Remittances increase GDP

Immigration, Displacement and Asylum: Current Issues

Stefanie Hertlein

To person

Stefanie Hertlein studies geography, economic policy and ethnology at the University of Freiburg.

Florin Vadean

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Florin Vadean is a member of the Migration Research Group, Hamburgisches WeltWirtschaftsInstitut (HWWI), doctoral student in economics at the University of Hamburg and Research Fellow of Research on Immigration and Integration in the Metropolis (RIIM), Vancouver, Canada.

In contrast to official development cooperation and foreign direct investment, remittances have increased steadily in recent decades and today represent an important source of income for countless households in developing countries.
Mexican migrant worker in California. (& copy picture alliance / landov)

Is the financial support from migrants now a step towards solving the poverty problem in developing countries? Or are they maneuvering the countries into a new dependency?

Opinions differ on how remittances affect poverty reduction, income distribution, spending behavior, education and health, investment and growth, and national balances of payments in developing countries. This is due to the inadequate data situation on the one hand, but also to different research methods on the other.

Poverty reduction

In the short term, the influence of remittances on the individual household income of the addressees can be assessed positively. The great advantage of remittances is that they are paid directly to individuals and families. Unlike government development aid and foreign direct investment, they do not flow to the state, companies or other organizations, but directly increase the disposable household income. As a rule, they are therefore aimed at satisfying specific needs of the recipient families. It should be emphasized at this point that there can be no direct comparison between remittances and the sources of money just mentioned: remittances are private capital and it is therefore up to the individual migrants and their families to decide how the funds are used.

The Office for Population in Mexico (CONAPO) estimates that remittances received in 2004 benefited 1.4 million Mexican households. These financial inflows represent an average of 47% of the beneficiaries' ordinary family income. There is also a consensus in the Philippines that households that receive remittances are financially better off, as they have an average monthly income that is 45% above the minimum wage. In addition to the direct improvement in the income situation, remittances also offer the beneficiaries certain security. While foreign direct investments in particular are subject to strong fluctuations, remittances have represented a stable, steadily increasing inflow of funds into developing countries since the 1990s (see Diagram 1). Above all, their stability in economic troughs makes them extremely important for the recipients. Often even an anti-cyclical increase is observed, i.e. migrants abroad increase the scope of support for their families in times of economic crisis. This behavior, for example, saved the Philippine economy during the financial crisis in Asia. A recession could only be prevented by increasing remittance flows, which supported domestic consumption and helped over the slump in export figures. In El Salvador, the government took advantage of this behavior and, during the devastating hurricane "Mitch" in 1999, appealed to its US citizens to increase support for their families.

The immediate increase in the available family income is therefore a significant support, especially for households in the lower and middle income segments. In addition to improving the standard of living, remittances also reduce the vulnerability in the event of natural disasters or economic crisis situations.

Distribution of income

The comparison of different case studies does not reveal any uniform pattern of effects on income distribution or even shows contradicting results. These differences can be due, among other things, to traditional migration patterns. As a rule, it is members of the middle income groups who are the first to move to other countries, as only they can afford the high costs of migration. As soon as migration networks have formed, the out-of-pocket expenses are much lower; which also enables poorer groups of people to emigrate. It is assumed that remittances go hand in hand with this migration behavior and therefore exacerbate an existing income inequality in the short term, which will, however, even out in the long term. In the beginning, remittances from migrants from the middle income brackets increase the household income of their families, which puts these families in a better position in the short term, before poorer households can catch up again through the migration of a family member.