Somalia receives $1.3 billion each year from remittances. This figure constitutes 50% of gross national income and 40% of Somalis rely on remittances for survival. Somalia already has 73% of its population living in poverty, 58% of children not enrolled in primary school, a life expectancy of 51, and continuing violent conflict. Without remittances, Somalia would be even worse off than it already is.
Considerations of poverty reduction mechanisms coming from outside Somalia underline the importance of remittances. Somalia receives more from remittances than aid and foreign direct investment combined. The U.S. is the source of about 19% of these remittances, with $250 million annually coming from the 109,000 Somali-Americans in the U.S.
Compare this figure with the $182.5 million USAID spends in Somalia each year. USAID spending on Somalia is smaller than remittance flows from the U.S., and there also isn’t much reason to think USAID spending does more good per dollar. USAID has to spend a significant amount of money on overhead, transportation costs, and expensive salaries for foreign workers. Apart from a relatively small transaction fee, remittances go directly to Somalis. They’re effectively the same as the cash transfers that aid agencies are increasingly using themselves (and in my opinion should be using quite a bit more).
So, would both the U.S. and Somalia be better off cutting USAID spending on Somalia and accepting 80,000 Somali immigrants, bringing an increase in remittances roughly equal to current USAID spending on Somalia? I think there’s a good case for yes, even if political realities mean that sort of increase in immigration is unlikely (in this hypothetical the U.S. has removed its barriers to sending remittances to Somalia). Not only would Somalia receive remittances that are probably more efficient than aid spending, the Somali immigrants would also have an enormously improved standard of living. Unlike USAID funding, remittances do not come at the expense of American taxpayers. While this increase in immigration would require government spending on processing immigrants and the immigrants could potentially receive benefits from social programs, I would think this is outweighed by the taxes they pay and the fact that they would still put most of their money into the U.S. economy. The effect of immigration on native wages is far beyond the scope of this post, but there is definitely evidence that it can have a positive effect.
The point of this blog post is not to argue that aid spending should be cut. If I could have my way, both aid spending and immigration would increase significantly. The question looked at in this post does suggest, however, that the attention given to different development topics is often far from proportional from their impact. While aid is spoken about so frequently that many take it as synonymous with development, remittances and immigration struggle for any role in the discussion. Yet, as shown, Somalia is probably benefiting more from remittances coming from the U.S. than from American aid.
Somalia is actually far from the largest recipient of remittances from the U.S.. I chose it because it was relatively easy to find data due to the flurry of articles over the U.S. decision to nearly shut down remittances to Somalia. Some of this data is probably in flux due to the increased U.S. restrictions on remittances, but it’s useful for examining the issue of remittances more broadly. It is notable that 4% of Somalia’s GDP comes from remittances from the U.S., particularly given the relatively small number of Somali-Americans. Still, for Guatemala, Honduras, and El Salvador those figures are 8%, 13%, and 14%, respectively. Globally, developing countries receive three times more from remittances than aid. These remittances are having very serious impacts in poor countries. While I’m sure someone with more expertise than I have could give better recommendations to increase the efficacy of remittances and immigration for poverty reduction, there are practical steps that can be taken. Supporting remittance infrastructure and lowering transaction costs would certainly be positive steps. In the Somali case, the U.S. should help make it easier to send remittances instead of its cruel and groundless attempts to make it more difficult. In all cases, the U.S. could simply let more immigrants in, as far more people want to come to the U.S. than are currently allowed.
But for those working on global poverty, the importance of remittances should remind us to diversify our focuses. For all the endless debates on the merits of aid and effective aid practices, a larger source of funding to poor countries hardly gets a mention. While there are reasons development practitioners shouldn’t focus equally on remittances and aid- not least because aid is largely implemented by development agencies while remittances are not-, it is clear that remittances and immigration receive too little attention. Other “beyond aid” issues like trade, illicit financial flows, and climate change, to name just a few, similarly deserve more attention. If there’s a good case to be made that Somalia would be better off if USAID cut funding and the U.S. accepted 80,000 Somalis, the current focuses of the development sphere must be a little off.