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Trade Fact of the Week: Remittances from overseas workers to poor and middle-income countries are double the size of all foreign aid programs

• December 20, 2021
• Ed Gresser

FACT:

Remittances from overseas workers to poor and middle-income countries are double the size of all foreign aid programs.

THE NUMBERS: 

Central American GDP and international income, 2020

$200 billion       GDP
 $45.6 billion     Exports
 $25.3 billion*    Remittances from migrants
   $1.6 billion      Foreign aid
   $3.4 billion     Foreign Direct Investment

* Assuming about 95% of remittances to Central America came from the U.S. in 2020, as the World Bank has estimated for 2017 (most recent year available).

WHAT THEY MEAN:

Who changes the world? Governments, intellectuals, scientists, entrepreneurs, NGOs, and charities? Doubtless they do their part. But do not discount the power and generosity of humbler, less celebrated people. An example:

Small banks and wire services in Central American neighborhoods around the U.S. are busy this week, as Christmas money flows south from places like Maryland’s Wheaton or LA’s Pico Union to Chalatenango, Intipuca, and La Union. World Bank research suggests that these “remittance” flows to the five Central American republics totaled $25 billion in 2021, with about 95% of this total coming from the United States. About $55 million will likewise move from the homes of security guards and drivers in New Zealand to small Pacific island towns in Tonga and Samoa; $11.6 billion will arrive from the Gulf states to places like Medan and Dhaka, sent by Indonesian and Bangladeshi maids, clerks, nurses, and construction workers.

How significant is this? Three ways to answer the question:

(1)    In the economic lives of recipient countries, sometimes very large. Central America joins the Pacific Islands, Central Asia, and the Caribbean among the world’s most remittance-reliant regions, and so provides an illustrative (if somewhat extreme) example. The $25 billion in remittance flows at the north end of the wire make up about 12.5% of a $200 billion regional ‘GDP’ (combining Guatemala, El Salvador, Honduras, Nicaragua, and Costa Rica) with peaks of 24% of GDP for El Salvador and Honduras.  Meanwhile, in 2020 the five countries together (a) earned $45 billion from exports; (b) received about $1.6 billion in much-debated but relatively modest flows of foreign aid, and (c) received $3.4 billion in foreign direct investment from international businesses.  Thus at the macro end, remittances from migrant workers and their families rank below (but not far below) trade as a source of income, and are five times the combined value of aid and FDI.

Moving the lens back, the picture shifts but does not fundamentally change.  Twelve countries rely on remittances for more than 20% of GDP, with Tonga at 35% and then Somalia, Lebanon, South Sudan, Kyrgyzstan, Tajikistan, El Salvador, Honduras, Nepal, Haiti, Jamaica, and Lesotho.  If we combine all low- and middle-income countries (using the World Bank definition but excluding China, Russia, and EU members Bulgaria and Romania), trade is easily the largest earner, with remittances a fairly distant second and about equal to FDI and foreign aid combined:

$14,210 billion       GDP
$3,850 billion       Exports
$462 billion       Remittances
$267 billion       Foreign Direct Investment
$175-$250 billion*  Foreign Aid

* The aid total depends upon how one estimates Chinese aid programs.  The OECD reports $175 billion from OECD members, plus Saudi Arabia, the UAE, Taiwan, and several other non-OECD donors. The scale of Chinese aid programs is uncertain, but probably large, with private-sector estimates going up to a maximum of ~$80 billion depending on one’s definition of Belt and Road Initiative loans. 

(2)     From the donor perspective, quite a lot.  A Honduran-American population of about 1 million, for example, likely sent $5 billion in remittances this year.  The median income for adult workers, by a Pew Research estimate, is around $25,000, which suggests that workers spent as much as a fifth of their earnings on remittances.

(3)    From the recipient perspective, often of great value:  Remittances seem most valuable to the poor and lower-middle class.  Central America again provides some interesting examples.  About 20% of families in El Salvador families receive remittances.  A 2016 report for the Inter-American Development Bank reported that 70% of these recipients are women; that 47% live in rural provinces; that 70% have primary education or less, and that 79% are poor or “vulnerable”.

In this holiday season, one need not doubt the potential of thoughtful governments, energetic intellectuals and scientists, or entrepreneurs, NGOs and charities to change the world for the better.  But the populist force of quite humble communities of migrant workers — tens of millions of Salvadoran waitresses and construction workers, Filipina nurses, Indonesian maids, Haitian cooks and security guards, Nigerian taxi drivers and Jordanian accountants — looks to be at least their match.

Closing note:  PPI’s Trade Fact service will be closed next week and return in the New Year. We wish friends and readers a happy and peaceful holiday, grateful for our good fortune and mindful of those who have less.

FURTHER READING

ABOUT ED

Ed Gresser is Vice President and Director for Trade and Global Markets at PPI.

Ed returns to PPI after working for the think tank from 2001-2011. He most recently served as the Assistant U.S. Trade Representative for Trade Policy and Economics at the Office of the United States Trade Representative (USTR). In this position, he led USTR’s economic research unit from 2015-2021, and chaired the 21-agency Trade Policy Staff Committee.