Africa - Can Remittances Do the Trick?

Poverty causes migration. But migration also fights poverty. Migrants accelerate their home countries‘ development via remittances. Already today the total amount of remittances is several times higher than world-wide development aid. Are remittaces, therefore, a solution to help develop the African continent?


Africa is the world’s poorest continent. Especially Sahel is defined by poverty, famine and violence. Parts of the population move abroad from where it sends money back. Migrants support relatives or invest in their country of origin. This foreign capital is a tremendous economic factor. According to the World Bank world-wide remittances amount to more than 600 billion $ in 2015. In the same year development aid made up only a quarter of that.  The majority – 441 billion $ - was transferred to developing countries.


The advantages lie at hand. Remittances are mainly paid to support family members. This money can be invested in education, healthcare and to fight poverty. Even if it is spent unwisely, it will stimulate the economy as demand rises. In many cases remittances take over the role of banks: As the poor cannot get loans they lend money from relatives abroad. Investments increase and, with it, labor productivity and entrepreneurship. A higher efficiency increases wages. If migrants themselves invest in local companies, trade relationships become more important as well.


Remittances are immune against crises. If the economy shrinks, especially foreign investment decreases. Remittances are way more constant. Migrants prefer cutting their own expenses to be able to continue supporting their family. Especially during the world economic crisis remittances stabilized   developing countries‘ economies.


Remittances also have their flaws. They can make countries depend on cash from abroad. 10% of the Philippines‘ GDP consists of remittances. This makes the country more vulnerable towards international crises. Remittances can also cause inflation as foreign capital rises prices. Production can also decrease as labor moves abroad. People left behind may have less incentives to be economically active, because they receive money. If that money is spent on housing or foreign status symbols such as cars or jewellry the money outflows the country again. Moreover only those people receive remittances whose relatives migrate. This applies especially to the richer parts of society. Therefore, remittances can incerease the difference between rich and poor.


Remittances alone cannot eradicate poverty. Africa needs support in terms of security and adaptation towards Climate Change. However, Africa itself must also fight corruption and incentivize foreign investment. A wise use of remittances, however, can be a central aspect of the continent’s economic development.


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