Remittances in Development. A Wobbly Crutch

• Author: Ralph Chami; Connel Fullenkamp
• Position: Division Chief in the IMF's Middle East and Central Asia Department/Associate Professor of the Practice of Economics at Duke University
• Pages: 31

Page 31

MANY economists are optimistic that remittances can be a major contributor to economic growth and development, and it is impossible to deny that remittances help lift millions out of poverty. But remittances do not represent a first-best solution to the problems of poverty and development. Far from it. They are costly to those who receive them and are difficult to channel into activities that lead to economic growth and development. They also have unintended consequences that may even make them obstacles to development.

Remittances aren't cheap for those who earn them. One or more family members—usually those most important to the family's well-being, such as the head of household— must make a long, expensive, and often dangerous trip, remaining apart from their family for months or years at a time. This places a tremendous burden on those left behind, economically but also emotionally. Children of remittance-receiving families often grow up without the benefit of close contact with both parents, and the entire family's stress level is heightened by the absence of one or more members. For example, involvement in gangs by children left behind by remitting parents has been reported in several countries. All of these factors make the pursuit of remittances a costly, risky investment for families. Who would want to make this investment, other than the truly desperate?

These transfers are intended to provide for people's basic need for food, clothing, and shelter. The effort to lift people out of poverty is laudable, and numerous survey studies on the use of remittances have concluded that remittances have always been overwhelmingly directed toward consumption and not investment activities. But we should not expect remittances to be engines of growth in the same way as foreign direct investment.

Even when remittances are "saved" by households, this typically means that the household uses the funds to purchase land or a better home or for home improvement. This generates very little new capital or other economic activity. Research on the effects of remittances on growth finds, at best, no robust, positive effect on economic growth and often reveals a negative effect (Barajas and others, 2009). For years, many countries have received huge amounts of remittances, relative to their gross domestic product, but there is not one example of a country that has exhibited remittance-led growth. Where is the remittances success story?

Remittances...