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.

The second problem is institutional. Remittances give governments an opportunity to postpone reforms. When a significant portion of households receives external support, authorities can delay addressing structural problems in the labor market, business climate, and education for longer. As a result, the country becomes locked for years into the role of labor exporter rather than creator of new jobs within its own economy.

The third set of risks involves external vulnerability. Household incomes and balance of payments stability begin to depend not only on the domestic situation, but also on migration policy, labor market conditions, and currency dynamics in the countries where migrants work. Any external restrictions in such a system quickly translate into domestic economic problems.

Economies living on remittances

The remittance phenomenon is most visible in countries where their share of GDP has reached double digits. This primarily involves small or vulnerable economies in Central Asia, the Caucasus, Africa, Latin America, and a number of island states, where in certain years remittance volumes reach 20–30% of GDP and even higher. According to 2023 estimates, the leaders are Tonga (41%), Tajikistan (39%), Lebanon (31%), Samoa (28%), and Nicaragua (27%). In this model, remittances become not merely a source of income for individual families, but a critical pillar of the entire economic system.

Countries' approaches to these risks vary. Some effectively follow a passive model: they account for remittance volumes, emphasize the diaspora's role, and build macroeconomic calculations on the assumption that this flow will continue. In such a configuration, dependence on external income only becomes more entrenched.

Other countries attempt to integrate remittances into their development strategy and channel at least part of these funds from current consumption into capital accumulation. A classic example is diaspora bonds: Israel has been issuing them since the 1950s, regularly attracting funds from the Jewish diaspora for government debt and infrastructure projects, while India used India Development Bonds and Resurgent India Bonds to close balance of payments deficits during periods of turbulence. In Africa, Nigeria tested a similar instrument: in 2017 it placed a $300 million diaspora bond to finance infrastructure and build up foreign exchange reserves.

A number of Latin American and Asian countries are also developing programs for returning migrants: they officially recognize qualifications obtained abroad and supplement them with startup grants and preferential loans for launching businesses. The idea is to give citizens an incentive to return home to create their own successful ventures there.

A separate direction involves reducing the cost of remittances and bringing them into the formal sector. Here the emphasis is on digital wallets and cheaper cross-border services. In Mexico, for example, according to regulator estimates and industry surveys, up to 99% of remittances already enter the country through formal channels, while the government and banks encourage the opening of accounts and mobile wallets for remittance recipients. After all, the cheaper and more transparent the channel, the higher the likelihood that funds will not only be spent, but also invested and put to work domestically.

Russia as a regional hub

Russia remains the key labor market for migrants from Central Asia and the Caucasus and, accordingly, one of the main sources of remittances for the region. According to World Bank estimates, the decline in remittances from Russia was the main factor behind the fall in remittances to Europe and Central Asia in 2023: after growing 18% the previous year, flows to the region dropped 10% to $71 billion. The weakening of the ruble—by approximately 39% against the dollar—played a substantial role, automatically reducing the dollar equivalent of remittances from Russia.

For Central Asian countries, this creates structural dependence: in certain years, the share of Russian money in their remittance flows reached 80–90%. Even despite some decline in recent years, Russia remains the key source of remittances for Tajikistan, Kyrgyzstan, and Uzbekistan. Therefore, ruble exchange rate fluctuations, a slowdown in the Russian economy, or changes in the migration regime are almost immediately reflected in household incomes, domestic demand, and the stability of neighboring countries' banking systems.

This became especially noticeable in recent years, when Russian policy on migration and cross-border remittances began to tighten consistently. The Bank of Russia maintains restrictions on remittances abroad, while migration legislation strengthens control over the stay, employment, and legal status of foreign workers. For Central Asian countries, this matters not only from a labor market perspective: the stricter Russian rules on entry, hiring, and financial oversight, the more significantly the volume, regularity, and channels of remittances change—remittances on which household incomes, domestic demand, and balance of payments stability depend.

Within Russia itself, remittances don't play a comparable economic role, but after the wave of emigration in 2022-2023, a new layer of cross-border income emerged, linked to relocators who maintained economic ties with the country. According to research by RANEPA, about 23% of relocators in 2024 continued working for Russian companies. This means that part of the income generated in Russia is effectively leaving the country—not only through migrant transfers, but through the earnings of departed specialists, their spending outside the country, and transfers to foreign accounts.

Remittances have become the largest source of external financing for many developing countries, surpassing direct investment and official aid, but this is precisely where their political-economic trap lies. The more an economy relies on migrant money, the easier it is to weather the current crisis and the harder it becomes to break out of a model of chronic dependence on external labor. Ultimately, remittances can cushion the shock, but they cannot replace domestic investment, reforms, or a country's own growth strategy.

The current escalation in the Middle East only makes this dependence more visible: a blow to the region, where a significant portion of labor migration and oil revenues are concentrated, quickly translates into risk for migrant employment, the stability of banking channels, and remittance flows themselves, spreading the shock to a broader group of economies.