It is now common practice for members of the African diaspora to send money back home. With mobile money technology, the process has never been faster and cheaper. For example, in a matter of seconds, a person can send money from the US to Kenya. The recipient would get it in their mobile money account and they wouldn’t need to go to a bank or another financial institution for withdrawal.
Thus, it is not surprising that last year, remittances to Africa reached $200 Billion, surpassing the Official Development Assistance (ODA) and Foreign Direct Investments (FDI). The World Bank and the UN have hailed remittances as an alternative source of development finance for the continent, and rightly so.
However, the downside that is not discussed often is the opportunity cost of remittances–labor supply loss. This is particularly significant in Africa where migrants are more educated due to the arduous process of obtaining migration documents. This special feature of the migration and remittances dynamic in Africa adds an element of urgency to make remittances work for Africa.
Diaspora bonds have not yet taken hold
It is prime time for remittances to be scaled up into high-impact investments. This necessitates moving from individual or family remittances and tapping into more collective, development-focused remittances. For instance, diaspora bonds have not yet taken hold on the continent. This is one avenue that governments need to explore to better pool resources from the diaspora and allocate them to long-term development projects.
UK-Africa Diaspora Conference in 2021 (source: Movemeback)
Equally important, African governments have to work to bolster domestic financial institutions and reduce transaction costs. Remittances are especially important during crises and negative shocks. For instance, during Covid-19, remittance flows showed resilience in most African countries.
Similarly, the rate of remittances appears to be higher in countries experiencing conflicts and/or social unrest. These dynamics prove the role of remittances in boosting resilience and risk-sharing during difficult times. However, remittances, due to their proliferation in recent years must play a more active role in driving economic growth.
It is up to governments to build credible institutions for the diaspora members to invest in. This should mirror the same FDI pull factors that developing countries adopted decades ago. Most African diaspora members in the US talk about how they want to retire back at home. This, too, should change. There have to be incentives for the diaspora to return, work, and invest in their home countries.
Remittances are increasing; we need to make sure that this trend yields positive results.
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