A remittance is the transfer of money from expatriates to their home countries. According to the World Bank, more than $ 550 billion is sent home every year in the form of remittances worldwide. However, this number has grown tremendously over the last decade due to liberal laws on migration between developed and developing countries and the ease with which money can be transferred with minimal transaction costs. Developing economies like India and China are the biggest beneficiaries of remittances, receiving an average of $ 65 billion a year. Remittances to Latin America and the Caribbean come mostly from their northern neighbor, the United States.
The role of remittances in the economy
Remittances play a fundamental role in the development of a country’s economic systems. At the national level, remittances are recognized as part of a country’s GDP and help to promote economic variables such as savings, investments, consumption and income distribution. They complete the national income by increasing national savings, investments and providing hard currency to finance imports, thus reducing the balance of payments deficit (BoP). Remittances show no interest and their consumption is not linked to explicit investment projects with high import content. As a result, this contributes positively to economic stability by reducing the probability of current account reversals. In the recent past,
Remittances provide the receiving country with foreign currency, which is a more stable and reliable source of foreign exchange earnings than foreign direct investment or aid flows. Similarly, it serves to alleviate an economic recession resulting from macroeconomic shocks such as the debt crisis, political instability, natural disasters and the balance of payments that are synonymous with developing countries, thereby creating economic stability. In countries such as Nepal, Pakistan and Bangladesh, it is estimated that the amount received in the form of remittances exceeds national currency reserves each year.
Remittances play a fundamental role in social well-being by helping to reduce poverty, investments, savings and development. This case is based on the fact that most remittance recipients are low-income families and individuals who use money for personal development, education and investment. With the increase in disposable income, their consumption and savings also increase. Furthermore, expatriates also want to invest in their home countries through investments in real estate and bond markets. In return, these investments trigger the demand for complementary goods and services in the domestic market.
On the other hand, remittances have no effect on the economic growth of a country in the medium and long term. Remittances are a known cause of inflation as they appreciate the real exchange rate and reduce participation in the labor market, as host families tend to live outside the expatriate. They hinder economic development because the short-term reduction of poverty slows down the implementation of structural reforms in the economy to alleviate the problem in the long run. Furthermore, savings from remittances are mainly used to purchase non-productive assets, which have no contribution to economic growth for the receiving country.