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Is There a Remittance Trap?

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Is There a Remittance Trap?

High levels of remittances can spark a vicious cycle of economic stagnation and dependence

Finance & Development Magazine,

5 min read
5 take-aways
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What's inside?

In developing countries, remittances alleviate poverty but also create macroeconomic dependency.

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Editorial Rating

8

Qualities

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Recommendation

Worker remittances from abroad can help a domestic economy improve the welfare of its population. Yet, according to economists Ralph Chami, Ekkehard Ernst, Connel Fullenkamp and Anne Oeking, policy makers often must deal with the distorted incentives that remittances create. Rather than fueling economic growth, these capital inflows tend to act like a drug, increasing the recipient’s dependence on them and causing macroeconomic stagnation. This perceptive study offers analysts and economists a fresh look at the factors affecting economic growth in developing countries.

Summary

In 2017, worker remittances worldwide amounted to $400 billion, rivaling the foreign direct investment in, and official development assistance to, developing nations. Remittances have lifted millions out of poverty – and they are essential to providing many people with the basics – especially in strife-torn countries. However, instead of stimulating domestic investment, these funds can create a macroeconomic dependency.

Lebanon, one of the top destinations for worker remittances, is an example. The conflict-ravaged nation...

About the Authors

Ralph Chami and Anne Oeking are economists at the IMF. Ekkehard Ernst is chief of macroeconomic policy at the International Labour Organization. Connel Fullenkamp is an economics professor at Duke University.

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