In the past, remittances were seen to help families in developing countries. But now, experts realize that they have a much more significant impact on economies than previously thought. When people send cash home, it becomes available for local businesses to invest and grow. And as more and more people become aware of this, remittances are likely to increase.
Here, we will see how remittance impacts economies by becoming a significant source of foreign income. But before that, let’s understand what remittance is.
What is Remittance and its History?
Remittance is a transfer of money by a foreign worker to an individual in their home country. In the past, this was often done by sending cash through the mail or by using informal channels such as friends and family. But now, many companies specialize in remittances, making it easier and faster to for example send money to the Philippines from Hong Kong.
The history of remittance dates back to the early 1800s, when workers from China and India started to migrate to other countries in search of work. There was no way to send back the amount home at that time, so they would often save up their earnings and send them home when they returned.
Since then, remittances have grown steadily. In the 1960s, workers from Latin America started to migrate to the United States in search of better opportunities. As a result, the money being sent home began to increase.
Today, remittances are a significant source of foreign income for many developing countries. In 2016, the World Bank estimated that $429 billion was sent in remittances to developing countries. This is more than three times the foreign aid these countries receive.
How Remittance Strengthens Economies
Remittance plays a vital role in strengthening the economies in various ways, such as:
It Provides a Safety Net for Families
In many developing countries, remittances provide a safety net for families. This is because they can be used to cover unexpected expenses or to tide over during difficult times. For example, if a family member falls ill, the money can be used to pay for medical treatment.
In addition, remittances can also be used to provide for basic needs such as food and shelter. This is especially important in countries with political instability or natural disasters.
It Boosts Local Economies
When people send their earnings and savings home, it becomes available for local businesses to invest and grow. This injection of cash helps to boost the local economy and create jobs. In addition, it also allows companies to expand their operations and reach new markets.
And as more businesses grow, they can provide better products and services to the community. This, in turn, leads to higher wages and improved living standards for everyone.
It Reduces Poverty
Remittances have a significant impact on poverty reduction. The money sent home is often used to cover basic needs such as food and shelter. In addition, it can also be used to pay for education and healthcare.
All of these factors help to improve the lives of those who receive remittances and eventually lead to a reduction in poverty levels.
The Benefits of Remittance for Both the Sender and Receiver
Remittances offer several benefits for both the sender and receiver.
Remittances provide a way to support their family and friends back home for the sender. They can also be used to save for future needs such as education or retirement.
Remittances can cover basic needs such as food and shelter for the receiver. They can also be used to start or expand a business, which can create jobs and help to reduce poverty.
Challenges Faced by Remittance Companies
Remittance companies face several challenges.
One of the main challenges is regulatory. This is because remittances are often sent through informal channels, making them difficult to regulate. As a result, there is a risk of money laundering and other criminal activities.
Another challenge is cost. Sending money home can be expensive, especially if the receiver is in a remote location. Remittance companies often have to pay for currency exchange and transfer fees.
Possible Solutions to These Challenges
One possible solution to the regulatory challenge is for remittance companies to work closely with government agencies. This will help to ensure that money laundering and other criminal activities are reduced.
Another solution is for remittance companies to offer more affordable services. This can be done by providing discounts or waiving specific fees.
Remittances are a vital source of income for many developing countries. Understanding how they work and the challenges they face is essential for ensuring that they continue to play a positive role in the economy.
Remittances have a positive impact on economies. They provide a safety net for families, boost local economies, and reduce poverty. As more and more people become aware of the benefits of remittances, they will likely increase. This will have a positive knock-on effect on economies around the world.