves in the end? Can the income they provide really make up for the loss of skilled labor that emigration represents? Quite possibly. According to Salvadoran sociologist Carlos G. Ramos, “Migration and remittances are the true economic adjustment programs of the poor in our country.”
The majority of migrants from the developing world are non-skilled, so emigration actually eases the pressure on local labor markets and helps consolidate public finances by relieving social security systems and increasing tax revenues. And remittances can create demand for local products, encouraging sectors like agriculture, construction and banking, and creating employment opportunities.
Ultimately it’s about transferring simple financial resources into long-term investments. Ideally, these positive developments will convince many qualified people to return home, something that can be observed today in Turkey and India.
It’s difficult to say with certainty whether remittances are a force for good or bad. On the macroeconomic level, remittances generally lead to import dependency and cause appreciation of local currencies, commodities and prices, hindering global competitiveness. But it doesn’t have to be this way. The socioeconomic impact of remittances depends on the way they are handled: whether they are entirely consumed or invested. Remittances are predominantly used to cover basic needs, but these basic needs – food, shelter, health services and education – are the best investments for the poor. They have positive, long-lasting consequences and are sustainable in as much as they enhance social inclusion and ownership.
It’s a close argument, but the impact of remittances on long-term economic development seems predominantly positive. As Devesh Kapur, Director of the Center for the Advanced Study of India puts it, money inflows from abroad can be “the new mantra for development“. In a roundabout way, the economic progress that comes from the financial and social contributions of migrants could lead to an eventual decrease in emigration and an increase in return migration. Combined with an investment-friendly remittance policy that encourages transparency and competition, and which cuts high taxes, this approach could eventually result in continuous, sustainable growth.