Image courtesy of Wikimedia Commons / Faisal Akram

economist.com | Article Link | by S.H.

Can remittances help poor countries to grow rich? In many countries, the money received from workers who are toiling abroad represents a significant source of income. India received remittances last year that were almost three times as large as the inward investments made by foreign firms. In Tajikistan, as we have previously reported, migrant workers send home the equivalent of 47% of the country's GDP, and as many as half of the Tajik men in working-age are now believed to be living abroad. Similarly, an estimated 40% of Somalia’s population depend on remittances and need the cash to buy food and medicine. Remittances may be large but what are their effects on economic development? According to previous research, they are hard to detect.

Adolfo Barajas of the International Monetary Fund (IMF) finds with his co-authors in an IMF Working Paper that:

"decades of private income transfers—remittances—have contributed little to economic growth in remittance-receiving economies...the most persuasive evidence in support of this finding is the lack of a single example of a remittances success story: a country in which remittances-led growth contributed significantly to its development...no nation can credibly claim that remittances have funded or catalyzed significant economic development."

Remittances are set to exceed the half-trillion-dollar mark in the near future, according to a projection from the World Bank. The increase has been dramatic; in 1990 such flows amounted to $49 billion (in 2011 dollar terms). Why has such a rapid growth in remittances not led to any discernible growth in GDP? A recent paper by Michael Clemens of the Centre for Global Development and David McKenzie of the World Bank provides three possible answers.

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