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Study Notes

Remittances and Economic Development

AS, A-Level
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 26 Nov 2021

Remittances are transfers of money across national boundaries by migrant workers.

Remittance flows have grown in the world economy over the longer-term as the scale of migration between countries has grown.

Migrants sent about US$450 billion to developing countries in 2017, ten times more than they did just 20 years earlier. These ‘workers’ remittances’ are more than four times the value of all foreign aid for development. Some countries are heavily reliant on remittances, for example, half of all Tongans work abroad, and many send money back home.

Western Union and MoneyGram dominate the money transfer industry and the high level of fees that these companies has been heavily criticised in recent years

Advantages of remittances

  1. Money from remittances goes directly to families - with less risk of waste or corruption - more effective than overseas aid. A 1% increase in remittances as a % of GDP leads to a 22% drop in poverty (Asian countries, 1981-2014 evidence)
  2. Remittances provide a key source of foreign savings for low income countries - Remittances are the biggest source of US dollar income for Mexico second only to oil exports.
  3. Increases a country's GNI and adds to consumers' real purchasing power - e.g. 1.65m Egyptians work in Saudi Arabia and their remittances are an source of foreign currency
  4. Higher remittances flows will increase liquidity in financial markets which may push down the interest rate and lead to an expansion of credit and investment
  5. The majority of remittance income is consumed - adding to aggregate demand (AD) - Through the multiplier effect they can lead to an even greater boost to economic growth.
  6. Remittance income provides funds for business start-ups. According to the UK DFiD, 80 per cent of start-up capital for Somali businesses is funded from remittances

Remittances, the largest aggregate flow to fragile states and economies, benefit a small number of middle-income countries with big diaspora populations.

Limitations of remittances

  1. A large outflow of workers from the home country can cause labour shortages, driving up wages and worsening competitiveness
  2. Remittance incomes cannot be a large enugh substitute for well targeted overseas aid and private investment for infrastructure
  3. Some countries are geographically isolated with poor transport networks - giving less opportunity for outward migration and remittance inflows
  4. Big inflows of remittances may cause an appreciation of the exchange rate causing a fall in competitiveness for
Economic Impact of Remittance Flows on Asian Economies

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