How do remittances help developing countries?

                Do you want to send money to India? In this article, we will throw light on how remittances help developing or third world countries. We will also define remittances in a manner which is easy for the readers to understand.

Remittance is the transfer of money into another country by a migrant worker. The incidence of abject poverty in most of the third world countries has pushed millions of skilled as well as unskilled people to find work in countries other than their countries of origin. Thus, people mostly find works abroad, most laborious jobs, and earn in foreign currency. A small sum of this foreign currency translates into a hefty amount in the domestic currency due to the difference in value. This practice helps people make ends meet with grace and dignity, which is too difficult otherwise.

Now, let’s take a look at how remittances help developing countries.

Corruption free funds: – money transfer to India or other countries as remittance is directly received by the person it is meant for without having to go through different channels which diminishes the chances of corruption taking place or embezzlement in the funds.

Poverty alleviation: – A study compiled based on the data from the Asian countries from the year 1981 till 2014 showed that even a 1% increase as a % of Gross Domestic Product (GDP) in remittances can lead to a 22% drop in poverty.

Foreign savings: – Remittances have always proved to be a major source of foreign savings for third world countries. After oil exports, remittances are the biggest source of US Dollars income for Mexico.

Gross National Income: – Remittances help increase as well as augment the Gross National Income (GNI) of the recipient country.

Financial market liquidity: – The increased flow of remittances in the recipient country increases liquidity in the financial markets of the beneficiary country which in turn pushes the interest rates downwards and expand credit and investment.

Consumed income: – Remittance is one of the incomes which is consumed as soon as the recipient receives it by adding to the Aggregate Demand (AD). Remittances can also act as a boost to a country’s economic growth through the multiplier effect.

Funds for start-ups: – Remittances can also be used as funds for business start-ups in the beneficiary countries. A report of the United Kingdom DfID showed that the capital for 80% of start-up businesses in Somalia is funded from remittances.

With these advantages of remittances, let’s now briefly touch upon the perils of remittances.

Firstly, the huge outflow of the labour from home country can cause labour shortage and push wages upwards despite their online money transfer to India, we can say it is a negative aspect.

Secondly, no matter how big the volume of remittances is, they cannot be a replacement for the foreign aid and private investment meant for infrastructure development in a country.

Thirdly, there are countries which happen to be isolated geographically with poor connectivity with other states due to which reason its residents find it difficult to travel to other countries to contribute remittances.

Conclusion: – From the above discussion we can safely conclude that where remittances contribute to the economic viability of the beneficiary country, they also have some negative effects on the economy as well. But, a fair analysis will show that the benefits remittances have and the positive impact like online money transfer to India reduces poverty. They also create on the economy far outweigh the negative impacts and the disadvantages.

And also, the negative effects are not as impactful as the positive.