The Impact of Remittances
Remittances are one of the most impactful tools a country has at its disposition. Remittance is the term used to define money sent back home by diasporas — people living outside of their country of origin. Often overlooked by development experts, remittances are gaining prominence as one of the most impactful drivers of global change due to their ample numbers, consistent nature, and social purpose.
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Remittances reached over $500 billion/year in recent years. According to the UN, 1 in 7 people in the world is involved, in one way or another, with sending or receiving remittances. Remittances are a lifeline for many countries; they represent 35% of Somalia’s GDP, three times the Suez Canal revenue for Egypt, and more than all IT exports combined for India. Remittances have recently overtaken Foreign Direct Investment (FDI) and foreign aid as the largest source of incoming cash to developing nations.
The sheer numeric force of remittances is certainly impressive, but the true power of remittances lies somewhere else: their consistent and reliable nature combined with their intricate social purpose. Indeed, contrary to FDI, remittances keep on flowing even when a country is facing instability or turmoil of any kind. Furthermore, remittances work in a so-called “countercyclical” nature; a country will likely receive more money from abroad if they are experiencing periods of hardships. A case in point would be the strong mobilization of the Lebanese diaspora following the Beirut explosion, during which Lebanese students abroad and older Lebanese business professionals working in America rallied together to help out back home.
When compared to foreign aid, remittances are better in almost every aspect. Foreign aid is often, whether we like or not, tied more to geopolitical strategic interests than purely altruistic motives. The phone call to the Ukrainian President that got US President Donald Trump impeached is, once again, a case in point. Foreign aid is also relatively esoteric in nature; it goes through multiple diplomatic channels, government agencies, agreements, and contracts before reaching its actual beneficiaries. On the other hand, remittances are a direct flow of cash from an individual to another, with most often than not, no strings attached.
In the words of Dilip Ratha, the World Bank’s Lead Migration and Remittances Unit Economist, remittances are “dollars wrapped with care”; that is, they serve an overwhelmingly social purpose in the vast majority of cases. Ratha explains that in families receiving regular remittances, the kids’ health is better and their school dropout rates are lower. Ratha, originally from India, explains that even he wouldn’t have been able to go to college without financial help from his aunt. Remittances quite literally change the lives of millions of people worldwide every day.
So the question now is — how do we capitalize on remittances, and more specifically on the intricate desire many diasporas have to help back home? One of the first steps is addressing the exorbitant costs that are attached to remittances; on average, a global money transfer costs 8% of the total sum, with wide variations depending on the region. A considerable part of remittances is picked up as cash, often at post offices. Governments often sign exclusive partnerships with MTO’s (Money Transfer Operators) such as Western Union for use of post offices, which those MTO’s then use to increase fees. Innovation in the fintech (financial technology sector) such as digital wallets and cryptocurrency are reducing costs, but there is still a lot to be done. As Ratha states, if the average transaction fee could be lowered from 8% to 1%, the net amount of remittances received would increase $30 billion/year; almost 4 times what the amount of aid the US gives to African countries yearly.
While financial remittances are demonstrated to have a clear impact on a country’s development, a new concept has been gaining traction in recent years: social remittances. The term, coined by sociologist Peggy Levitt, is defined as the “set of skills, ideas, and practices imbibed by a person in time, that begin to reflect in his or her personality and way of life; in short, it’s the social impact of migration that leads to social development”. She explains that financial flows are not the only way that diasporas contribute to their home countries; she also argues that diasporas provide people back home with a set of knowledge, among other things, that diasporas have learned while abroad and consciously or unconsciously share with people back home.
The real challenge then is: how do we optimize the diaspora’s intricate desire back home? The answer to that question is GrowHome. GrowHome is a platform that connects diasporas to entrepreneurs in their home countries. Through GrowHome, diasporas can connect, mentor, collaborate, and directly fund entrepreneurs making a real impact back home. GrowHome allows diasporas to put the resources they’ve acquired abroad — financial or intellectual — to good use. On the other hand, entrepreneurs in developing countries get access to a wide range of opportunities from a community of people who really care and want to help. By facilitating diaspora-entrepreneur collaboration, GrowHome is unleashing human capital and potential on an unprecedented scale.
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