Understanding the Importance of Remittance

Remittances worldwide have become a major factor in helping developing countries build infrastructure. Remittances contribute to millions of families around the world sent family members abroad.

Understanding the Importance of Remittance
By [http://ezinearticles.com/?expert=Jason_Karp]Jason Karp

Workers' remittances have become a major source of external development finance. Officially recorded remittances received by developing countries exceeded $250 billion in 2006. The actual size of remittances, including both officially recorded and unrecorded transfers through informal channels is even larger.

There are 2 kinds of remittances-family and community. Family remittances are money sent by individual immigrants to family and friends back home. These remittances are often used to meet their most basic needs.

Community remittances are money sent by immigrants and by hometown associations to communities in their home country. This money is traditionally used for infrastructure like roads, schools, parks and churches.

Remittances are now more than double the size of net official flows and are second only to foreign direct investment as a source of external finance of developing countries. In 36 out of 153 developing countries, remittances are larger than all capital flows, public and private.

Also, remittances are stable and may even be counter-cyclical in times of economic hardship. Moreover, remittances are person-to-person flows, targeted to the needs of the recipients who are often poor.

Regulation of remittance flows is key in assuring migrants that their families back home receive the money they have worked for. There is a need to strike a balance between a regulatory regime that minimizes money laundering, terrorist financing and general financial abuse, and one that facilitates the flows of funds between hard-working migrants and their families.

Migrants often use informal channels to send money home because these channels are cheaper, are better suited to transferring funds to remote areas, offer the advantage of the native language, and, on rare occasions, anonymity. Informal channels however can be subject to abuse.

Strengthening the formal remittance infrastructure by offering the advantages of low cost, expanded reach and language can shift flows from the informal to formal sector.

Remittances are believed to reduce poverty, as it is the poor who migrate and send back money to their families, although some argue that it is actually the rich who can migrate and send back remittances. The impact of remittances depends on their use, especially on schooling of children. Studies show that the school drop-out rate is lower and enrollment ratio higher in households that receive remittances.

There is tremendous potential for using remittances to encourage development in countries. Some have argued that were remittances to stop flowing, Latin America's economies would collapse in an estimated three months.

Remittances tend to increase when the home country's economy slows, making it a particularly effective anti-poverty tool. The money sent home promotes economic growth, increased investment and community development.

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