The effect of remittances on investment and development
There are more than 287 million migrants in the world today. Many of them consistently send money home to the families they leave behind because they know the difference financial 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 financing for low- and middle-income countries since 2015, reaching $626 billion last year.
Beyond basic needs, remittances go a long way to help families prosper and to promote long-term development in entire communities. Their potential as a source of investment is increasingly recognized.
What is the importance of money transfers?
Remittances have exceeded foreign direct investment to low- and middle-income countries over the past seven years, reaching US$626 billion 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 pay for healthcare. It can also mean that young family members do not have to work to help out at home, and that there is more money to spend on schooling.
About 75% of transfers are used to cover necessities such as food, healthcare, education fees and basic expenses. The remaining 25%, more than $150 billion per year worldwide, goes to savings or investment in activities that generate income and jobs. That’s more than what the US government spent on transportation infrastructure last year.
Connect diaspora with investment at home
The governments of many low- and middle-income countries are well aware of how important remittances can be to local economies. Many of them have created departments dedicated to their diaspora, such as the Philippine Ministry of Migrant Workers or Senegal’s Haut Conseil des Senegalais de l’Extérieur, to provide support and services to its citizens who live and work abroad. Fewer than 1 million Senegalese citizens live abroad, but the remittances they send home contribute almost 10% to the country’s GDP, well over $2 billion each year.
More countries are beginning to see the benefits to their economies of trying to direct more remittances towards investment and are stepping up efforts to help make these 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 the 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 program just over a year ago to encourage recipients of remittances in the state and senders who lives. in the United States to join forces to start businesses that will generate employment and contribute to economic development in the region. The government provides guidance on investments and credit limits for projects that qualify.
Ghana has also encouraged its diaspora to take an active role in the country’s future. In 2019, the government launched a “Year in Return” initiative for this purpose, which increased visitors from the United States 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 could 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 can help change the lives of the youngest members of their families back home, not only by providing them with better food and medicine, but by providing resources to pursue educational opportunities that may not be possible otherwise. In fact, remittances received from abroad increase the expenditure on education of recipient families by 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 171 million people could escape extreme poverty. If all adults completed secondary school, the global poverty rate could be cut by more than half. The UN has made quality education one of its sustainability goals for 2030 for this reason: education helps reduce poverty. And reducing poverty is the first step towards building more productive and more prosperous societies everywhere.
Remittances help support agricultural investment
Remittances also increase 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 fertilizers, as well as reduce risk by buying insurance. It also helps bring them closer to financial planning and establishing creditworthiness, opening the door to access credit that can help them expand. Remittances help support the sector that employs the most people in developing economies: agriculture.
The money received from family members working abroad keeps food on the table, improves access to healthcare for families and educational opportunities for children, and expands 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 contribute to development in the communities migrants leave behind is only beginning to be explored.
