NCPA - National Center for Policy Analysis


November 1, 2006

Many development economists believe foreign remittances from the United States and other wealthy countries could transform some of the world's most impoverished regions, by putting cash directly in the pockets of the poor.  With tens of millions of migrants around the globe sending remittances home, the flood of money has grown immense -- $167 billion last year, according to the World Bank.

But reliance on remittances may turn out to be the latest development fad that fails to live up to its hype, says the Wall Street Journal.  Consider the case of Central and Latin Americans working in the United States.  The downside is:

  • A cycle of continued poverty, as dependence on remittances turns towns into a kind of ward of the United States.
  • Those with entrepreneurial ambition head north, emptying out the town of its talent.
  • Only a tiny fraction of the money they send home is invested in industry or agriculture that could produce jobs.
  • And with the breadwinners away, organized thugs pounce on a place where money pours in from outside.
  • All of that leaves little opportunity for the next generation except to follow their predecessors north, if they can.

"As soon as people go home and see what their salaries are [there], they come back to the United States again," says Israel Hernández, 38 years old, who left Ciudad Barrios, El Salvador in 1998 and has been cleaning houses in Washington, D.C.

For countries to reduce poverty on a sustained basis and to create a middle class, they need to grow rapidly over years, says the Journal.  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.

Source: Bob Davis, "Migrants' Money Is Imperfect Cure For Poor Nations: Earnings Sent Home From U.S. Fuel Increased Spending But Not Much Investment; Thugs Extort Cash by Phone," Wall Street Journal, November 1, 2006.

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