The Remittance Economy

Remittances are a significant portion of external financing. Remittances are transfers in the form of goods or money that migrants send back home to their families. Studies have shown that people at the low income, poverty, or unemployed level often migrate to different countries to work and send their earnings back home. Many people in the developing countries depend upon the remittances received from their families abroad. It is one of the important source of external financing, after Foreign Direct Investment. “Remittances is the least volatile source of foreign exchange earnings for developing countries. (Ratha). “According to World Ban the magnitude of remittances in many developing countries has surpassed official development assistance (ODA), private equity flows, and foreign direct investment (FDI), and their rate of growth has outpaced that of official and private capital flows ”. Every year, millions of people from India, Bangladesh, and Nepal migrate to the Middle East, Japan, and Korea; and people from Central and South America migrate to the United States. On the positive side, remittances are believed to reduce poverty, as it is the poor who migrate and send back remittances. But same time it is argued that remittances may increase inequality, because it is the rich who can migrate and send back remittances, making recipients even richer. The majority of developing countries offer tax incentives to attract remittances. The side effect of such incentives, of course, is that remittances may then be used for tax evasion and money laundering. Also, a number of governments provide matching funds for remittance-backed projects.