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Is There a Remittance Trap?
Article

Is There a Remittance Trap?

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

Ralph Chami, Ekkehard Ernst, Connel Fullenkamp and Anne Oeking
Finance & Development Magazine, 2018
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Editorial Rating

8

Qualities

  • Analytical
  • Eye Opening
  • Overview

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.

Take-Aways

  • In 2017, worker remittances worldwide amounted to $400 billion, rivaling foreign direct investment in and official development assistance to developing nations. 
  • Although they keep many individuals out of poverty, remittances fail to contribute meaningfully to a country’s economic development. 
  • In nations caught in the “remittance trap,” remittances used for household expenses bid up prices and wages, making imported goods less expensive and decreasing incentives to export.

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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