Millions of people migrate from developing countries every year not only to improve their own economic circumstances, but also to make life a little better for loved ones who are unable or unwilling to leave home.
Ever wonder, for example, why 10, 12, or 15 immigrants would choose to live together in a tiny apartment? It’s not because the enjoy it. It’s because they are doing everything they can to keep their expenses low and send as much money home as possible to the children, parents, spouses, siblings, and grandparents who stayed behind in the home country.
This money—often called “remittances”—has become an increasingly massive source of income to developing countries over the past two decades. As the chart shows, remittances sent to developing countries (the red line) totaled more than $300 BILLION in 2009. That’s twice the amount rich countries contributed to poor countries in the form of official development assistance (the green line) and greater than net foreign investment inflows to developing countries (the blue line). And all this during an economic crisis!
The beauty of remittances is that they are transferred directly from migrants to their family members, bypassing corrupt government officials. And unlike loans, they do not burden developing countries or poor households with repayment schedules and interest.
Surveys conducted throughout the developing world find that remittances are generally used to purchase the most basic goods and services—food, clothing, medical care, books and tuition, housing, water, electricity, gas, etc. In a survey of 767 households that I conducted in Mexico in 2008, 57% of households reported that buying food was their primary use of remittances. Healthcare and medicine came in second place.
What explains the sharp increase in remittances over the past two decades?
One factor is that there are more people living outside of their country of birth today. Still, when you divide the amount of remittances sent by the number of migrants, you find that the average migrant today sends more money home than his counterpart in the past.
Another explanation is that migrants send more money home today simply because it’s easier and cheaper than ever to do so. Throughout the developing world—even in very rural towns and villages—banks and companies like Western Union and MoneyGram have set up shop so that people can receive money from abroad quickly and efficiently. With the boom in electronic transfers and to stay competitive, banks and wire transfer companies have gradually reduced the fees they charge.
A third point is that some of the increase in remittances is an illusion. Electronic transfers are easier to keep track of, so governments are now able to count money that once flowed to developing countries in the form of cash. Still, even since the boom in electronic transfers began in the early-2000s, remittances have increased greatly.
A final reason, which I wrote about in my dissertation, is that cuts to social spending in developing countries over the past two decades have left the poor without subsidies and other social safety nets that they were once depended on for their survival. As government support has been reduced, households now rely more on private self-insurance strategies.
In a future article, I’ll write about how governments have developed programs to encourage migrants to invest in their home communities by contributing cash to public works projects.