Britain is not just a hub for global financial activity and a major trading partner for countries on both sides of the Atlantic. The British economy is the nation’s relationship with the developing world. Immigrants working in Britain send billions of pounds home every year, and the nation is one of the world’s most generous in terms of international aid.
“In relation to developing countries, you know, Britain plays a very important role,” said Alan Gelb, an economist at the Centre for Global Development in Washington.
As a result, British voters’ decision to divorce their county from the European Union – which caused a frenzy in global markets – is especially worrisome for those developing economies that are closely bound to Britain.
In the short term, the collapse in the value of the pound means that remittances and aid coming from Britain will be worth less to the people receiving it. In the medium term, the possibility for less expansion or even contraction in the British economy generally means that immigrants and the government will have less money to send abroad.
Britain has committed to spending 0.7 percent of national income on foreign aid – about 12.2 billion pounds – which is more than all but a handful of wealthy countries. Beyond that bottom line, Gelb said, the British offer aid in ways that are genuinely useful to the countries that receive it. Unlike other nations, they are less likely to focus on advancing their own interests in their charitable spending abroad.
According to the British government, the greatest beneficiary of that aid in 2014 was Ethiopia, which received 322 million pounds that year. That aid alone accounted for about 0.8 percent of the Ethiopian economy at the time, based on data from the World Bank.
Sierra Leone, another major beneficiary, received 238 million pounds in aid from the United Kingdom – the equivalent of nearly 6.8 percent of its economy.
With the decline in the price of sterling, the British government will provide less help to those countries. The pound lost 8.5 percent against Sierra Leone’s currency on Friday, implying the fluctuation in currency alone could reduce the size of the African nation’s economy by roughly half of 1 percent.
If the British economy also expands more slowly or enters a recession as a result of the decision to leave, then the government will have less in revenue from taxes and other sources to devote to foreign aid. Remittances are a second source of funds from Britain for poorer countries.
Nigerian immigrants are sending the most money home, according to the World Bank’s most recent data – an estimated $3.7 billion in 2014, or about 2.7 billion pounds. The combination of those remittances with official foreign aid of 237 million pounds was equivalent to about 0.7 percent of Nigeria’s economy that year.
The good news is that migrants are likely to adjust their behavior to counteract the decline in the pound. Workers can take on additional jobs or reduce their spending to send more money home, protecting their families from fluctuations in global currency markets.
In a detailed study of Filipino migrants worldwide, economist Dean Yang of the University of Michigan estimated that a 10 percent decrease in the exchange rate resulted in a decline of about 6 percent in remittances. How migrants from around the world in Britain will respond to changes in the value of the pound remains to be seen.
“There’s a very, very strong link between how well migrants are doing overseas and how well their families are doing back home,” Yang said.
Besides reducing standards of living, Yang suggested, the decline in the pound could make it more difficult for families in the developing world to keep children in school rather than sending them to work. “We should expect families back home to suffer as a result,” he said.