Migrants from emerging economies play a vital role in the labour markets of advanced economies, contributing both low and high-skilled work in exchange for income. In 2024, these contributions translated into an astounding USD 685 billion in remittances, as reported by the World Bank. However, as immigration continues to spark challenges, calls for stricter immigration policies are growing louder. Such measures could disrupt the flow of remittances, affecting not only advanced economies but also the very nations these migrants come from. Rather than viewing immigration and remittances as mere transactions, we should recognise their potential to create a broader system that promotes social inclusion and drives development.
The benefits
Migrant workers from emerging economies help alleviate labour shortages and thus also mitigate wage and inflation pressures in advanced economies. According to the OECD, the surge in cross-border migration has helped advanced economies recover from the sharply increased inflation after the COVID-19 pandemic and the outbreak of the war in Ukraine.
Industries such as construction, hospitality, agriculture and food processing in advanced economies heavily depend on migrant workers, both legal and illegal. Illegal workers alone comprise around 5% of the US workforce and 1.5% of the European workforce. If this workforce were to disappear, these industries would have to raise wages to attract workers, and even then, it could be difficult to fill these vacancies domestically, as some jobs are simply not appealing to non-immigrants. High-skilled immigrants are also in considerable demand in sectors competing for talent, particularly those driving advancements in technology. However, many of these individuals come from well-off families and may have less incentive to send remittances back home.
At the same time, remittances have become a lifeline for many emerging economies, financing education, supporting household consumption, and funding residential housing investments and small businesses back home. They have proven to be one of the most stable sources of funding, even during crises like COVID-19. In fact, the amount of remittances exceeds that of concessional financing from governments and foreign direct investment combined. In countries like Nicaragua, Honduras, Tajikistan, and Pakistan, remittances account for 10% to 45% of their GDP. Research indicates that the greater the share of remittances in the GDP of the country of origin, the more substantial the impact on the country’s development.
The challenges
On the flip side, immigration can lead to a brain drain and loss of human capital when migrants do not return home. A further challenge is that when remittances are not channelled through a financial system, they are often used solely for consumption, which has only short-lived benefits. Remittances that contribute to savings and investments have long-term benefits, but these usually come from migrants with a legal status in the country where they are working.
Creating a virtuous cycle between immigration and remittances requires effort. For instance, immigration policies in advanced economies ideally need to align with their labour market demands by making labour shortages more transparent and providing temporary visas not only to high-skilled workers but also to low and middle-skilled workers. Immigrants with a legal status have access to financial services. This increases their potential to open a business in their countries of origin, making it more likely that they return home someday. Simultaneously, the reintegration of returning immigrants into the society of their home countries should be a priority, especially with regard to work prospects, to prevent them from becoming lost between two countries.
Remittances and financial inclusion
Indeed, remittances channeled through financial intermediaries can significantly enhance financial inclusion for a substantial segment of the unbanked population. Efforts are ongoing to channel remittances from legal migrants through the financial system. The expanding digitalisation of remittance flows reduces transaction costs, although these costs remain relatively high, often due to the small size of individual transactions. The impact of remittances is strongest when they are made through a well-developed and robust payment network. Additionally, appropriate products catering to people living abroad, for example allowing remittances to be used as collateral for mortgage loans in the country of origin or loans to finance new businesses, have been expanding.
Triodos Investment Management invests in several financial institutions, for example in Latin America, which use remittances to back microfinance loans and residential mortgages. Financial institutions offering integrated services for remittance customers - such as current accounts, savings, credit and mortgage products - help drive development and social inclusion. By increasing job and income opportunities in emerging economies, this would help alleviate immigration pressures on advanced economies.
Rather than merely halting immigration, we must rethink it in all its aspects. Reconsidering the dual dynamic of immigration and remittances, as well as immigrants’ rights in host countries and the reasonable limits to immigration in these countries, is a good starting point. Unless initiatives like this are part of a broad system aimed at building more prosperous and stable countries where people are happy to live, we can be certain that the inclusive societies we hope to develop will remain elusive.
