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Nearly every time there is a news story about the billions of dollars flowing to poor countries as remittances, someone worries that not “enough” of that money is being saved and invested. A case in point is today’s piece in the Washington Post. Latin American workers in the US will send home $45 billion this year, but “only a small portion … has gone to economic development.”

Where does it go instead? Primarily to consumption -- but is there anything wrong with that? The article points out that “only … 15 to 20 percent” of remittances are saved and invested by the households that receive them. But only around five percent of non-remittance income of poor households in Peru, for example, is saved and invested. What do low-income Peruvians spend that money on instead? Food, rent, and transportation, mostly. Why should we expect them to spend money differently according to the country their primary provider happens to work in?

First, notice that they do save and invest more of remittance income than other income. Second, if they don’t save and invest more than 15 or 20 percent of it, there’s probably a good reason for that. Perhaps it’s the poor investment climate in Peru, which Hernando de Soto has spent years quantifying and publicizing. Remittances go to countries that people leave; people leave countries where the return to capital is low. By definition, little will be invested in those countries. No “remittance policy” can do much to help that until the fundamentals get better.

The best policy to get people to save and invest more remittance (or any other) income is to make it pay for them to do so. Greater investment of remittances will arise from improved returns to investment in developing countries, not primarily from schemes to try to convince migrants' families to invest when they'd rather not. Contriving such schemes and associations tends to assume we know what's good for those families better than they do. Do you?

Disclaimer

CGD blog posts reflect the views of the authors drawing on prior research and experience in their areas of expertise. CGD does not take institutional positions.