Remittances: Political Economy and Developmental Implications

Private remittances are becoming an increasingly important part of the financial landscape of many developing countries. Indeed, for some such countries, these flows are the single most important type of international capital inflow—public or private—and they have become an important source of purchasing power and foreign exchange. The growing importance of remittances has stimulated a great deal of discussion among scholars and policymakers. However, most studies tend to be rather narrow and microeconomic in scope, and fail to understand remittances within a broader political economy context. This contrasts with studies of other international capital flows such as official development assistance, direct foreign investment, private bank loans, and portfolio investment where political economy concerns have long been a central concern. This paper draws together findings from the rapidly growing multi-disciplinary study of remittances; identifies what we know, what we do not yet know, and what we still need to know about their economic, political and social consequences; and argues that there are a range of important political economy concerns raised by these flows (such as public moral hazard). The current global economic crisis raises new questions for remittance researchers, not least of which is whether the established counter-cyclicality of these flows is giving way to pro-cyclicality. The paper concludes that the political economy effects of remittances are complex, contradictory, and not amenable to generalizations across the developing world, and that there is still much that we need to know about them.