Remittances: The Most Visible Impact of Migration
– Sarthak Gupte,
S.Y. BSc. Economics (2023-27)
Estimated Reading Time ~ 5 minutes
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Recent news headlines say that India has yet again topped the list of countries receiving remittances from abroad at $111 billion in 2022. The International Organization for Migration (IOM), an agency associated with the United Nations (UN), recently released the World Migration Report 2024 which confirmed this figure. This report tries to explain the dynamics of migration patterns and conveys a complete picture of the migrant community residing across the globe.
But hold on. What does remittance actually mean and how does it really matter to any country?
Well, to understand what causes this inflow of money, we must first understand migration. The movement of people from one locality or region within the country or country to another temporarily for a short duration or permanently is called migration. However, there is no single internationally acceptable definition of the term ‘migrant’. According to the International Organization for Migration, “ a person who moves away from his or her place of usual residence, whether within a country or across an international border, temporarily or permanently, and for a variety of reasons” can be termed as a migrant.
Now, migration can be internal as well as international. It can also be from rural to urban areas. Here however, we are only concerned with the international migrants who move across international borders voluntarily or involuntarily (forcefully). Some of them join the labour force in the destination country and start earning a living to sustain themselves. ‘Destination country’ or ‘host country’ refers to the place where people have newly settled or immigrated. ‘Country of Origin’ is the place where the person was born and raised. They also send some portion of their earned income back home, to their country of origin. This transfer of money is known as ‘Remittance’. It also includes goods and gifts but primarily refers to funds.
Remittances help migrants to improve their families living conditions back in the home country. Wage differentials and exchange rates play a key role here. Even though the migrants might earn less in the host country than the natives, they certainly do earn more if the wage is converted to their home country’s currency (Todaro, 1976). This fact encourages migration. Remittances have actually reduced poverty amongst the receiving households (Adams and Page 2003, 2005; Gupta, Pattillo, and Wagh 2009). It acts as an additional source of income for them. For richer households, they get funds for entrepreneurial activities whereas the poorer ones can fulfil their basic daily consumption needs. From a macroeconomic perspective, remittances serve as a reliable source of foreign currency which is more stable than other capital inflows like foreign direct investment and development aid (World Bank 2005, Ratha 2003). They have proved to be stable during the 2008 Financial Crisis for host countries like the US as migrants cut down on expenditure to absorb income loss but also feared leaving the host country as they might not be able to re-enter it. This led to an increase in remittances even during these turbulent times.
However, over-dependence on remittances can reduce the labour force participation in recipient countries which could lead to a slowdown in economic growth. In terms of dependency of the recipient nations on these funds, there isn’t one internationally accepted way to calculate this overreliance but it is generally measured by assessing the remittances to Gross Domestic Product (GDP) ratio.
A remittance usually goes through three steps. First, the migrant sender pays the amount to the sending agent using cheque, money order, cash, credit or debit card or a debit instruction sent via an email, phone or through the internet. Then the sending agent informs its agent in the recipient’s country to deliver the funds. Finally, the making agent delivers the remittance to the recipient.
Data shows that international remittances have depicted an upward trend in recent times. From $128 billion in the year 2000 to $831 billion in 2022, they did not fall below the predicted 20% line by the World Bank even during the Covid-19 pandemic, declining merely by 5.4% in 2020. India became the first country to cross the $100 USD billion mark in 2022, receiving more than $111 billion USD. It has consistently occupied the first rank in this list since 2010. As per the World Migration Report 2024, the most number of international migrants (nearly 18 million) were from India.
Image Courtesy: The Economic Times
Remittances are essentially private funds transferred by a person to another or to a household. They are ‘‘dollars wrapped with care’’, says World Bank economist Dilip Ratha. Receiving households spend them primarily on education, housing, clothing and food, thus improving their overall socio-economic conditions. High-income countries like the USA, Saudi Arabia, Switzerland and Germany have been the top remittance sending countries to low and middle income countries from where migrants come from. Sure, there are transaction costs that migrants have to incur but they have declined over the years.
Now, if you consider migration to be a problem of brain drain, you must also consider remittances that your country benefits from. Migration is mutually beneficial for both, the country of origin and the host nation. And the migrant is the greatest beneficiary of this symbiotic relationship!