EconomyNewsThe Macroscope

Harnessing the diaspora

What happened?

Remittances (i.e. the money that migrant workers send home to their families) have become a fundamental part of the economy of many countries. In 2019, official remittances are on track to reach $550 billion. This means that remittances (excluding those to China) are now larger than foreign direct investment (FDI) in low- and middle-income countries. Remittances are also more than three times larger than foreign aid. In some countries, like Tajikistan and Nepal, remittances already surpass 25% of GDP. Interestingly, these countries will be more vulnerable to economic shocks from foreign labor markets rather than changing interest rates.

What does this mean?

Although remittances reflect the highly problematic brain drain of developing countries, it can be a more effective driver of development than foreign aid or investment. When hardship in developing countries increases, foreign investment is likely to decrease, but remittances from family members tend to increase. Moreover, as opposed to foreign aid and investment, remittances flow directly to the poor (instead of mostly corrupt governments). Unfortunately, the high cost of sending money home (which globally averages 7% on a money transfer of $200, rising up to 20% within Africa, and up to 90% in Venezuela) remains a barrier to the growth of remittances (although blockchain technology promises to boost remittances by cutting out financial middlemen).

What’s next?

Remittances are booming, but they reflect the much larger potential of a country’s diaspora. Family ties have a stronger influence on economic development than just remittances: countries trade more with, and invest more in, diasporas’ home countries, and countries are good at making products that their migrants’ home countries excel at. As global migration continues to grow, states and families will continue to look for new ways to leverage their diaspora in order to boost economic development, such as India’s diaspora bonds and dollar deposit scheme and Israel’s start-up programs.