Consider a small island developing state (SIDS) such as Tonga. In 2023, remittance inflows reached approximately 43% of GDP, making Tonga one of the most remittance-dependent economies in the world. For decades, remittances have provided a critical economic lifeline, financing household consumption, education, healthcare, housing and debt recovery. Similar patterns can be observed across many Pacific small states, where remittances sent by migrants abroad to their families back home have become embedded in national development trajectories.
The migration systems that generate these remittance inflows appear to simultaneously weaken domestic productive and service delivery capacity. Fiji’s health sector illustrates this problem clearly. The country trains 40 midwives a year and had only 200 midwives nationwide as of 2025, against an estimated minimum requirement of 300. Additionally, the International Council of Nurses has warned that Fiji has already lost up to a third of its entire nursing and midwifery workforce to overseas migration. Prime Minister Sitiveni Rabuka recently warned that severe labour shortages will become a major obstacle to the country’s growth.
Adding to this conundrum — the mobility of skilled workers who send remittances but simultaneously weaken domestic capacity — is the role of foreign aid. Tonga is among the most aid-dependent economies globally, with official development assistance (ODA) representing roughly 35% of GDP. In 2023–2024, ODA accounted for 51% of Tonga’s national budget. ODA funds core public services, infrastructure and administrative systems, often compensating for weak domestic fiscal capacity.
This piece argues that remittances and aid should not be analysed separately, but as compounding forces. While remittances appear to stabilise households from below, aid stabilises governments from above. Their interaction could help explain why many SIDS remain trapped in what could be termed a “stability trap”: a politically sustainable but fragile equilibrium in which external flows of remittances and aid together soften the pressures for domestic reform. We focus on small states because in larger economies, the loss of a few thousand skilled workers is often absorbed by markets and greater institutional capacity. 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. Likewise, aid represents a much larger share of public finance and administrative capacity for SIDS. These characteristics make small states an especially useful setting for understanding how remittances and aid interact.
Below, we summarise what existing scholarship tells us about how remittances and aid work individually, and why it is important to understand their political interactions in sustaining the “stability trap”.
Global remittance flows to low- and middle-income countries were estimated at US$685 billion in 2024, making them one of the largest sources of external financial flows to developing economies. In earlier work on SIDS, Prasad argued that reliance on remittances risks becoming a “non-strategy” for development, sustaining consumption without necessarily generating productive capacity at home. Remittances appear to smooth consumption, reduce poverty and provide informal insurance where domestic social protection systems are weak. In fact, Chami, Fullenkamp and Jahjah argue that remittances behave less like investment capital and more like compensatory family transfers, motivated by altruism rather than profit. Cross-country evidence finds few consistent links between remittances and long-term growth. Abdih and colleagues show that large remittance inflows are associated with weaker governance indicators, arguing that remittances can insulate households from government failure and thereby reduce pressure for institutional reform. Evidence from the Caribbean similarly suggests that remittances often function as replacement income for migrant households rather than drivers of productive investment.
From the micro-perspective of individuals and families, the system appears rational. But when educated citizens are also the most mobile, out-migration can gradually hollow out domestic labour markets. Teachers leave classrooms, nurses and doctors depart for better-paying health systems abroad, and private firms struggle to recruit skilled workers. In this sense, remittances provide household-level stabilisation, but are also associated with domestic skill shortfalls.
If remittances sustain households without transformation, a parallel question arises for aid: does development assistance build domestic capacity, or does it sustain the appearance of functionality?
The debate over whether aid promotes growth remains unresolved, as does the question of whether aid strengthens domestic institutions or requires institutional quality as a precondition to be effective. For small, aid-dependent economies, the more consequential question is whether aid builds the domestic systems that would eventually reduce reliance on external support either to nil or the lowest level possible. On this, one thing is uncontested: most aid, directly or indirectly, finances government spending. The question is what kind of capacity that aid spending leaves behind. Donor fragmentation, transaction costs, “poaching” of qualified local staff and lack of localisation are all found to reduce aid effectiveness in general and particularly in small states. Where many donors operate simultaneously, each establishes its own project management teams, reporting requirements and evaluation cycles. In doing so, they may recruit the most capable local administrators away from government, draining the state of the personnel it needs to function independently. The Lowy Institute’s finding that the rise of “micro-donors” has dispersed the same per-capita funding across many more projects and partners suggests aid fragmentation is worsening in the Pacific.
None of this implies that aid is without value. Clinics operate, schools remain open and critical infrastructure is maintained in large part because of sustained development assistance. The issue is that these functions are sustained through external support rather than by domestic systems strengthened to deliver them autonomously. Aid can create states that appear functional but remain structurally dependent: a pattern that becomes especially consequential when it operates alongside the household-level stabilisation provided by remittances.
Remittances and aid are usually analysed in separate policy debates: one as a private flow supporting households, the other as external funding supporting governments. Yet we argue that for many small economies, their interaction is central to understanding why domestic transformation proves elusive. One may ask how this argument relates to the MIRAB model, which describes how small island economies are organised around migration, remittances, aid and bureaucracy. In Geoffrey Bertram’s view, expressed almost forty years ago, this configuration is defensible and durable for small states. We accept the description but depart from it in two major ways.
First, the MIRAB model considers interactions between remittances and aid in an economic sense, but we argue that their political interaction matters and remains understudied. When households rely on remittances, dissatisfaction with weak labour markets or low wages is likely to be softened. This is not because citizens stop caring, but because some of the immediate consequences of state underperformance are cushioned by external income. Similarly, when governments rely on aid, fiscal crises that might otherwise force reforms in taxation, productivity or public administration can be postponed. Each flow makes the other politically tolerable. This is, of course, purely conjecture and reinforces the need for rigorous empirical investigation on this topic. Second, where Bertram reads this interaction as being sustainable, we read it as the problem itself: an equilibrium that is stable precisely because it disables the pressures that would otherwise drive transformation.
We return to the puzzle posed at the beginning of this article. For decades, development assistance and remittances have sustained livelihoods, financed public services and reduced economic vulnerability across many small economies. But they may just as well have reduced the pressures that normally drive institutional reform, domestic productive investment and the retention of skilled labour. This is the essence of the stability trap. As aid budgets contract and migration continues, many small states could soon face a moment of reckoning. Development cannot depend indefinitely on exporting labour while importing capacity. At some point, countries must become capable not only of generating remittances abroad, but also of creating opportunities within.
The question is no longer whether aid and remittances help reduce poverty: clearly, they do. It is whether they are helping countries reduce dependence or merely helping them manage it more comfortably.
