With increased labor mobility and spread of globalization, there are more and more discussions on remittances, their role in getting cash to people in need and helping countries to develop. But, do remittances really help to move people out of poverty or are they just a temporary relief for the daily pains?
Monday’s Wall Street Journal takes a closer look at remittances and their role in development. The front page story – Migrants’ Money Is Imperfect Cure for Poor Nations (subscription required) – looks at the flow of money sent by workers back to their homes in developing countries and evaluates prospects for reducing poverty. In all, as the author Bob Davis says,
For countries to reduce poverty on a sustained basis and to create a middle class, they need to grow rapidly over years. Though remittances fuel some spending, there isn’t much evidence they have added to sustained growth. Instead, the infusions of outside cash often distort the local economy and may diminish the long-term prospects for gains. [emphasis mine]
As the article argues, remittances are most often used for consumption and are rarely invested to generate growth and employment (85% goes just to pay daily bills).
Focusing on a small town in El Salvador, the article shows that there are two sides to the story. On the one hand, remittances address the daily needs — the money helps people to get education, buy food, and pay for housing and also spurs the development of some businesses. On the other hand, they hurt long-term development prospects — cities lose people with highest entrepreneurial potential, exporting industries are hurt, etc.
In all, remittances may be effective in getting people out of extreme poverty, but there seems to be little they can do to spur long term development.
Published Date: November 08, 2006