Remittances represent major part of some economies | Destination Europe | DW | 11.01.2012
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Destination Europe

Remittances represent major part of some economies

Many people decide to migrate in order to support their families back home. The small sums remitted back are of great economic importance, but they can also cause problems.

A 500 euro bill in a mailbox

Money makes the world go round

Barbara Czarnecki, which is not her real name, is happy in Cologne. She has been living and working in Germany for almost 20 years, and regularly sends money back to Poland.

"Every month I transfer between 300 and 400 euros," the 56-year-old woman told Deutsche Welle, adding that her son in Poland does not earn enough money to support himself. Until recently, she also supported her mother, whose meager pension just about covered her rent.

Students in a classroom in Morocco

Many migrants transfer money to cover their children's school fees

Czarnecki is just one of many migrants living and working in the European Union who regularly sends money - a monthly average of some 300 euros ($401) - back home. About a third goes to other European countries, with the majority of the rest being sent to developing nations.

The individual sums are small, but collectively they are of great economic importance: The World Bank estimated that global remittances are worth about $325 billion a year - more than three times as much as international development aid.

Help for basic needs

Remittances are unique in that they are transferred directly to the beneficiary without governments interfering in how the money is spent.

"Remittances tend to be spent on buying consumer goods," Thomas Liebing expert for migration at the Organization for Economic Cooperation and Development (OECD), told Deutsche Welle.

In the world's poorest countries, the money ensures the survival of the migrant's family and is spent on basic necessities, such as food, medicine or on educating the family's children. As such, Liebig said, money sent home also contributes to development.

"It is difficult to prove a direct correlation between development and remittances," Liebig said. "But remittances definitely do more than merely fuel short-term consumption."

In order for the money to contribute to development, it has to go to where it is needed. Given the rudimentary nature of the banking sector in many migrants' home countries, those sending the money depend on money transfer operators, such as Western Union or Moneygram. But these services are expensive. The fee to transfer 300 euros from Germany to Uganda for example, is 26.50 euros.

Inflation fuelled by remittances

Costs are not the only down side. Several studies showed that remittances can actually contribute to inflation, and consequently to falling standards of living among the world's poorest families. Migrants also tend to invest in houses in their home countries, thereby pushing up land prices to such an extent that only families supported by migrants working abroad, are can afford to buy a home.

A woman cleaning a floor

Czarnecki works as a cleaner

What's more many countries depend on money sent home as their main source of income. In Tadzhikistan, for example, remittances account for almost half of the country's gross domestic product. In the Republic of Moldova they constitute about a third of GDP.

"Those economies import more than they produce, and that can be dangerous," Liebig warned, adding that economic development can solve the problem.

"Germany and Turkey are a good example," Liebig said. "Some 50 years ago, when migrants started coming to Germany to work, their remittances were extremely important for the Turkish economy. Today, they're virtually irrelevant."

Dilip Ratha, an economist at the World Bank, said it is not up to private transfers to develop a country, but that direct investments and development aid are key.

"That's the way it's supposed to be," Ratha said. "Remittances shouldn't be instrumentalized. They have to remain what they are: direct help for those in need."

Author: Helle Jeppesen / nc

Editor: Sean Sinico

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