Remittances flow to developing countries at volumes that dwarf official development assistance. They are also the least understood and most poorly governed form of development finance.
The Scale of Remittance Flows
Remittances — the money that migrants send to family members in their countries of origin — have grown into one of the largest financial flows between rich and developing countries, significantly exceeding official development assistance in total volume and in the breadth of recipient populations they reach. Unlike ODA, remittances are not channelled through government or multilateral institutions — they flow directly to households, serving as income support, education finance, healthcare expenditure, and small business capitalisation for the receiving families.
This direct household delivery mechanism gives remittances several characteristics that make them highly effective as poverty reduction instruments: they reach the households that most need them rather than the projects and programmes that government budget processes prioritise, they arrive on the schedule that receiving households need rather than the disbursement schedule that institutional finance imposes, and they are spent on the priorities that receiving households identify rather than the priorities that donor or government preferences determine.
The Cost Problem
The primary governance failure in the remittance system is the cost of transfer. The global average cost of sending remittances — the fees charged by the money transfer operators, correspondent banks, and payment processors that handle the transactions — has declined from over ten percent of transferred value two decades ago to around six percent today. This remains extraordinarily high for a financial transfer, and represents a significant tax on the development finance that remittances provide. The sustainable development goal of reducing remittance costs to three percent of transferred value by 2030 would, if achieved, release additional billions annually to receiving households — a development gain achievable primarily through regulatory reform rather than new resource mobilisation.
Remittances are the most effective development finance instrument available — targeted, demand-driven, and directly reaching the people who need it. The governance failure that keeps their transfer cost at six percent is a regulatory choice that taxes development finance at the point of transfer. Addressing it is among the highest-return institutional reforms available in the development space.
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