Remittances' economic impact is being underestimated

This month, the world is focused on getting young people ready to go back to school. This means that school supplies are being bought, uniforms are being refreshed and the first semester's tuition is being paid.

During this busy time of year, many people may not be aware of the key role that remittances play in education around the world. With such a positive global impact, remittances remain surprisingly misunderstood.

We know that in today’s world, many of consumers are global migrants who send remittances home to their families and communities. These money transfers offer many transformative benefits, such as lifting recipient families out of poverty, improving health and nutrition conditions, increasing education opportunities and promoting entrepreneurship.

Beyond the local impact, remittances have become a significant factor in the global economy. According to the International Fund for Agricultural Development, an estimated 800 million people worldwide are directly supported by remittances from relatives and loved ones abroad. In 2017 alone, migrants sent an estimated $466 billion to families in developing countries, with a total of $613 billion globally, which includes flows to high-income countries. Remittance figures are expected to rise by the end of 2018, with a projection of $485 billion to developing countries and $642 billion globally.

We recognize the positive effect these payments have on both local and worldwide economic growth, so we hope to debunk some of the most common misconceptions.

The first misconception is that the money transfers only benefit the receiving families. In fact, remittances are a powerful engine of wider economic development. While the majority of remittances are used for families’ basic needs, such as housing and education, approximately 25 percent, which represents over $100 billion per year, is available to be either saved or invested in asset building in infrastructure or businesses. Such investments allow for greater returns and generate additional income and more jobs, which ultimately transforms economies. Therefore, remittances as investments can function as a means for wider economic growth.

Another mistaken notion is that online remittance services are more old-fashioned and expensive than bank transfers. However, according to the World Bank, it is often more costly to complete payment transfers through banks than through remittance services, which are are specifically designed for customers sending small, frequent amounts of money across borders. Therefore, remittances remain a modern, reliable and cost-effective method for migrants to transfer funds back home to improve the livelihood of their local communities.

A final misconception is that recipients cannot rely on consistent remittance transfers, as payment amounts fluctuate depending on the economic health of the source country. In fact, the opposite is true. Remittances become even more critical during times of economic downturn and instability because remittance flows tend to be more steady than private capital flows.

For example, during the Great Recession, while remittances did decline in 2009 for the first time since the 1980s, the overall 5.5 percent decline was modest when compared to a 40 percent decline in foreign direct investment between 2008 and 2009 and an 80 percent decline in private equity flows. This example demonstrates that remittances can indeed be a dependable source of capital flow into local economies around the globe.

By supporting basic human needs, such as education, remittances from migrants around the world provide for financial stability, community empowerment and global economic growth.