Remittances: Maximizing Their Impact on African Development

I always believed that the only way I could develop my home, and enrich my family was to leave the Continent, find riches elsewhere and send resources back home. I accepted the irony of leaving one of the most promising regions in the world, to seek growth and opportunity in nations reaping the consequences of unfettered and uncritical capitalism. Simply because, the alternative would have meant confronting Africa’s nakedness. And our failures to make manifest the richly adorned future we seek.

So I left; believing that the riches I would find, and remit back home would be enough to solve the problems that persistently plague our countries. And I was wrong. And while, I may come to regret immortalising these words on a platform with a vicious memory, they must be said. And to understand why, we need to talk about remittances.

What are Remittances?

The International Monetary Fund (IMF) defines remittances as: “transfers from one person to another person or household [that] are targeted to specific needs of the recipients.” Often, these payments subsidise the public cost of poverty reduction by acting as a private, complimentary, social safety net. However, remittances are more than the funds transferred. Intangible remittances – or social remittances – are the flow of ideas, knowledge and cultural values. Contrary to popular belief, these remittances are subordinate to financial remittances, or economic transfers. This is because, social remittances work in the long-term to drive development and change in societies.

Together, financial and social remittances, are incredibly valuable. As African Development Bank President Dr. Akinwumi A. Adesina said in his opening remarks for the African Development Bank Forum, 

“The African diaspora has become the largest financier of Africa! And it is not debt; it is 100% gifts or grants, a new form of concessional financing that is the key for livelihood security for millions of Africans.”

Indeed, the amount Africa receives in foreign direct investment and aid is overshadowed by the amount Africans working and living abroad remit home. Altogether, Africans in the diaspora sent $95 billion in remittances in 2021; $12 billion more than Africa received in FDI that year, and $37 billion more than Africa received in aid. 

Against this backdrop, it is not surprising that scholars and policymakers regard remittance earnings like Gollum regards the One Ring: Infinitely Precious. And, likewise, must be relentlessly pursued, jealously guarded and possessed.

However, to what end? 

What problems will remittances address? The problems, like the mismanagement of our resources and poor governance, that colour our society and bankrupt our potential? Or will they, like the One Ring, imbue our countries with the ability to better mask the evils that lie within?

Mo Money, Mo Problems

First, it is worth articulating the benefits of remittances. They are often thought of as a micro and macroeconomic poverty reduction tool. Micro-economically, remittances mitigate transient poverty. Transient poverty is “poverty experienced as the result of a temporary fall in income or expenditure,” and can be addressed remedied by a timely injection of cash – or remittances. Given that much of the poverty on the continent is transient, remittances act as a buffer; dislodging the burdens of transient poverty, in some cases, or easing its burdens, in others. Subsequently, improve household resilience, allowing families to invest in health, education and housing. Writ large across millions of households experiencing poverty, remittances could, therefore, contribute to the reduction of socioeconomic inequities.

Conversely, and macroeconomically, remittances act as a valuable form of foreign exchange that a country can use to settle its’ balance of payments (hereinafter BOP). The BOP is an account that records transactions between residents of a country with residents of other countries. Remittances increase a country’s capital inflow, thus allowing the State to channel more funds towards ‘economically productive’ activities like debt repayment or investment in public infrastructure. Painted in this way, the pursuit of remittances is more than good sense. However, and as John Green says, the truth, often, resists simplicity. 

Remittances and Poverty Reduction

First, remittances do not address the true problem of poverty. They merely provide a band-aid solution to it. Though studies across Lebanon, Armenia and El Salvado, and Ghana show that households that receive remittances experience a reduction in poverty, they do not suggest that remittances alleviate the systematic, structural and entrenched costs of poverty. That is to say the factors that force low-income individuals to pay premiums to access necessities like water, education and healthcare due to an under-investment by the state. A remittance-fuelled increase in income will not resolve this fundamental inequity; it will just make it easier to meet it. 

For example, A 2023 Afrobarometer working paper suggests that that “remittances bolster recipients’ cash income and purchasing power, which … intensifies their contact with agents of the state and exposes them to requests for bribes to a greater extent than non-recipients.” This implies that while, macroscopically, remittances may mitigate grand corruption, on an individualised scale, they increase instances of pocketbook corruption which does nothing to improve access to basic resources, which in turn does little to alleviate poverty.

This might explain why, the aforementioned Ghana study also found that “remittances [also] increase income inequality in Ghana.” And why a later (2022) review of microdata from 42 African countries found that “income inequality [rises] by 0.02 per cent for every 1 increase in remittances inflow to Africa.” This is due to a number of reasons specific to the mechanics of remittances; the most interesting ones (to me) will be surveyed here. 

First, the prohibitive costs of migration and the strict immigration policies in developed countries that favour rich and skilled workers, mean that poorer and lower-skilled households may receive limited gains from remittances. Second, funds remitted to poorer households typically cover necessary expenses – like housing and rent – rather than income generating opportunities. Third, and perhaps least discussed, financial remittances neither change nor challenge the social norms that determine expenditure. For example, a 2012 study of household surveys in Nepal by Ann Vogel and Kim Korinek found that while remittances inspired greater investment in education, “the investment is disproportionately spent in boys’ education, particularly in low-income households relying on male remitters.” Fourth, and perhaps most importantly, remittances may not challenge the State to remedy the structural problems associated with poverty. In fact, they could encourage the State to turn the bounty remittances represent elsewhere; as the poor have already been catered for. Therefore, the case for remittances as a poverty-reduction tool is less clearcut than we were led to believe. 

Now, allow us to turn our attention to how remittances affect the wider economy.

Remittances and The Economy

While remittances increase the state of a country’s BOP, they may also trigger the occurrence of the Dutch Disease. The Dutch disease is a paradoxical situation where good news for one sector of the economy, such as the inflow of capital and foreign exchange through remittances, results in a negative impact on the country’s overall economy. This is because an influx of remittances creates perverse incentives to keep these inflows high, even if it means drawing workers away from more productive, export-oriented industries which grow a country’s trade and foreign exchange reserves. As a result, remittances can disincentivise the development of local industries to absorb the workers from whom remittances are sought.  At worst, they can even cripple these industries.

Take the Philippines as an example. Since, the 1980s, the value of remittances as a share of GDP has increased nearly 10-fold; from 1.1 percent in 1980 to approximately 8% in 2020. As a result, the Philippines have become over reliant on them, to the detriment of key industries like healthcare and manufacturing. Regarding the former, the attractiveness of working abroad, compared to working at home, has led to an exodus of Filipino nurses. And while these nurses remit $8 billion to the economy annually; “about 25% of all remittances, which together account for some 9% of GDP,” their departure has also led to a drastic decrease in the ratio of nurses to patients in the Philippines. The ratio fell from 1 nurse : 15 - 20 patients in the 1990s, to 1 nurse to, at most, 60 patients by 2020. Consequently, in 2021 – and in the middle of a global health crisis – hospitals began downsizing their operations “not because of the lack of facilities or health equipment, but because of the lack of health care workers.” 

Conversely, and regarding manufacturing, remittances have caused premature deindustrialization. Tuan Khai VU found, that “an increase by ten percent in remittances at impact is associated with a fall by about 0.1 percent of the GDP share of industry in the medium run (about five or six years after the shock).” Therefore the value of remittances as share of GDP rose, the value of manufacturing fell. 

While remittances, alone, cannot be blamed, the pursuit of them and the amount of energy and political will dedicated to that pursuit can be. Put altogether remittances in the Philippines did not pan out the way they were supposed to. The promise of economic freedom, echoed by AfDB President Dr. Akinwumi A. Adesina, rang hollow. This is incredibly ironic, as the rhetoric around the pursuit of remittances is the promise for economic freedom and the desire to break the cycle of dependency upon foreign capital. Remittances are a revolutionary act of self-reliance. Yet, the Filipino example suggests that remittances continue and mutate our dependence upon foreign capital, without changing the dynamics that necessitate the use of such capital. The only difference being the conduit; capital now flows through familiar and familial, rather than condescending and Caucasian, hands.

And given the coercive nature of money, we need to discuss how remittances will change our relationship to and with the diaspora. 

However, at what cost?

Are we really so naïve as to believe that funds remitted by our countrymen come without strings? That the impact of the influx of foreign capital, albeit remitted through local hands, will only be contained to households and villages? 

These questions are important to ask given the fact that money is not a mere medium of exchange or signifier of value. To reiterate, money mediates social relationships in implicit and explicit ways. As Tim Zaiontz argues, although in reference to debt, the exchange of money is “marked by asymmetrical material relations and power differentials” between the sender and the recipient. These asymmetries typically favour the sender and motivate self-directed choices that attempt to neither anger nor challenge the sender. This means that, within the context of remittances, remittances may bear political consequences, not merely economic ones. 

Indeed, as Angela O’Mahoney argues in her 2012 paper, “migrants who maintain economic ties with their home country may also seek political influence with their remittances, and as such remittance flows systematically reflect migrants’ political concerns.” As O’Mahoney states: 

Migrants represent different political preferences and agendas than their compatriots back home. By exercising their capacity to ‘exit’, migrants have expressed some sort of dissatisfaction with the status quo in their home country. As such, migrants may be more likely to support opposition parties and candidates. For developing countries with large remittance flows, remittances may not only serve as an impetus for economic development, but may also underwrite political change.

The Verdict? 

Ultimately, we must return to the implicit question I posed at the beginning of this essay. In light of everything I have said, was I wrong to believe that remittances would be the change we wish to see in the world?

Well, that This essay reflects on the role of remittances in Africa, challenging the belief that they alone can solve the continent’s challenges. Remittances, defined as both financial transfers and social contributions, provide a valuable safety net for families and communities. However, while remittances can alleviate transient poverty and improve household resilience, they do not address structural problems like poor governance and systemic inequality. The essay also explores the negative economic impacts of over-reliance on remittances, such as hindering local industry development, and examines how remittances may even contribute to political influence and corruption. Ultimately, it argues that remittances are not a panacea and that true progress requires strengthening governance and institutions, alongside leveraging remittances in a sustainable way. upon the problems we hope to resolve with remittances. Remittances increase the number of resources we have at our disposal, but the lack of resources has never been Africa’s problem. Our problems are borne from a dearth of governance. To paraphrase Chinua Achebe, the problem is “unwillingness or inability of [our] leaders to rise to the responsibility, to the challenge of personal example which are the hallmarks of true leadership.” Indeed, remitting money home will not solve this. And expecting remittances to redress the fundamental problems of our economies (like poverty and a lack of industrialisation) is not only unfair but ridiculous. Therefore how should we leverage remittances as an engine of economic development?

First, we must understand remittances within its contexts and limitations and dispense with our desire for a panacea. Upon building this understanding, we must buttress our institutions in preparation for remittance inflows and outflows. This goes beyond lowering the cost of receiving and sending money abroad, and to lowering the costs, both hidden and explicit, of services, altogether. Hidden costs, in particular corruption, can limit the efficacy of remittances. Indeed, A 2023 Afrobarometer working paper suggests that that remittances “exposes [recipients] to requests for bribes to a greater extent than non-recipients,” because remittances increase their contact with the state. Third, we must remain vigilant; not content to rest on invisible hands and nebulous market forces to bring about the change we seek. Critically, ready to acknowledge when remittances have served their purpose, and when they have not. 

Only then will we have a chance at the future we envision for ourselves.