Remittances and their importance for developing countries

In most high school economics courses there is a unit on ‘Development Economics’ and within it the importance of remittances. Remittances are money that is earned by migrant workers that is sent back to their country of origin which are predominately developing countries. In 2022 global remittances were estimated to be $647bn which is three times the amount of official development assistance which is government aid for economic development and welfare in developing countries. However, when you consider the amount of informal channels, that figure is much higher. Some interesting statistics from the IMF are above.

In the Gulf countries (Saudi Arabia, Qatar, UAE, Kuwait etc) the proportion of foreign workers can exceed 70% of the population and this was the case in the preparation for the Football World Cup in Qatar. Although this figure might begin to diminish as countries start to employ more of the domestic population.

Cost of remittances Sending money back to their country of origin canoe expensive. On average customers pay $12.50 for every $200 they send back to low-middle income countries – 6.3% of the transaction which is more than double the target set by UN Sustainable Development Goals. Africa tends to be the most expensive:

• Africa average – 8% of transaction for $200

• Tanzania to Uganda – 35% of transaction for $200

The advent of digital wallets are the cheapest way to send money but most transfers still involve cash at both ends. The market for remittances is expensive as it is oligopolistic in nature with a small number of providers who have control over networks. Add to that underdeveloped financial infrastructure, regulatory obstacles and a lack of access. Governments have tried to tax remittances arguing that they could use it productively to help migrant workers. However as well as being hard to administer this would lead to an increase in the informal arrangements.

Growing remittances With more than 1 billion people expected to join the working age population by 2050 (mainly in Africa and South Asia) and the aging population in advanced countries, the demand for migrant workers will increase. Climate change and extreme weather will add to migration pressures. Remittances will continue to provide stable income to millions of people.

Source: Resilient Remittances by Dilip Ratha. September 2023 IMF F&D

For more on Developing Economies and Remittances view the key notes (accompanied by fully coloured diagrams/models) on elearneconomics that will assist students to understand concepts and terms for external examinations, assignments or topic tests.