Everybody knows that the tens of millions of migrants from developing countries (documented and undocumented) who work in Europe, North America and the Persian Gulf send home a lot of money. What most don't know, though, is that the sums are triple the development aid budgets of the rich donor countries, and growing rapidly. Nor are many people aware that remittances have morphed from an afterthought to a key component in strategies for transforming poor countries into successful "emerging market" economies. Indeed, it's becoming clear that Lant Pritchett, a brand-name economist now at the Center for Global Development, was ahead of his time in arguing that the best thing rich countries could do for the developing world is to let their migrants do the heavy lifting.
Start with the numbers. Remittances to developing countries, which were below $100 billion as recently as 2002, reached $372 billion in 2011. Not surprisingly, India and China topped the list of recipients with $64 billion and $62 billion respectively, followed by Mexico ($24 billion), the Philippines ($23 billion), Egypt ($14 billion), Pakistan ($12 billion), Bangladesh ($12 billion) and Nigeria ($11 billion).
What may surprise, though, is that the impact on these large countries with relatively large economies was dwarfed by consequences for a dozen small countries that are effectively remnants of colonial empires or economic satellites of the oil states. Think Tajikistan, Moldova and the Kyrgyz Republic, ex-Soviet republics that each receive more than one-fifth of their incomes from migrants. Or Lesotho (29 percent of GDP), which is surrounded on all sides by South Africa. Or Lebanon, which derives 20 percent of its income abroad, mostly from the Gulf. There's a three-way tie for most dependent Latin American country, by the way, with El Salvador, Haiti, and Honduras each pulling in about 15 percent of their income from migrants living in the United States.
The flows are volatile. Changes in oil prices affect the gush of money sent from Russia and the Gulf, for example, while the global recession (in particular, the collapse of the construction industry) took a hefty chunk out of remittances from Europe and the United States. But that hit was cushioned in part by the strength of the dollar and euro through the recession, which meant the money that was sent paid more bills in local currency back home. Note, too that the average rate of growth in remittances is so rapid that the cycles are overwhelmed by the trend.
Of course, the primary beneficiaries are the migrants' families. But the long-term effect on economic growth is considerable, and for a variety of reasons. China had a big head start in this regard. Overseas Chinese provided huge amounts of capital -- and more important, the mix of technological and managerial knowhow and experience in international trade -- to power China's takeoff in the 1980s.
India is far behind, in part because a large percentage of overseas Indians are semi-skilled workers in the Gulf. Ironically, India's well-developed financial markets have also played a role: That has made it possible for affluent overseas Indians to invest in stocks and bonds back home rather than in new businesses. But there's little doubt that the Indian-American high-tech connection is beginning to pay off, both in terms of direct investment and in the ease of technology transfer. Though hard to quantify, the success of India's North American diaspora clearly offers aid and comfort to interests back home that are fighting to open the country to foreign business -- an uphill struggle in a country long dominated by politicians and bureaucrats who have much to lose in a more competitive, less regulated economy.