Many developing countries depend on foreign aid and investment to boost their economies. However, there is another major source of income that receives less attention, money sent home by migrants, or remittances. A new World Bank report looks at how developing countries have come to depend on migrant income.

The World Bank report “Global Economic Prospects 2006” says there are nearly 200 million migrants worldwide. It says their productivity and earnings are a “powerful force for poverty reduction.”

Dr. Dilip Ratha is co-author of the report.

“They are in fact now the largest source of external financing for developing countries. The latest number for 2005 shows that developing countries received nearly $250 billion. That is larger than, for example, foreign direct investment or more than double the size of official aid flowing to developing countries,” he says. 

The countries receiving the most officially recorded remittances are India, China, Mexico, France and the Philippines. But they also have a major benefit for many African countries. Lesotho is one example, as reflected in its GDP, or Gross Domestic Product, a measurement of its economic output.

Dr. Ratha says, “Lesotho in the early 90’s probably had the highest number for remittances as a share of GDP. In the early 1990’s, Lesotho was receiving remittances that were nearly 60 percent of their GDP. We have seen similar dependence on remittances in many smaller economies in Africa, as well as in other countries.”

Dr. Ratha says these include Uganda and Ghana, which have used migrant money to help alleviate poverty.

“In the absence of remittances, the share the share of poor in the population would have gone up by something like 11 percentage points in Uganda. And in the case of Ghana, the share of poor in the population would have gone up by five percentage points in the absence of remittances,” he says.

With developing countries depending so much on remittances for their economic well being, the World Bank report makes some recommendations. It says transfer costs – which can run 15 percent or higher – should be reduced to allow more money to be sent home. The report also recommends expanding banking networks, “allowing domestic banks in origin countries to operate overseas.” What’s more, it says micro-finance institutions and credit unions should enter the remittance market.

The World Bank report, however, opposes efforts to tax remittances by some governments – or to direct them to specific areas of the economy.

The Global Economic Prospects report says overall emerging market growth will slow to 5.9 percent this year and 5.7 percent in 2006, highlighting the importance of migrant income.