Introduction to Remittance

Every year, billions of dollars of migrant workers are sent to their home countries. According to data from the World Bank, the total amount of remittances in 2019 reached a record 554 billion U.S. dollars.For some countries, remittances account for a large part of GDP. How does remittance work, and what pitfalls are developing countries facing when dealing with such large cash inflows?

Remittances are funds transferred from immigrants to their home country. They are the private savings of workers and households in the country for food, clothing, and other expenditures, and they drive the country’s economy. For many developing countries, remittances from citizens working abroad provide a much-needed source of imports. In some cases, remittance funds exceed the assistance provided by developed countries, and only foreign direct investment (FDI) can exceed it. (For more information, see Reassess emerging markets.)

Remittances and developing countries
Many developing countries find it difficult to borrow, just as first-time homebuyers may find it difficult to obtain a mortgage. In developing countries—the countries most likely to rely on remittances—governments are often less stable and less likely to repay debt or not default. Although organizations such as the World Bank can provide funds, these funds are usually tied to conditions. For governments in the developing world, this may just be too many measures against sovereignty, especially when power is controlled by a single thread. (For more information, see What is the World Bank?)

Remittances give countries the ability to fund development in their own way; however, like a teenager who gets cash from his first job, developing countries must first understand how to use remittance funds effectively. If these funds are to be used effectively, the country must first formulate policies to promote smart and stable growth and ensure that growth is not only concentrated in cities.

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State effect
It is difficult to track how remittance funds are used because they are private transfers. Some economists believe that the recipients’ use of funds to purchase necessities such as clothing, food, housing and transportation will ultimately not stimulate development, because these purchases are not investments in the strictest sense (purchasing shirts are not the same as investing in shirt production factories). Other economists believe that funds from abroad can help develop the domestic financial system. Remittances can be sent through wire transfer services, and can also be sent to banks and other financial institutions. According to the restrictions on the flow of funds across the country, these funds can not only help individuals pay for the consumption of goods and services, but also can be used to provide loans to companies if they save money instead of consumption. Some banks may even seek to establish branches abroad to facilitate the transfer of remittances.

Research also shows that immigrants returning from work abroad are more inclined to develop their own businesses.They have seen how companies operate in developed countries, are able to recognize trends in their countries and create a company to take advantage of opportunities.

The inflow of remittances is likened to a windfall for countries with high-demand resources such as oil. Governments in these countries are cash-rich, and they often splurge on social projects or poorly planned projects. When the demand for specific commodities slows, they will get into trouble.Unlike oil revenues that are usually held by the state, remittances are sent to individuals responsible for expenditures.

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Remittance problem
Although remittances are an important lifeline for many developing countries, they may also lead to dependence on external capital flows, rather than prompting developing countries to build sustainable local economies. The more a country depends on the inflow of funds from remittances, the more it depends on the global economy to stay healthy.

Remittance flows may be negatively affected by the global economic downturn. If workers employed abroad work in highly cyclical industries such as construction, they may lose their jobs and may have to stop remittances. This has two effects. First, the home country may see a large portion of its income dry up, and therefore cannot fund the project or continue to develop. Second, workers who have moved abroad may move back home, thereby increasing demand for services in an already troubled economy, thereby exacerbating the problem.

Macroeconomic impact
The influx of large amounts of foreign currency will cause the domestic currency to appreciate, which is often referred to as the Dutch disease.This in turn reduces the price competitiveness of the country’s exports, because as the domestic currency appreciates, goods become more expensive for other countries. Due to the appreciation of the domestic currency, import consumption began to rise. This can stifle domestic industries in developing countries. However, cash inflows can also help recipient countries reduce their balance of payments. (For more information, see What is international trade?)

It is worth noting that immigrants not only go to work in the world’s largest economy; instead, they go to the places where work is most likely. Although construction-related jobs are generally considered to be the jobs of choice, many workers also flock to countries with developing economies. Commodity-rich countries have high demand for labor because the prospects for rising commodity prices continue to remain unchanged.

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According to a United Nations report, 3.4% of the global population lived outside their home country in 2017.A more integrated and globalized world has made the flow of labor between countries more fluid, and more and more workers are migrating abroad to find ways to support their families. Therefore, immigrants seeking to remit remittances have become an integral part of the economy.

The funds sent home by the immigrants allow the wire transfer company to continue its business and allow the home country to purchase imported goods. Immigrants consume goods and services provided by domestic workers. The presence of foreign workers helps alleviate labor shortages. The role of these workers is more like a partnership. Immigrant workers help developed countries continue to expand while sending a portion of their income back home as remittances. In addition, social networks created by foreign workers can expand the reach of developed countries and promote a more comprehensive cultural understanding through interaction with the local population.

in conclusion
Immigration is often a hot topic in domestic politics. When it comes to the economic impact of foreign workers, it may be difficult to analyze facts from fiction. In the final analysis, remittances are an important factor in the global economy, helping to promote growth at home and abroad. Developed countries must provide guidance on the prudent use of these funds, and it is important for developing countries to formulate policies to ensure effective and well-planned growth. (For more information, see 3 ways immigration can help and harm the economy.)

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