Editor’s note: Connel Fullenkamp is an associate professor of economics at Duke University.
DURHAM, N.C. – The ongoing financial crisis could easily turn into a global humanitarian crisis, but not for the reasons you might think. Yes, the worldwide recession means that developed countries will buy fewer products from the developing world, build fewer factories there and even give fewer dollars’ worth of aid. But a potentially bigger threat to the well-being of developing countries is that remittances — the cash that migrant workers send to the loved ones they leave behind — appear to be falling, for the first time in decades.
Millions of people around the world leave their home countries to find work in foreign lands. They are an incredibly diverse group that includes cab drivers and construction workers, engineers and accountants. The one thing they have in common is they scrimp and save in order to send a few hundred dollars whenever they can to their families back home. These remittances are a lifeline for those who receive them — research shows the vast majority of remittances are spent on food, medicine, shelter and other necessities.
Although each remittance is small, together they are huge, especially in comparison to the size of the economies that receive them. The latest estimate from the World Bank puts their magnitude at roughly $283 billion this year, and for many countries remittances are larger than the foreign aid or private investments they receive. Some of the largest recipients of remittances are people in the Philippines, India, Pakistan, Brazil and Egypt. In Mexico, families receive more than $26 billion in remittances each year, primarily from people working in the U.S.
Remittances’ most important economic and social effect is they directly alleviate poverty by providing significant income to some of the poorest members of society. This makes remittances very different from foreign aid or trade, which at best trickle down to the poor. And remittances have been a remarkably stable source of income, serving as a buffer against bad times. When a developing economy suffers a downturn, more people migrate and the migrants send more remittances to their loved ones. This process has made remittances a tremendous stabilizing factor in many developing nations.
Until now, that is. There are already signs that the global slowdown is affecting the demand for migrant labor in both the industrialized and the Persian Gulf countries, the main sources of remittance income. In fact, the most recent numbers show that remittances to Mexico, the Middle East and Africa have dropped considerably. If this trend continues, which is likely given the depth of the impending recession, the impact on the recipient countries could be severe.
For countries like Lebanon, for example, where remittances account for more than 21 percent of GDP, a drop in these flows could send the government budget and the economy into a tailspin. The same could be said for other remittance-dependent countries such as Pakistan, which is already suffering from social and political unrest. Even the Philippines, thought to have escaped the brunt of the crisis so far, may feel its impact if remittances fall from their current level of more than $13 billion per year.
What will happen when the safety net that hundreds of millions of people have come to rely on fails? At the very least, we will see an increase in the number of people suffering from hunger and disease. Unemployment will rise to even higher levels as migrants who lose their jobs are forced to return home. Social unrest will likely follow, and as we have seen too many times already, it will not be limited by national boundaries.
The upshot is there is far more at stake than we realize in getting our own financial and economic problems sorted out, and quickly. The fates of millions of people who are directly linked to our economy through remittances also depend on our decisions.