If we still have an outdated view of Third-World development being funded by Western foreign aid programs, consider this: 82 percent of the $703 billion dollars that flowed from the developed world to the developing world in 2010 came from private sources: capital investments, philanthropists, and remittances from individuals. Government foreign aid, which a half-century ago made up about 70 percent of funds flowing from the developed world to the developing world, now accounts for a mere 18 percent of such funds. In fact, private funds flowing to developing counties have exceeded government foreign aid for two decades, starting in 1991.
These are the lead findings of the just-released 2012 Index of Global Philanthropy and Remittances published under the direction of Carol Adelman at Hudson Institute’s Center for Global Prosperity.
The report details the relative sizes of the three sources of private funds: philanthropists, capital investors, and individual remittances, using 2010 data (the most recent available):
Among the three sources of the $575 billion in private funds, what we think of as “philanthropy” -- foundations and philanthropists giving money and in-kind support -- is the smallest source, valued at only $56 billion.
The greatest source of private funds came in the form of private capital investment, which was valued at $329 billion. This figure shows a strong rebound in investment to 2007 levels after a collapse to about $125 billion annually during the global financial crisis.
Remittances -- money sent by individuals who have migrated to developed countries to family and friends back home -- was valued at $190 billion.
This last figure is incredibly important. Not only does the $190 billion in remittances represent over a quarter of all transfers from the developed to the developing world (dwarfing the $56 billion from foundations and philanthropists and also greatly exceeding the $128 billion in official government foreign aid), but it’s also money that, dollar for dollar, is among the most effective of the transfers to the developed world.
As Carol Adelman described in an April 2nd presentation at Georgetown University on the 2012 Index, remittances “have a huge, huge effect on providing goods and services to families” and reducing poverty. Remittances, of course, support recipient households. However, remittances have broader economic effects as well: migrants are forming “hometown associations” where they pool a fraction of their remittances to support local development projects that the migrants know will make a difference for their family and community; entrepreneurs receiving regular remittances use that income to support credit applications; and governments have been able to improve their credit rating and secure loans at a lower rate on the basis of remittances received by their citizens. (Listen for her description of these benefits of remittances starting at 12:26.)
Remittances are so effective because they are individual-to-individual transfers where people making the transfer know to whom they are giving the money and what it will be used for. Remittances are essentially small-scale grants, made by individuals who understand the needs of the recipient family and community, to carry out readily achievable goals. There’s a high degree of accountability on the part of the recipient and a high degree of commitment on the part of the giver. The high degree of commitment between senders and recipients of remittances helps explain why remittances, unlike private capital investment, held steady during the global recession.
The 2012 Index of Global Philanthropy and Remittances shows once again in a development context what we’ve seen so often in domestic philanthropy: what works best is not philanthropy carried out on a large scale built on a grand theory of social change but small acts of philanthropy towards those who are personally known to the philanthropist. It’s the many, individually modest acts of philanthropy that sum to have the greatest impact.