Remittances (What Are They Good For?)
The One Billion-Person, $800 Billion Industry Many Have Never Heard Of
Unless you work in international aid, technology or finance – or know family or friends living abroad who send money back home (or send money home yourself) — you may not know what “remittances” are, nor realize the incredibly large role they play in the global economy.
But they do, and quietly so. Simply put, remittances refer to money sent from one country to another — usually from a family member earning income in one relatively wealthy place, to family or close friends living in another, less well-off one.
And as we’ll soon see, remittances are, I think, amazing. It’s hard to imagine a better vehicle for shifting wealth from the world’s richest places to its poorest, in a way that ensures the bulk of that money goes right to some of those who need it most.
The scale of this international money transfer is massive. The UN estimates around one billion people worldwide — around one in every eight people on earth — either send or receive remittances each year. And KNOMAD, the Global Knowledge Partnership on Migration and Development, estimates that $840 billion was sent globally in 2023.
Even this is a likely underestimate due to underreporting — and even so, it represents an incredible three times the money transferred to poor nations by official development assistance organizations like USAID.
Remittances matter not only for individuals and families, but constitute enormous parts of some economies as well. As Dilip Ratha writes for the IMF, “Egypt’s remittance receipts are greater than revenue from the Suez Canal; Sri Lanka’s exceed tea exports; Morocco’s are larger than tourism earnings." And some countries’ reliance on remittances is even higher. The World Bank reports that money sent from abroad constitutes 48% and 41% of the GDPs of Tajikistan and Tonga, respectively, and more than a quarter for each of Samoa, Lebanon, and Nicaragua. Indeed, El Salvador’s president cites as a primary motivator for his Bitcoin ambitions the full 25% of his country’s economy reliant upon payments sent home from abroad.
While remittances aren’t necessarily “technology” or “the internet,” they’re increasingly tied up with these things and can potentially benefit from them. As we discussed in recent posts investigating Bitcoin in El Salvador, many in the cryptocurrency community hope the technology can ease the cost and hassle of sending remittances across the globe.
This isn’t a guarantee, and crypto’s not the only way to improve remittances. But it’s worthwhile understanding what they are and why they’re important, especially as they play such a large role in our increasingly interconnected world.
Two dollars almost anywhere in the U.S. is worth very little. It’s hard to find a $2 coffee today; I tipped more than that on my ride from the airport. But imagine if you could double the income of your family back home by saving just one tip each day, or one half-coffee?
Remittance funds go a long way to helping their recipients, given the incredibly wide gap in global incomes and purchasing power. Even though many migrants only send home $200 or $300 each month, according to Gilbert F. Houngbo, President of the International Fund for Agricultural Development, this money alone can “make up about 60 per cent of the [recipient] family’s household income.”
And according to the UN, half of the money sent by remittances goes directly to rural areas, where a majority of the world’s poorest live. This means that even relative to some of the most efficient nonprofit organizations, each dollar sent can result in a great deal of impact.
I apologize for what may feel like a shocking example, but I’d like to share a story that I think illustrates the potentially transformative power of remittances. And the power of the immigrant visa allowing them to be earned — transformative not only for the person receiving it, but also their family and community back home.
A few years ago I met a Lyft driver named Benjamin who picked me up at the Salt Lake City airport. He told me as we drove how he’d grown up in Rwanda — and how, as a young boy, he was left orphaned following the country’s 1994 genocide.
Benjamin’s childhood was unsurprisingly full of hardship. He worked from a young age, shuffling between homelessness and the support of distant extended family. He told me how he’d learned as a teenager, almost by complete chance, of the US Immigration Services’ “Diversity Visa” system that rewards green card status to qualified applicants from countries with low immigrant numbers. (According to the ACLU, fewer than 1% of the one million-plus applicants each year receive the visa.) Rwanda was one of the the countries, and Benjamin was encouraged to apply.
He assumed it was a scam — this was, after all, well before the internet arrived in Rwanda. But on a whim, right before the deadline, he went for it.
And a few months later, he won. He learned the news via phone call (which he also thought, at first, was a scam.) And he was told he could live and work in the US for years if he could complete the necessary paperwork, and scrape together enough money for the flight.
It took Benjamin several years moving between immigration centers and cities before I met him in Salt Lake. But when I did, he’d built a decently comfortable life for himself. He spent a lot of time driving for Lyft and Uber and working odd jobs, but he could afford to rent an apartment and buy food. He had friends, and hobbies. We discussed beautiful destinations around the western US he wanted to visit once he found enough time and saved enough cash.
And Benjamin made enough to send money home to his extended family, too. Driving for Lyft and Uber isn’t exactly lucrative in the US: median rideshare driver income by state comes in well below the US median salary for full-time work. But contrast this with Rwanda’s median income of around $780 USD, or under $2.15 per day.
Two dollars almost anywhere in the United States is worth very little. It’s hard to find a $2 coffee today; I tipped more than that on my ride from the airport. But imagine if you could double the income of your family back home by saving just one tip each day, or one half-coffee?
Benjamin’s story is unique, of course. Most who cross the globe hoping to build a better life for their families haven’t experienced horrific childhood trauma, nor won a literal life-changing sort of lottery. (A lottery, it’s worth noting, that allowed Benjamin merely to experience the sort of opportunity most Americans take safely for granted.)
But the story of how Benjamin saves money to send home to his family — even if that money couldn’t even pay rent in the US, let alone buy a month’s worth of lattes — isn’t unique at all.
According to the World Bank, the countries receiving the most remittances in 2023 were India ($125 billion), Mexico ($67 billion), China, the Philippines, and Egypt. And the United States tops the chart of remittance source countries, along with other wealthy nations like Saudi Arabia, Switzerland, and Germany.
But it’s important to realize money isn’t only sent from very wealthy countries to very poor ones. Russia (even after its invasion of Ukraine) is the second-largest source of remittance outflows, despite ranking ~34th in global median income. That’s just above Greece, Slovakia and Romania, some of the poorest countries in Europe.
Some former Soviet states like Uzbekistan, Kyrgyzstan, Georgia, and Armenia actually receive the vast majority of their remittance receipts from Russia. And the bulk of India’s remittances come from the United Arab Emirates (where Indians form an astonishing 30% of the population), and shortly after that Dubai.
As discussed up top, remittances can efficiently transfer wealth to help boost some of the poorest people in the world — except for the high costs imposed by the companies controlling the transfers. And this is where some hope technology can help.
The World Bank writes that the most expensive channel for remittances are banks (with a very high average cost of 12.1%), followed by “post offices (7%), money transfer operators (5.3%), and mobile operators (4.1%).” And the UN, which fortunately pays a lot of attention to this, notes that, between currency conversions and fees, international money transfers overall, on average, cost about seven percent of the total money sent. That’s $7 on every $100, and a whopping $70 on every $1,000. That’s a lot of coffees.
Luckily, there’s hope this might change soon. The UN has marked out “Sustainable Development Goal (SDG) 10.C,” aiming to “reduce to less than 3 per cent the transaction costs of migrant remittances and eliminate remittance corridors with costs higher than 5 per cent by 2030”.
And the shift toward phone-based money transfer apps promises to bring competition, simplicity, and transparency to the remittance process. Crypto advocates vouch that Bitcoin and others can reduce these transaction costs dramatically. And stablecoins like USDC offered by the company Circle offer these same benefits, without cryptocurrency’s memestock-like volatility.
There’s one last benefit to a transition to digital remittances: they’re more legible to researchers and development professionals hoping to better understand money transfer flows, and to better invest funds where they’re needed. Professor Joshua Blumenstock at Berkeley and colleagues showed how metadata from mobile phones in Rwanda (somehow it all comes back there today) can be used to estimate money transfer patterns, and even populations of rich and poor.
Remittances Require Immigration
Finally, it’s worth noting that none of this — which again, I consider amazing — happens without good immigration policy. I couldn’t help but think of this as the recent US immigration bill was proposed, and then tanked. The bill would at least, despite its flaws, have rapidly accelerated the process for asylum-seekers to gain work visas.
And for anyone wondering if all this remittance money might one day drain rich countries, the UN reports that money immigrants send home represents only about 15% of earnings. The rest “stays in the countries where they actually earn the money, and is re-ingested into the local economy, or saved.”
Immigration is a thorny issue today, of course. But think of Benjamin in Salt Lake the next time you learn your rideshare or taxi driver, barista or waitress, is an immigrant. And remember the tip you give might do a whole lot more good than you’d think.
Song of the Week: DJ Phil Peter, Chriss Eazy & Kevin Kade — JUGUMiLA. I’m really digging this fun new song & video from the Rwandan artists.