The Role of Remittances in Supporting Sustainable Development in Recipient Countries

Joachim Adeponle

15 Nov 2023 • 6 min read

Remittances, or money sent home by migrant workers, have become a significant source of income for many developing countries. In 2022, remittances reached a record high of $621 billion, surpassing foreign direct investment (FDI). These funds play a vital role in poverty reduction, healthcare, education, and other essential services in recipient countries.

Global trends in remittances

Global remittance flows have been steadily increasing over the past few decades, reaching a record high of $831 billion in 2022. This growth is attributed to factors like rising migration, economic growth in migrant-sending countries, and the development of new remittance channels.

India, China, Mexico, the Philippines, and Egypt are among the top remittance-receiving countries, reflecting their large migrant populations.

Remittances play a significant role in the economies of many developing countries, accounting for an average of 4.9% of GDP in 2022. In certain countries, remittances constitute an even larger share of GDP, reaching 21% in Tajikistan and 19% in the West Bank and Gaza in 2022.

Experts have noticed that remittances exhibit countercyclical behaviour, increasing during periods of economic hardship in recipient countries. This pattern reflects migrants' tendency to send more money home when their families face financial challenges.

Digital remittances are gaining traction due to their convenience and affordability compared to traditional methods like bank transfers and money orders and with that, the cost of sending remittances has been declining in recent years due to competition from new remittance providers and migrants are increasingly using remittances for productive purposes, such as investments in education, healthcare, and businesses in their home countries.

Global remittance flows are projected to continue rising in the future, driven by factors like the increasing number of migrants, economic growth in migrant-sending countries, and the development of new remittance channels. Remittances will remain a vital source of income for many developing countries and will play a crucial role in poverty reduction, healthcare, education, and other essential services in recipient countries.

The impact of remittances on poverty reduction

Remittances play a significant role in poverty reduction in developing countries. They are a direct source of income for millions of households, helping to reduce poverty and inequality. Remittances can also improve household food security and nutrition, and enable households to invest in education and healthcare. Below: we shall be looking at some core points on the impacts of remittances on poverty reduction:

1. Remittances as a direct source of income

Remittances are a direct source of income for millions of households in developing countries. In fact, they are the largest source of external financing for developing countries, exceeding official development assistance (ODA). In 2020, remittances totalled $540 billion, representing an average of 11% of GDP in low- and middle-income countries.

Remittances help to reduce poverty by providing households with a much-needed source of income. This income can be used to meet basic needs, such as food, shelter, and clothing. It can also be used to invest in education, healthcare, and other assets that can help households improve their livelihoods.

2. Remittances and inequality reduction

Remittances also help to reduce inequality in developing countries. This is because they are often sent to households in rural areas and to female-headed households, which are typically the poorest and most vulnerable groups in society.

For example, a study by the World Bank found that a 10% increase in remittance inflows can reduce poverty by 0.7 to 1.4 percentage points in developing countries. The study also found that remittances are more effective at reducing poverty than other forms of aid, such as ODA.

3. Remittances and food security

Remittances can also improve household food security and nutrition. This is because they provide households with the income they need to purchase food. A study by the International Food Policy Research Institute (IFPRI) found that a 10% increase in remittance inflows can reduce hunger by 1.3 to 2.6 percentage points in developing countries.

4. Remittances and education

Remittances can also enable households to invest in education. This is because they provide households with the income they need to pay for school fees, books, and other educational expenses. A study by UNICEF found that a 10% increase in remittance inflows can increase school enrollment rates by 0.6 to 1.2 percentage points in developing countries.

5. Remittances and healthcare

Remittances can also enable households to invest in healthcare. This is because they provide households with the income they need to pay for medical care, medicines, and other healthcare expenses. A study by the World Health Organization (WHO) found that a 10% increase in remittance inflows can reduce child mortality rates by 1.5 to 2.5 percentage points in developing countries.

Remittances and Sustainable Development Goals

Remittances play a vital role in supporting sustainable development in recipient countries. They can contribute to the achievement of the Sustainable Development Goals (SDGs) in a number of ways.

Poverty reduction: Remittances are a direct source of income for millions of households in developing countries. This income can help to reduce poverty and inequality.
Education: Remittances can be used to pay for school fees, books, and other educational expenses. This can help to increase school enrollment rates and improve education outcomes.
Healthcare: Remittances can be used to pay for medical care, medicines, and other healthcare expenses. This can help to improve access to healthcare and reduce child mortality rates.
Infrastructure: Remittances can be used to invest in infrastructure, such as roads, bridges, and schools. This can help to improve the lives of people in recipient countries and promote economic growth.

Supporting sustainable development initiatives

Remittances can also support sustainable development initiatives in a number of specific areas. For example:

Sustainable agriculture: Remittances can be used to invest in sustainable agriculture practices, such as organic farming and agroforestry. This can help to improve food security and nutrition in recipient countries.
Climate change adaptation: Remittances can be used to help communities adapt to the impacts of climate change, such as by building seawalls or investing in drought-resistant crops.
Disaster relief: Remittances can be used to provide relief to victims of natural disasters, such as earthquakes and floods.

Promoting economic diversification and growth

Remittances can also promote economic diversification and growth in developing countries. They can help to create jobs, increase entrepreneurial activity, and reduce reliance on traditional sectors such as agriculture.

In addition to the points mentioned above, here are some other ways in which remittances can contribute to sustainable development:

Empowering women: Remittances can be used to empower women by providing them with financial independence and the opportunity to start their own businesses.
Promoting financial inclusion: Remittances can help to promote financial inclusion by providing access to financial services to people who are traditionally excluded from the formal banking system.
Remittances can encourage sustainable migration by providing a source of income for migrants and their families, which can help to reduce the need for irregular migration.

Overall, remittances play a vital role in supporting sustainable development in recipient countries. They can contribute to the achievement of the SDGs, support sustainable development initiatives, and promote economic diversification and growth. By harnessing the power of remittances, we can help to create a more sustainable and equitable world for all.

Stakeholders

Stakeholders including governmental and international finance organisations can help enhance the impact of remittances by doing the following:

Reducing the cost of sending remittances can increase the amount of money available to households in recipient countries.
Promoting financial inclusion can enable households to better manage their finances and invest in productive assets.
Encouraging remittances to be used for productive purposes, such as education and business development, can further enhance their impact on sustainable development.

Challenges faced by remittances in sustainable development

Despite the significant contributions of remittances to sustainable development, several challenges hinder their full potential:

Disruptions due to COVID-19: The COVID-19 pandemic caused widespread economic disruptions, particularly in migrant-sending countries, leading to a decline in remittance flows. This disruption threatened the livelihoods of millions of households relying on remittances for basic needs and essential services.
Digital transformation: The rapid adoption of digital technologies has revolutionized the remittance landscape, offering new opportunities for faster, cheaper, and more accessible remittance services. However, this transformation also presents challenges, such as ensuring financial inclusion for those without access to digital platforms and mitigating the risk of cybercrime.
Limited research on long-term impacts: While there is ample evidence on the immediate impact of remittances on poverty reduction and household well-being, more research is needed to understand their long-term effects on sustainable development outcomes. This includes assessing the impact on economic diversification, social inclusion, and environmental sustainability.

Future directions on remittances for sustainable development

To address these challenges and harness the full potential of remittances for sustainable development, several future directions can be explored:

Resilient remittance systems: Building resilient remittance systems that can withstand economic shocks and adapt to technological advancements is crucial to ensure the continued flow of remittances during crises and periods of uncertainty.
Digital inclusion and financial literacy: Expanding access to digital platforms and promoting financial literacy among migrant communities and remittance recipients are essential to fostering inclusive and secure digital remittance services.
Long-term impact research: Investing in comprehensive research on the long-term impact of remittances on various sustainable development goals is vital for policy formulation and effective resource allocation.
Policy coordination and partnerships: Strengthening policy coordination and partnerships among stakeholders, including governments, financial institutions, remittance service providers, and civil society organizations, can enhance the effectiveness of remittance-based development initiatives.
Leveraging remittances for social investments: Encouraging the use of remittances for social investments, such as education, healthcare, and infrastructure projects, can maximize their long-term impact on sustainable development.

By addressing the challenges and embracing the future directions outlined above, remittances can continue to play a transformative role in promoting sustainable development and achieving a more equitable and prosperous world.

Final words

Remittances play a vital role in supporting sustainable development in recipient countries. By reducing poverty, improving healthcare and education, and contributing to economic growth, remittances can help to create a more equitable and prosperous world.