Remittances, Foreign Aid And Other Capital Flows

by Constantin Gurdgiev, TrueEconomics.Blogspot.in

So globally, remittances by migrants are now worth more than double the total flows of foreign aid and more than portfolio flows (financialised investment).

In fact, remittances are now second in importance to only FDI.

 Source: Economist; H/T: @RonanLyons

The latter fact is not surprising as remittances already were second largest source of capital inflows for developing countries at the start of the century and even before (see more on this here covering data until 2000). Interestingly, at variance with the above chart, evidence before 2000 suggests that remittances were negatively (though not statistically significantly) correlated with private capital flows. It appears this negative correlation has been substantially reversed in post-2000 period.

Another study looked at the effect of remittances in Sub-Saharan Africa – the world’s poorest region overall, where foreign aid is a very important driver of ‘official’ development. The study (link here) found that

“remittances, which are a stable, private transfer, have a direct poverty mitigating effect, and promote financial development. These findings hold even after factoring in the reverse causality between remittances, poverty and financial development.”

Globally, the same was established based on pre-2000 data (link here).

A 2009 paper ties remittances (positive effect on long-term growth in the receiving economy) to the degree of development of financial services in the economy (a factor that positively reinforces growth effects of remittances) – details of the studyhere. Which is sort of a good thing, as remittances themselves promote financial services development (see a study covering 1975-2003 period here).

Given Latin America’s experience with emigration and brain drain, data on remittances effects in these countries is interesting in itself. More interesting, however, is the following study that looked at links between remittances, poverty reduction, education and health in recipient countries.