Importance of Remittances for the Future of the Economy

Global remittances are currently around $656 billion annually, and they’re expected to grow a further 1.4% in 2023. This makes them a serious economic force.

This concept exists forever. One family member moves to a different country (with a higher purchasing power parity) and sends a part of their salary back home. Due to discrepancies in purchasing power and living standards between the target country and their current residence, the difference may be so substantial that they elevate their families standing quite drastically.

An example of how this has worked in the past could be seen in the German Guest Worker Program (Gastarbeiter program), which started in 1955. Due to the catastrophic effects of WW2 on the German workforce, workers from Italy, Spain, Greece, Turkey, and Yugoslavia rushed to Germany for work. Due to a low living standard in their home country, they were considered an affluent part of the society upon returning, even though, in Germany, they often worked on a minimal wage.

Still, how does all of this work in the 21st century, now that we have access to the internet and cryptocurrencies and now that 6.9 billion people have smartphones? Let’s check it out.

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1.   Economic growth of receiving countries

The first major advantage of remittances is that they lead to the economic growth of the receiving country. Remember, it’s not just that the family receives the money, they spend it in the local economy, and this non-debt money gets infused into the local economy, making it more valuable.

If you fail to see what the target country gets from it, the first major aspect is the labor of a highly-driven workforce. People trying hard to send money back home are loyal, consistent, and generally a productive part of the population.

Remember that, on average; migrant workers send $200 to $300 back home, which is not enough to weaken the target economy (it’s just 15% of what they earn). However, back at home, it makes a world of difference. Now, if, at the expense of this 15%, they can be much more productive and reliable, then it’s a small price to pay for any economy.

With more money pumped into the local economy, there’s an enormous boost in customer spending. This alone would increase the demand for local products and improve local enterprises’ lives.

Another thing to understand is that many developed countries are committed, through one program or another, to help these developing countries. This means there’s no need for foreign aid programs (to that degree) when the local populace is boosting their own economy (albeit far away).

2.   Financial inclusion and innovation

A lot of banks and financial institutions depend on remittances. Just think about it for a second – we’ve mentioned the figure of $656 billion. Most of this money comes through formal channels like banks and transfer unions.

In other words, people sending remittances are motivated to apply for official documents that will allow them to open bank accounts and apply for these financial services.

One problem with this system is that because these people are sometimes desperate, banks sometimes set predatory conditions and charge outlandish fees. Having no other choice, people sending remittances accept these terms.

Well, this may change soon when more and more people embrace cryptocurrency as their preferred way of sending remittances back home. As we’ve mentioned earlier, about 6.9 billion people already have access to smartphones and the internet, which means that it shouldn’t be hard to people (both sending and receiving remittances) just to open crypto wallets.

With crypto, these transfers will be much quicker and cost less. Sure, well-established tokens like Bitcoin and Ethereum are great for this already, but there are new coins every day, some of which may be even more convenient for these tasks.

It’s important to understand that crypto has flaws, but the influx of new options may urge some well-established financial institutions to reconsider their stances. More competition is great for innovation, and, at the very least, it will benefit the customer.

3.   Attracting foreign direct investment

A high volume of remittances may also attract a lot of foreign investment to the region. You see, foreign investors assess the region by the amount of economic stability and the amount of local effort to make things better. This is where remittances make a huge difference.

Financial stability is often fragile; however, remittances don’t rely on the local economy. The economy of the target country is usually far more stable and resilient. For instance, even though the Western world is also facing high inflation, the definition of “high” for inflation greatly differs from region to region. Record high inflation in a country like US or Canada may be incredibly low when the numbers are compared to a country in development.

There’s one more thing to bear in mind; remittance recipients often use this money to invest in education. This means many young people are getting new skills and have much-improved employability. Many employers are looking for the availability of this kind of talent. Otherwise, they would have to bring their experts (from their own country), which would be insanely expensive.

Also, it’s not unheard of that a person working abroad works alongside their employer so much that they decide to use their country of origin as their future offshore branch. After all, they have someone reliable, someone who knows the language. Also, if everyone in their home country has the work ethic of this “star employee” of theirs… Of course, this is not a guarantee but a connection many people make.

If anything, people sending remittances usually work harder, earning a certain reputation for all of their countrypeople.

4.   Diaspora engagement

This is incredibly important both for the integration of economic migrants into the target culture and the preservation of their own identity. You see, a lot of people develop a false belief that maintaining a strong connection with your country of origin will hamper your integration rate. However, nothing can be further from the truth. A strong and authentic identity will allow a person to coexist in both cultures.

Since remittances mandate the maintenance of the connection between individuals in the target country and people back at home, this connection is bound to remain consistent.

Most importantly, there are a lot of fields in which these diaspora engagement side-effects of remittances can lead to a significant knowledge transfer. Tourism and investment (something we’ve already elaborate on in the previous section) are just two examples. Cultural exchange and collaboration in various sectors are also guaranteed.

Remittances benefit the local economy and offer numerous perks to the target country

Remittances are an integral part of the global economy, and with so many people having access to smartphones and the internet, these matters now run semi-automatically. One of the most surprising statistics is that, even during the pandemic, the amount of remittance money sent didn’t drop. In other words, this is an incredibly resilient economic branch worth more serious consideration.

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