Much is made in policy circles about the role remittances can play in boosting economic development in Latin America. Proponents point out that the over US$60 billion in remittances that return each year to the region is far higher than foreign aid and often higher than foreign direct investment in a country. Yet so far this money has not greatly affected economic growth or economic opportunities at home. Instead, the vast majority of remittance money goes to consumption. Some believe it actually fuels dependency, as more local community members are incentivized or even have to migrate in order to support their families.
While these monetary flows often do lift recipients out of poverty – providing adequate food, clothing, and shelter – they do little to stimulate local or national economic growth through productive investment. And as private money, unlike foreign aid or even FDI, it has been hard for governments to direct this capital into development-oriented projects. How can governments stimulate investment through public policies without hurting these flows?
So far, governments have focused on reducing the costs of transmitting remittances through formal channels such as banks with quite a lot of success. The costs of transferring money abroad have fallen precipitously, allowing migrants and their families to keep more of the funds earned. Also, migrants and their families are beginning to put funds in local and international banks, leading to more savings and investment capital. But these changes, while beneficial, do not in and of themselves increase investment in productive activities in their home communities. The amounts in individual accounts are small, and still used primarily for consumption by local families. In addition, banks often pool these savings from remittance receiving communities and invest them in larger amounts in more attractive loan markets, such as the capital cities in each country. This limits local economic development in the places most starved for investment capital.
Another set of public policies, prevalent in Mexico, involves matching funds for local community investment. Dubbed “3 for 1†programs, migrant groups pool together funds for infrastructure investments – for instance local roads or schools – and the federal, state, and local governments each match a peso. While helping local communities, the actual size of these programs is quite small, estimated at roughly US$70 million in investment last year. Many also question why migrants are funding 25% of public infrastructure for which the state should ultimately be responsible.
Mexico recently announced another pilot program aimed at directing remittances into rural economic development (Houston Chronicle 12/24/07). Unlike earlier policies, this program targets productive private investment. And, it focuses on agriculture, ensuring that these funds go back to the communities of origin of many migrants. While obviously in the initial phases, this incentive structure is promising. It may actually get at the elusive goal of economic development in the hardest hit areas of the national economy – the areas most likely to send large numbers of migrants abroad. If tied to capacity building and technical assistance programs – either provided by the Mexican government, non-profit organizations, or international aid such as USAID – this type of program could become and important step in promoting economic development, and ultimately providing citizens the choice of staying home.
Here is a recent interview I conducted with Bernard Gwertzman at the Council on Foreign Relations:
Interview November 6, 2007
Flying yesterday from JFK to Mexico City on Aeromexico’s afternoon flight, I sat next to a Mexican man in his late twenties. We started talking when he asked me to translate a few words on the English language customs form that were handed out.
He was returning to Mexico “ to a small town in Morelos “ after almost two years in the New York area. The main reason was to see his family: his wife, children, parents, and other relatives. While he never had working papers, during his two years he held jobs in restaurants, hotels, and most recently in a supermarket. He came to the United States with four friends, easily crossing the border, ending up in Los Vegas, flying to Boston, and then making his way down to New York.
He was both happy and sad about his return: happy to see his family after such a long absence, but also sad to leave the opportunities of the United States. He told me he plans on driving a taxi (his family has an extra car) and perhaps studying to get a certificate to join the municipal police or a private security company. But, if it doesn’t work out, he will migrate again to the United States. His employer at the supermarket told him to hurry back, saying there would always be a position for him. If he does return, it will only be for a limited amount of time again, so he can earn more money to help out his family.
His story is similar to that of so many migrants. He doesn’t want to stay in the United States: his home and family are in small town Mexico. But he also is searching for better economic opportunities to provide for his family. He is engaging, like so many others, in “circular migration,” moving back and forth between Mexico and the United States. Yet with the current U.S. migration system, this behavior is becoming increasingly difficult. With no legal means to come, and the rising costs of illegal crossings, many migrants are returning less often and are even deciding to settle in the United States permanently. But this situation leaves no one happy. For the United States millions of individuals continue working and living in the shadows, and for the Mexicans, they remain far from their home.
A recent report by the Inter-American Development Bank (IDB) concludes that Mexican migrants are sending back less money or remittances to their home country than in the past. A survey of 900 migrants showed that only 64% – compared to the previous 71% – sent money home in the first half of 2007. The fall was particularly acute in new migrant states, or those without long histories of Latino communities. The reasons suggested by the survey are anti-immigrant sentiment in the United States and a general feeling of insecurity and discrimination on the part of migrants. This is leading these workers to save more, and to reduce flows home. The polling results also show that more Mexican migrants expect to leave the United States in the next five years than before, seeming to support these conclusions.
Yet in-depth studies done on remittances show that those migrants with stronger ties to their home country and with greater expectations of returning are more likely to send home remittances (e.g. Cortina and de la Garza 2004). The logic is that they are investing in their home family since they expect to rejoin this community. Some call this the insurance policy effect, as the money sent now ensures the migrants are welcomed back home later.
This logic contradicts those put forth in the IDB report, but points to other potentially overlooked explanations. One is that Mexicans are sending money home increasingly through informal, rather than formal channels (official remittance statistics only count formal flows). The Arizona Attorney General this last year tried to stop Western Union transfers to Mexico over US$500, holding the funds until the senders’ identity could be determined (see Washington Post 1/26/07). The money was seized if the sender was determined illegal. This practice was later itself found illegal and stopped. But fear of discovery or just of lost funds may be channeling remittance flows toward informal channels, lowering official tallies.
The decline in remittances may also reflect the effects of increased border security on migration patterns (though not overall migration numbers). An unintended effect of increased border patrols seems to be the reduction in circular (as opposed to permanent) migration. Supporting this position is the increasing number of children crossing the border (as migrants bring their families to the United States rather than returning home for several months of the year). Permanent migration decreases remittance, as the migrant families create their life here in the United States.
If per capita remittances are indeed declining (and not just shifting to informal channels), this will have varying effects. In Mexico, it will likely mean many more families will remain or fall into poverty, as remittances provide a large portion of the daily needs of migrants’ families. The IDB estimates the recent decline in financial flows will affect at least 2 million people in Mexico. A fall in remittances may also encourage further migration, as more individuals search for jobs abroad to replace the funds previously sent home by relatives. So rather than a positive sign of changing dynamics, this decline in remittances may reflect a deepening of the cycle of human movement and dependency between the United States and Mexico.
With Congress on vacation, immigration reform is on hold. Coming back from their break next week, all sides will be ready to fight, armed with new arguments. In my op-ed in today’s Washington Post, I point out two issues so far ignored: bureaucratic capacity and demographic necessities. Let’s hope on their return Congress adds these fundamental underlying factors to the more expected debates about walls, new visas, and point systems.
The importance of demography for U.S. immigration is finally getting its due. Recent Congressional testimony by Dowell Myers highlights the effects of baby boomer retirement on the U.S. labor market, and the importance of legal migration given these shifts. A recent study by Mitra Toosi at the Bureau of Labor Statistics develops projections for the U.S. labor market in more detail. She adds the interesting fact that not only will baby boomers retire, but women’s participation rates in the workforce have stabilized (at near 60%). That means that unlike in the past, there isn’t a large untapped “surplus” of native Americans to meet growing labor demands.
These calculations contradict many of the responders to my recent op-ed, who question that U.S. demographic shifts will increase our future demand (and need) for immigrants. Often these comments come from self-identified baby boomers that say they don’t plan on retiring at 65.
That may be true. But I doubt the vast majority of them plan to be working at 80. If in fact the baby boomers overwhelmingly decide to postpone retirement, it will only delay, not put an end to, these future labor needs.
The overall trend, as these studies show, is a shrinking workforce and growing dependent population. While immigration can’t solve all of the challenges of this demographic shift, it will be a necessary part of our future if the U.S. economy is to continue to grow, and if many of the amenities we now enjoy in the United States are to remain available.
Following up on my op-ed in the Los Angeles Times, I talked with Lou Dobbs last night (see transcript) about the issues of demographic change and immigration in the United States. In my appearance and in earlier shows, Lou lays out various numbers regarding legal immigration – saying that 2 million people come into the country each year. But looking at the reports from the Department of Homeland Security (DHS), this 2 million figure is total visas – many of which are for the same person year after year. These are not all new additions to the annual workforce or population. But even if they were, these 880,000 for 2005 (see Table 3 of the DHS report on Temporary Admissions of Nonimmigrants), this is only 0.5% of our current workforce of nearly 150 million people.
The DHS also releases numbers on U.S. legal permanent residents. In 2006 they totaled roughly 1.2 million people (see Table 1). But here too, the vast majority are not new to the United States – new arrivals each year from 2004-2006 averaged roughly 400,000. Thinking again about the workforce, this is about 0.3% of the total.
Finally, Lou focuses on illegal immigration to the United States, saying that 1.5 million to 2 million illegal immigrants come in every year. In depth studies – using U.S. census data as well as other sources – instead estimate these flows as 500,000 a year (see this Pew Hispanic Center study). The DHS estimates a lower 400,000 unauthorized migrants each year (see DHS study).
Migration to the United States is an important subject, and one that should be discussed broadly. But in these discussions, we need to make a serious effort to be as accurate as possible about the numbers we use when defining the issue.
I wrote an op-ed for the Los Angeles Times yesterday that has received a fairly strong response (you can find it here).
Many responders – understandably – concentrate on the current effects of illegal immigration: the problem of undocumented migrants for U.S. security, the pressures on schools and other services in areas with heavy migration, and the effects of these new entrants to the labor market on the opportunities for lower skilled Americans.
All of these issues are incredibly important, and are key elements of the national debate on immigration now occurring. But as we discuss these immediate issues, we also need to be considering the medium to longer term dynamics of the labor markets on both sides of the U.S.-Mexican border. There are huge demographic shifts occurring in both of our countries, which will have significant repercussions for labor supply and labor demand, and for immigration, in the coming years.
The U.S. population is rapidly aging, and the first baby boomers are reaching retirement age. Over the next two decades, many will leave the workforce. Many will also need increased health care and living assistance – creating new jobs. The next U.S. generation – Generation X – is much smaller. With fewer native Americans entering an expanding job market (assuming our economy continues to grow), migrants will be needed to fill jobs.
Mexico too has an aging population. While in the 1990s one million new workers entered the working population each year, that number has recently fallen to 500,000. While still a challenge, the Mexican economy will better be able to absorb this smaller number going forward. In the coming ten to twenty years, significant labor surpluses among the young (those most likely to migrate) will decline.
The point is that labor supply and labor demand between our two countries is not a static relationship. It is in fact changing right now. As the nation debates immigration reform, we need to consider these dynamics, and their medium and long term effects. Otherwise, we will potentially be yet again fundamentally revising our immigration policy in just ten or twenty years, as the effects of current demographic shifts materialize.
