Migrants′ money supports developing economies | Globalization | DW | 26.11.2012
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Migrants' money supports developing economies

The world's poorest countries are struggling because of the financial crisis, partly because of cuts in development aid. But migrants from those countries are remitting more money than ever back home.

Since the outbreak of the financial crisis in 2008, foreign direct investment in developing countries has dropped by 50 percent. In addition, the official amount of financial aid provided by most donor countries has sunk or at least stagnated. In most cases it is still far from the goal that the richer UN members have set for themselves: to donate 0.7 percent of GDP for development aid by 2015.

But there is one source of income that the developing world can rely on: the migrants who live and work abroad and, despite the crisis, send more and more money back home. A new study by the UN Conference on Trade and Development UNCTAD shows that the amount of money being sent back continues to increase.

Migration as an economic factor

Especially in the least developing countries, the money transfers are a major economic factor, UNCTAD's Igor Paunovich, one of the team compiling this year's report on the Least Developed Countries (LDC), told Deutsche Welle.

Igor Paunovic Copyright: UNCTAD/Jean-Philippe Escard

Paunovic says the poorest countries need remittances

What was noticeable, he said, was that, for some of the countries, the transfers have already become the second largest source of foreign currency – second only to foreign development aid.

"In 2011, the money sent back home by migrants was almost twice as much as direct foreign investment," says Paunovic. Migrants' remittances amounted to some $27 billion (21 billion euros) in that year and they are a lot more independent of crises than the countries' other sources of income.

Money for the family

According to Benjamin Schraven, an expert for migration with the German Development Institute (DIE) in Bonn, migrants' money is sent directly to their families but it still has significance for the economy as a whole. It's not only spent on day-to-day needs, but also for health, education and to help set up a family business. Schraven points out that the money may create work for other people, for instance if it was invested in the construction of a house.

But still, the transfers are not all good, he adds. They also lead to a certain dependency, both for the families and for the country as a whole.

Investing in employment and education

Paunovic admits that there is a danger when young people are simply financed by their relatives abroad. But in most cases, the money actually lifts whole families out of poverty.

UNCTAD's experts say they would like to see the poorest developing countries benefiting directly from these remittances. Their report suggests introducing so-called diaspora bonds: government bonds designed especially for migrants. That way the money from abroad could also be used for government investments like infrastructure and development.

Expensive transfers

Dr. Benjamin Schraven Photo: Helle Jeppesen for DW

Schraven criticizes the high cost of transferring money

UNCTAD believes the money could also help building up the countries' banking and finance sectors and that way create the foundation for further investments. Better financial institutions could also lower the costs of the transfers back home. Money transfers from a developing country or an emerging economy to another developing country are very expensive, says Schraven: "The World Bank estimates that a transfer of $200 dollar from South Africa to Zambia costs on average 45 dollars."

Bank rates between developing countries affect many people: four out of five migrants from the world's poorest countries don't work in the rich industrialized nations but in other developing or emerging economies.

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