Remittances and aid in small states: the stability trap

Small island developing states (SIDS), such as Tonga, are heavily reliant on external financial inflows like remittances and foreign aid, which together can create a "stability trap." In Tonga, remittances alone reached approximately 43% of the nation's GDP in 2023, financing household needs and debt recovery. Similar patterns are observed across many Pacific small states, where migrant earnings have become integral to national development.

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The migration systems that generate these remittance inflows appear to simultaneously weaken domestic productive and service delivery capacity.

However, the migration systems that generate these crucial remittances also tend to weaken domestic productive and service delivery capacities. Fiji's health sector exemplifies this issue: the country trains 40 midwives annually but faces a shortage of at least 100, with a significant portion of its healthcare workforce migrating abroad. Prime Minister Sitiveni Rabuka has warned that such labor shortages will impede the country's growth.

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Severe labour shortages will become a major obstacle to the country’s growth.

Adding to this complex dynamic is the role of foreign aid. Tonga, for instance, receives official development assistance (ODA) equivalent to roughly 35% of its GDP, funding essential public services and infrastructure. The article argues that remittances and aid should not be viewed in isolation but as compounding forces. While remittances stabilize households, aid stabilizes governments, potentially softening the pressure for domestic reforms.

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While remittances appear to stabilise households from below, aid stabilises governments from above.

The "stability trap" describes a politically sustainable yet fragile equilibrium where external financial flows reduce the impetus for necessary internal changes. This phenomenon is particularly pronounced in small states, where the loss of even a few hundred skilled workers can severely impact public services and economic growth, unlike in larger economies where such losses are more easily absorbed. Analyzing the interaction of remittances and aid in SIDS offers a unique lens into how these external dependencies can sustain a state of fragile stability.

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In small states, however, the departure of even a few hundred nurses, teachers or engineers can significantly weaken public services, state capability and private sector growth.