Remittances as a Force for Development

How money sent home by migrant workers compares with aid and investment, what it does for families and countries, and the debates it raises.

Remittances are the money that migrants send back to family members in their home country. Individually, a transfer might be a few hundred dollars a month. Added together, they have become one of the largest sources of outside money for developing countries. World Bank estimates suggest that recorded remittances to low- and middle-income countries run at well over 600 billion dollars a year, several times more than all official foreign aid. This lesson looks at remittances through a development lens: what they do for households, for national economies, and for the countries migrants leave.

Where remittances matter most

In absolute size, India receives more remittances than any other country, with other large recipients including Mexico, China, the Philippines and Pakistan. But relative to the size of the economy, the dependence is greatest in smaller countries. In places such as Tajikistan, Tonga, Nepal and Lebanon, remittances have in some years been equal to roughly a fifth or more of national income.

What remittances do for families

Remittances go straight to households, without passing through governments. Research across many countries finds that they are often spent on food, housing, school fees and health care. They also provide consumption smoothing: when a harvest fails or a family member falls ill, a relative abroad can send extra money, helping the household keep eating and keep children in school.

Remittances also tend to be countercyclical for the receiving country. When a home economy suffers a disaster or recession, migrants often send more, not less, which is the opposite of how private investors typically behave.

A remittance after a flood

Picture a farming family in Nepal whose son works in construction in Qatar and normally sends home about 200 dollars a month. When a flood destroys the family's rice crop, he sends 500 dollars that month instead, borrowing against his next paycheck. That extra 300 dollars lets the family buy seed for the next season and avoid selling their buffalo. Multiply that decision by millions of migrants, and remittances act like an informal insurance system that arrives exactly when it is needed.

Brain drain or brain gain?

A long-standing worry is brain drain: when doctors, nurses and engineers emigrate, poor countries lose skills they paid to train. Some small countries have lost a large share of their university graduates this way.

Newer research suggests a more mixed picture, sometimes called brain gain. The chance of working abroad can encourage many more people to get an education, and not all of them end up leaving. The Philippines, for instance, trains large numbers of nurses partly because of overseas demand. Migrants who return often bring savings, skills and business contacts, and diaspora communities can channel investment and trade back home. India’s information technology industry benefited in part from ties to Indian engineers working abroad.

Concerns and policy choices

Heavy reliance on remittances has downsides. A large inflow of foreign currency can push up the exchange rate and make a country’s exports less competitive. Families may come to depend on a single earner abroad, whose job can vanish. Migrant workers themselves sometimes face exploitation and high recruitment fees. And sending money has often been costly; the Sustainable Development Goals include a target to cut average transfer fees to below 3 percent.

Assuming remittances are wasted on consumption

Critics sometimes complain that remittances are "only" spent on everyday needs rather than invested in businesses. But spending on food, schooling and health care is itself an investment in people. A better-fed, better-educated child is a real development gain, even if it never shows up as a new factory.

Key takeaways

Remittances to developing countries are several times larger than official foreign aid.
They flow directly to households and are often spent on food, schooling and health.
They tend to rise when home economies are hit by crises, acting like informal insurance.
Emigration can cause brain drain, but the prospect of migration can also encourage education.
Risks include dependence, exchange rate pressure and high transfer costs.