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Addition by Subtraction: How Diasporas Can Boost Home-Country Growth

Version in عربي (Arabic)

Every year, millions of people leave their countries of birth in search of better opportunities abroad. Often, these migrants are among the most talented workers in their home countries. At first glance, this is a loss for the home countries, which invested considerable time and money in educating and developing these people, only to watch them leave. But look again.

With the right policies, home countries can make use of their diaspora communities—which include emigrants and their descendants—to support the economy. In a recent study, my colleagues and I find that diasporas can help raise long-term economic growth, on average, by 0.6 percentage points in emerging and developing home countries (see chart).


How diaspora communities boost home-country growth

Diaspora communities can make a unique contribution to the development of their home countries—especially toward building physical capital and productivity, and ultimately helping to boost job creation, living standards, and higher growth.

How do they do this? First, they send money home in the form of remittances. Migrants from emerging and developing countries sent home $430 billion last year—three times more money than their home countries receive in financial assistance from other countries or international financial institutions and a substantial portion of their GDP. For example, as a percent of GDP, remittances represent 37 percent in Tajikistan, 30 percent in Nepal, around 25 percent in Tonga, Liberia, and Haiti, and 16 percent in Lebanon. These figures could be even higher if the high cost of sending remittances—ranging from 5 percent of the amount being sent in South Asia to 12 percent in Sub-Saharan Africa—were lowered.

When these remittances are spent on goods and services, they immediately support economic activity. When these remittances are used to invest, they can boost the home-country’s capital.  For example, relatives back home may use this money to fund their own businesses—or they may save it, increasing the funds banks have to lend to businesses. Diasporas also invest directly in business opportunities and government bonds in their home countries. In addition to supporting investment in capital, diasporas also support productivity by funding education, training, and healthcare.

Second, by virtue of their education and training, diaspora networks convey knowledge and expertise—raising productivity through a variety of channels. By contributing to the design of educational curriculum and training, diasporas can raise the quality of education in their home countries. They can also directly provide rigorous professional development and leadership training programs. Combining their skills, contacts, and know-how with their insights into global opportunities and local customs, diasporas help home-country businesses overcome hurdles, raise efficiency, and expand into new markets. In the same vein, they can also be powerful advisors to governments in helping to improve the quality of public institutions and advocates to foreign businesses looking to expand. For example, Indian-born executives in U.S.-based technology companies played a critical role in giving their companies the confidence to outsource work to India.

Catalyzing diasporas

Ultimately, the intensity of diaspora involvement in their home country depends on a multitude of factors. Many of those are out of policymakers’ realm of influence, such as culture, a sense of identity, prevalence of extended families, and security conditions. However, there is also plenty governments can do.

A multi-pronged strategy can help governments get the most out of their large and successful diaspora communities, including: