Is There a Remittance Trap?

Is There a Remittance Trap? High levels of remittances can spark a vicious cycle of economic stagnation and dependence

Ralph Chami, Ekkehard Ernst, Connel Fullenkamp, and Anne Oeking

Ralph Chami: Avoiding the Remittance Trap

Workers’ remittances—the money migrants send home to their families—command the attention of economists and policymakers because of their potential to improve the lives of millions of people. Amounting to over $400 billion in 2017, remittances rank between official development assistance and foreign direct investment in terms of size. Such massive financial flows have important consequences for the economies that receive them, especially when many countries receive flows that are large relative to the size of their exports or even their economies.

Many argue that remittances help economies in two ways. First, because remittances are person-to-person transfers motivated by family ties, these transfers from outside the country help relatives back home afford the necessities of life. But remittances also have the potential to fuel economic growth, by funding investment in human or physical capital or by financing new businesses.

Economists have worked to measure both of these effects. Many studies confirm that remittances are essential in the battle against poverty, lifting millions of families out...