How remittances bolster emerging economies

Remittances play a well-known but little discussed role in emerging markets around the world. Low-income countries like El Salvador are heavily dependent upon such payments from families and friends who work in other countries, with roughly 20% of gross domestic product coming from remittances. The payments are an important way that capital flows on a person-to-person basis from wealthier countries with strong economies to areas where opportunities are more limited. We can think of these private transfers of capital as an unofficial form of foreign aid, with obvious benefits for the recipients and indirect benefits for the donors. Such payments not only provide money for those in need, but in the process they also strengthen low-income economies and create a market for American goods and services. Increasing the well-being of low-income families is in the economic interests of the United States and tends to reduce the spread of disease and can on the margin reduce the undocumented flow of migrants by bolstering emerging economies. Last year, American workers sent nearly $73 billion in remittances to other countries, according to estimates from the World Bank Group’s knomad.org. Overall, global remittances are expected to total $800 billion this year. Remittances to India alone were valued at $100 billion, while $60 billion was sent to families in Mexico. Families in China received $50 billion from workers abroad.

Remittances start in higher-income economies…

There is an obvious relationship of remittances between high- and low-income countries. Remittances originate in countries where employment is available and tend to end up in countries where workers often receive subsistence wages.

…and are sent to low-income economies

Remittances sent to Lebanon, for example, account for 38% of gross domestic product. In El Salvador, Honduras, Jamaica and Haiti, remittances are expected to exceed 20% of GDP this year. In Mexico, where the population and economy are larger, remittances account for only 4% of gross domestic product.

After declining, remittances are back on track…

Remittances dropped in 2020 when economies were closed and employment and excess income were harder to come by. Then they increased as economies reopened last year but were not followed by a post-pandemic spike. That speaks to the informal employment that is typical of U.S. migrants. The reestablishment of remittances can be attributed to the tightening labor markets in advanced economies, the spurt of growth in the post-pandemic era, the increase in wages and the rise in the dollar’s value where applicable. In Europe, a weaker euro had the opposite effect of reducing the U.S. dollar valuation of remittance flows to North Africa and elsewhere.

…but what about next year?

Next year, the World Bank expects the growth rate of remittances to moderate because of a weaker economic outlook for the United States. With respect to the Russia-Ukraine war, rising oil prices and the post-pandemic rebound in Russia’s demand for migrant workers increased the flow of remittances to Central Asian and Southern Caucasus countries.

The takeaway

The $73 billion of U.S. earnings sent abroad to families in need is not trivial. But those remittances also highlight the need for a sensible immigration policy. American businesses are facing a persistent shortage of labor. Discrepancies in census numbers create a burden on local governments that are responsible for the health and education of its population. Closing the gap between formal and informal labor would increase income tax revenue and close the funding gap for social services.