The 30m-strong Africa diaspora likely sends $160bn home every year: Where does it go?

Because about 75% of all transfers are informal and, therefore, impossible to track, diaspora remittances would be up four times bigger.

ACCORDING to the International Fund for Agriculture Development (IFAD) the African remittance flows to and within the continent reach $40 billion per year.

The 30 million strong African diaspora fuels the continents’ budget to the tune of 5% of its total GDP.

However, according to Adams Bodomo, a Hong-Kong based Ghanaian academic researching remittances, about 75% of all transfers are informal and, therefore, impossible to track. “If we add all that [informal transfers] in, the diaspora remittances would be bigger by a factor of three or four times”, bringing the actual figure anywhere between $120 billion and 160 billion.

Breaking down the official numbers indicates that the remittances received on per capita basis equal about $40 – that is to say that if the total population of Africa is estimated at 1 billion, each person receives approximately forty dollars per annum.

Since not every person is lucky enough to have a diaspora friend or relative, the actual average estimated remittance value sent by a migrant equals $1,177 yearly. This is most often shared by a number of relatives.

In terms of the total volume of remittance received, Morocco tops the chart at over $6 billion. In second place is Algeria with $5.4 billion then Nigeria with $5.39 billion and Egypt with $3.6 billion.

However, if one looks at the percentage of a country’s GDP that is supplied through remittance, it is the poorest and relatively smaller countries that show the highest dependence on foreign transfers: Eritrea (38%), Cape Verde (34%), Liberia (26%) and Burundi (23%).

Somalia, which receives approximately $1 billion worth of diaspora transfers every year, is not listed on percentage terms because its GDP is unclear. Using the Central Intelligence Agency (CIA) economic estimates, however, shows that the country’s remittance could be approximately 40% of its total domestic product. Placing Somalia at the top of relative remittance value.

President Kagame (left in glasses) shakes hands with members of the Rwanda diaspora in Boston in 2012.

Where does it go?

Because remittance plays such an important role in so many African countries it is interesting to see where this money goes and how it is spent.

The standard economic view states that remittances are mostly spent on consumption and therefore do not play an important role in facilitating investment and encouraging productivity. The empirical evidence, however, disproves this assumption.

One very common investment coming from remittance is in human capital, or education.

In Eritrea, where ¼ of population lives abroad, about one in three households depends on remittance income, while 75% of all survey respondents receive at least one form of remittance.

A study by Temesgen Kifle from the University of Queensland noted, “it is evident that remittances receiving households [in Eritrea] spend part of the remittances on child education […]’.

Kifle’s regression analysis shows that a 1% increase in household income (including both formal earning and remittance) increases the education ratio by around 0.04 percentage points.

A World Bank paper titled: “Remittances, Consumption and Investment in Ghana” concludes that remittances do affect marginal spending behaviour of households.

Most significant findings show that households receiving remittance spend less at the margin on food by as much as 14%, and more at the margin on education by as much as 33%.

Another study focusing on Nigeria and Kenya published by the World Bank in 2011, revealed that more than half of total remittance spending is invested in homebuilding, land purchases and farm improvements.

In comparison to Eritrea’s investment in human capital, Nigeria and Kenya show significantly lower figures of 37% and 30% respectively. Their physical investment levels, however, are much higher.

Impact on growth

Donna Clifton, in an article in the Population Reference Bureau, concludes that countries’ economic growth can be directly affected by remittance levels through consumption and investment patterns.

Clifton points to an important fact related to migration: As the overwhelming majority of workers living abroad are male, a significantly higher number of female-headed households emerge in the country of origin. In Ghana, for example, 52% of households with migrant workers were female headed, compared with only 25% for households with no migrant workers.

It has been empirically proven, many times over, that female-headed households have a considerably higher inclination to invest in health care and education – the core sectors of human capital – as well as having a higher propensity to saving.

There are also apparent cases of foreign money transfers being invested in business too.

In Somalia, a country with diaspora spanning all continents, money is spent less eagerly on health and education simply because these facilities aren’t commonly available and, if they are, reflect poor quality.

Interviewing one prominent Somali diaspora from Italy, Hassan, who returned to Garowe (the capital of Puntland) to open a restaurant, it becomes apparent that a number of things drive this investment incentive.

“I came back because there are opportunities here. Puntland is becoming increasingly stable in economic terms and since Somalis enjoy eating out, opening a restaurant seemed a natural step to make”, said Hassan.

When asked about the prosperity of his business, he replied:

“My restaurant turnover relies 90% on diaspora Somalis – they have more money, they know better how to enjoy good food. The next 9% are government officials and the remaining 1% is people like you”, smiles Hassan, meaning International relief workers.

Despite a recent deterioration in security levels in Garowe, the local diaspora still eats out, believing in their country and God, making Hassan cheerful about the future.

[Source]