The Economics of Remittances: Why Money Transfers Are No Substitute for Development

How the Economics of Remittances Works

Remittances (from the English "remittance") are cross-border private transfers of income by individuals, most often labor migrants, to households in their country of origin. Over the past two decades, this flow has become one of the most stable and significant sources of external financing for low- and middle-income countries.

According to World Bank estimates, remittances to such countries grew to $656 billion in 2023. Total global remittances reached approximately $818 billion—nearly four times the official aid provided by OECD countries.

The largest sources of remittances remain developed economies—primarily the United States, Western European countries, and select Gulf states. Among recipients in absolute terms, the leaders are large economies with sizable diasporas—India, Mexico, and China.

The structure of channels is equally important. The share of digital services and formal payment channels is growing, yet informal routes remain significant in many countries: cash hand-to-hand, money transferred through acquaintances, and semi-legal intermediary mechanisms. As a result, official statistics capture only part of the actual flow, and the full scale of the "gray" segment remains difficult to assess.

Remittances as a Foundation for Economic Stability

At the household level, remittances effectively function as an external insurance policy: they provide families with regular income that goes toward basic expenses—food, housing, education, and healthcare—and helps them weather domestic crises. At the macro level, their role is broader: they're a source of foreign currency for import-dependent countries and simultaneously an additional resource for the banking system, since part of the transfers settles into accounts and savings.

Moreover, remittances ease the burden on budgets and social services. When prices or unemployment rise domestically, families receiving transfers from abroad maintain minimum consumption levels longer, and the state less frequently needs to urgently expand support.

Remittances are considered one of the most resilient sources of external financing for developing countries: unlike investments, they typically decline more slowly, as migrants try to support their families even during crises.

When Support Becomes a Brake

Yet remittances have a flip side. What supports an economy in the moment can hinder its development over the long term.

The first long-term risk is the dependence of households and entire regions on external income. If remittances cover a significant portion of the family budget, incentives to seek employment, pursue entrepreneurship, and advance professionally within the country gradually weaken. In this model, education and career are increasingly viewed not as a path to developing one's own economy, but as a means to leave and establish oneself abroad.