Remittances and Economic Development

Economic Engine

One of the major sources of financial flows to developing nations over the past few decades has been the remittances of workers. While it is apparent that international money transfers impact recipient households that reduce poverty and smooth consumption, a crucial practical question is whether they also help impact recipient households that reduce poverty and smooth consumption.  

In recent years, they have expanded quickly and are now the main source of foreign currency transfer for many emerging economies. However, in comparison to 2020, there was an 8.6% increase in global remittances, and in 2022, it is expected that they would reach $630 billion.  

The majority of remittances made it home by migrant workers go through physical businesses where customers pay cash, but the coronavirus outbreak caused a significant change in favor of digital. This is significant since mobile payments are more affordable and easier, especially for individuals who live in remote regions. In developing nations, remittances act as a stimulus for the growth of the financial system and monetary policy.  

Remittances reduce the barriers to lending to the poor, enhance capital allocation, fill the gap left by a lack of financial development, and stimulate economic progress.  

The relationship and trends between remittances and economic growth

Although remittances have a direct impact on reducing poverty, it is still unknown how they will affect overall economic growth in the receiving countries. This is due to the influence of remittances having a number of competing elements.  

On the one hand, by encouraging extravagant expenditure and discouraging saving, remittances can harm the economies of recipients. Contrarily, through investment and access to financing, remittances can have a positive effect on GDP. Remittances can specifically aid in the start-up of self-employment in a typical developing nation where there is a plentiful labour supply but few official job options. By easing credit restrictions, which are frequent in the unorganized sector in developing nations, remittances can promote the development of new small-scale firms and encourage entrepreneurship.  

Remittances are more productive than international assistance since the money flows directly to households with less chance of fraud or waste. Due to the billions of dollars that migrants. workers send home each year, remittances account for a sizable portion of a country’s GDP. The number of remittances sent home may change if inflation results in a price increase for goods and services. The report by the Asian Development Bank of 2018 confirms a rigid reduction in poverty with that of 1 per cent in 10 different Asian countries.  

“The two economies with the greatest emigrant populations around the globe are India and the People’s Republic of China, which have also received the largest amounts of remittances, with India alone accounting for more than a quarter of both the Asian total.”  

Positive Impact of Remittance on Economy 

  1. For low-income nations, remittances are an important source of foreign currency transfer. 
  1. The financial markets will become more liquid as a result of higher remittance flows, which might lower interest rates and promote lending and investment.  
  1. Funds are provided for new company ventures through remittance revenue.  
  1. Most of the money received through remittances is spent, increasing overall demand. They may result in a bigger economic growth boost as it is called to have a multiplier effect.  
  1. Boosts a nation’s gross national income and increases the real buying power of its citizens.   
  1. Remittances can enhance financial literacy, remove credit limitations for the unbanked population in impoverished rural regions, help with asset accumulation and company ventures, and lessen poverty.  
  1. By enabling better hygiene practices, healthier lifestyles, access to quality healthcare, and higher educational achievement, remittances can support the building of human capital.  

Restrictions of Remittance on Economy

  1. A rise in the currency rate due to significant remittance inflows might reduce competitiveness.  
  1. Geographic isolation and inadequate transportation systems in certain nations limit the opportunities for international migration and remittance inflows.  
  1. By increasing the demand for non-tradeable goods, raising their costs, boosting the real exchange rate, and decreasing exports, remittances can make it more difficult for a nation to compete on the global stage.  
  1. Increased anti-immigrant sentiment and more enforcement measures in receiving countries can diminish both international migration and remittances.  
  1. According to the World Bank’s General principles for international remittance services Guidelines of 2007, Due in large part to their social and economic standing, “access limitations” for some end users of remittance services can significantly worsen transparency issues. They can also lack the time and financial awareness to find and contrast different remittance providers. Even if the market is theoretically competitive, this may dramatically reduce the number of services they have access to. For instance, low-income immigrants in a foreign nation may struggle to understand remittance services and establish their creditworthiness due to language barriers (if they have no track record of using credit).  

Remittance flows may greatly improve the living conditions of recipient households by balancing their consumption and allowing investments in people and other resources. They promote economic stability, improve creditworthiness, and can attract investments to bolster economic growth and alleviate poverty in the receiving country on a worldwide scale.  

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Advait Panchal

Advait Panchal