When it comes to injecting capital in the developing world, we tend to think of foreign aid - the benevolent gesture of Western governments - as the main source. But investment sent back to those countries turns out to be far more personal; money sent back to developing countries by migrants now triples the amount of aid foreign aid, according to the World Bank, and nearly matches foreign direct investment.
And research out of the University of New Brunswick confirms that they’re helping in numerous ways. These transfers, called migrant remittances, don’t just alleviate poverty - they also boost the credit system, helping banking systems mature and spurring entrepreneurship, according to Basu Sharma, a human resources professor at UNB’s Faculty of Business Administration in Fredericton.
Dr. Sharma has long studied the effects of foreign aid and foreign direct investment, and recently began to look at migrant remittances as a growing segment of foreign capital flow. “This is going to be one of the major sources of foreign capital in developing countries in the near future,” he says.
In a paper published earlier this year in the International Review of Business Research Papers, Dr. Sharma and co-author Azmat Gani of Sultan Qaboos University in the Sultanate of Oman found that remittances sent back to low- and middle-income countries significantly correlates with credit provided by the banking sector.
“The credit provided by the banking sector has increased with remittances in many developing countries,” Dr. Sharma says. “If people can borrow more from the bank, that will be helpful for entrepreneurial activities.”
Many people in these countries don’t have much to begin with. Money sent back home to developing countries traditionally first goes to basic needs such as food, then toward the advancement of human capital, Dr. Sharma says, such as sending children to better schools. After these needs are met, the remaining money from remittances provide the liquidity needed in the banking sector to lower interest rates and make credit more accessible, which encourages investment in entrepreneurial projects.
The research builds on previous work that suggested migrant remittances help relieve poverty and increase demand-led economic growth in developing countries. It also supports World Bank research that remittances are positively associated with financial sector development and investment financing.
Dilip Ratha, manager of the World Bank’s migration and remittances unit in Washington, says the bank has found that in Sub-Saharan Africa, somewhere between 15 and 30 per cent of remittances are used for “non-consumption” purposes, including the funding of small businesses.
“Remittances can alleviate credit constraint and provide additional credit for business,” says Mr. Ratha, a major contributor to the World Bank’s massive Migration and Remittances Factbook. The money sent over from these transfers, he says, “are a lifeline for developing countries,” and credit expansion “is observable on a global level.”
In some cases, economies are so small that remittances have made up close to half a country’s GDP in a single year, such as Tajikistan and Haiti in 2008, according to the World Bank. And the $400-billion figure is a low-ball number, since it only counts for remittances sent through official channels that can be measured by central banks and money-transfer agencies.
The number of transfers is certainly growing: In 2012, Western Union oversaw 231 million global money transactions between consumers – 23 per cent more than just five years earlier. The global money mover has also watched these transactions grow and shift, noting in particular that, over time, emerging countries, such as Turkey, have shifted from being cash receivers to cash senders, signalling that their economies are strengthening.
“Remittances can be an economic lifeline for consumers globally who are un- or under-banked,” says Odilon Almeida, Western Union’s president for the Americas region.
That’s a lesson reflected in Prof. Sharma’s research. “The main message is that there will be more entrepreneurial activities in developing countries due to remittances,” he says.