African remittances, or funding sent by migrants to family members and loved ones living in African countries, is an important part of any discussion on international development. In Africa, these were estimated to be about 48 billion US dollars. In general, the countries that are most vulnerable from an economic standpoint tend to be most reliant on remittances. For example, in South Sudan, 35% of the Gross Domestic Product (GDP) or national earnings are from remittances and in Lesotho this is about 21%. It is understood that the real amount is probably significantly larger, since this figure does not account for funding sent through informal channels. Remittances are a key source of economic stability in many African countries, so it is not very surprising that visits by African Heads of State to their citizens stationed abroad are common, and often taken while visiting international donors and agencies in the same countries and regions for development aid. For context, the flow of remittances to low-income and middle-income countries around the world from migrants reached about 550 billion US dollars, exceeding both development aid and foreign direct investment.
A key question has been whether the COVID crisis of 2020 had a significant impact on remittances. It may be too early to unpack medium-term impacts, but African migrants have likely been affected through a variety of mechanisms. Most obviously, the loss of jobs and reduced earnings would have compromised the amounts that migrants typically send home. However, given that most economies are reopening, it will be interesting to see if migrants send more funding to make up for lost time, or if the funding rates remain consistent over time.
The biggest hurdle for African migrants is the cost of remittances. Cash transfer firms such as Western Union have made significant profits for decades by charging migrants exorbitantly high prices to send funding to their families in African countries. The main reason for this outcome is that historically, there has been little competition in this space. Without such barriers, even more funding would theoretically have been available to African communities over time. More recently, however, there are a number of mobile applications that connect North American, European and other financial institutions with mobile money service platforms. In a sense, remittances benefit from the African mobile money revolution. There is a need for more African migrants to send funding via mobile money and not the cash transfer firms. In Senegal for example, although 32% have access to mobile money, only about 5% of the remittances were sent through mobile money channels. However, this outcome will likely to improve over time as mobile money platforms become stronger competition for established cash transfer firms.
Why have remittances been such a powerful tool in Africa, and what do they mean for international aid? First, due to their context knowledge, migrants have an arguably clearer sense on how to allocate resources in their countries of origin as they often had relationships prior to migrating to their new country. This argument is particularly salient for migrants who spent significant amounts of time in those environments or left as adults. Although familiarity changes over time due to the fast growth rates and dynamism in most African countries, it is usually helpful knowledge from an economic standpoint.
Also, migrants are often sending personal earnings consistently, for long-term goals (such as building housing). Because of family ties, migrants may send more funding when the country of origin is in crisis. Most international aid from developed countries, on the other hand, tends to favor short-term funding as they are subject to short election cycles. Aid is also subject to the broader political climate of developed countries, unlike remittances. Ultimately, since remittances, investment and aid will continue to coexist for the foreseeable future, there is room for collaboration across these different financial assistance types. International aid and foreign direct investment could learn much from the rich contextual information that many migrants have, for example, to complement statistical approaches and nationally representative household surveys that are traditionally used for data analysis for aid.
There are significant impacts attributed to African remittances, but there is much heterogeneity. Research suggests that remittances are larger for African countries that have larger international migrant communities and where most of such migrants are based in wealthier countries abroad. With that said, experts agree that remittances tend to have mostly significant positive effects on poverty, education and human capital development as well as the social welfare of recipients and their communities in Africa. However, whether or not the remittances translate into economic outcomes seems to depend on how well the national democratic institutions function.
Remittances can have gender dimensions. In Egypt for example, where 5% of the GDP comes from remittances, women whose male family members migrated outside that country were more likely to be working than their peers whose male family members did not migrate. In essence, households of migrants feel the need to replace the labor which the migrant would
African countries are in the unusual position where remittances are often much better targeted than funding from state actors. However, governance in Africa is generally improving. In Togo, for example, policy makers used machine learning and satellite data to distribute funding to citizens during the 2020 COVID crisis arguably more efficiently than how the US served its citizens during the same timeframe.
One of the hurdles African economies face is that sanctions meant to discourage political instability can inadvertently limit the impact of remittances. This was the case in Mali for example, where post-instability sanctions had the effect of making more remittances informal. However, such instability is now extremely rare in Africa.
The larger issue appears to be that dominant Western financial technology firms seem to be poorly placed to serve African markets. There is growing interest in cryptocurrency-based platforms, which are showing some promise. Although these are still relatively early, Africa has quickly become the most dynamic cryptocurrency receiving over $100 billion from July 2020 to the middle of 2021 and is the third fastest-growing cryptocurrency economy in the world according to reports. Since most Africans migrate to other African countries, there needs to be a way to make remittances within Africa easier and more convenient.
African remittances remain a critical part of development. Much of what remains are more robust connections between people of African descent around the world and their supporters. We must harness ideas and funding to continue this positive trajectory in the future for the next generation.
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