Is There a Remittance Trap?

• Author: Ralph Chami, Ekkehard Ernst, Connel Fullenkamp, and Anne Oeking
• Pages: 44-47

44 FINANCE & DEVELOPMENT | September 2018

W

orkers’ remitt ances—the money

migrants send home to their

fami lies—command the attention

of economists and policyma kers

because of their potential to improve the lives

of millions of people. Amounting to over $400

billion in 2017, remittances ran k between ocial

development assistance and foreign di rect invest-

ment in terms of size. Such massive na ncial ows

have important consequences for the economies

that receive them, especia lly when many countries

receive ows that are large relative to the size of

their exports or even their economies.

Many argue that rem ittances help economies in two

ways. First, because remittances are person-to-person

transfers motivated by family ties, these tra nsfers

from outside the country help relatives back home

aord the necessities of life. But remitta nces also have

the potential to fuel economic growt h, by funding

investment in human or physical capital or by n anc-

ing new busi nesses.

Economists have worked to measure bot h of these

eects. Many stud ies conrm that remittances are

essential in the batt le against poverty, liftin g millions

of families out of deprivation or bare subsistence. But

at the same time, economic resea rch has failed to nd

that remittances m ake a signicant contribution to a

country’s economic growth (see Chart 1).

e latter result is puzzling, especially given the

nding that remittance income helps families consume

more. Consumption spending is a driver of short-term

economic growth, which in turn should also lead to

longer-term growth as industries expand to meet the

increased demand. But research that digs deeper into

the remittance-growth nexus increasingly suggests that

remittances change economies in ways that reduce

growth and increase dependence on these funds from

abroad. In other words, there is increasing evidence of

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

PHOTO: ISTOCK/ RAMZIHACHICHO

Beirut, Lebanon.