Foreign Affairs Article in Spanish
For those of you who may prefer to read in Spanish, my Foreign Affairs article on Mexico has been translated and appears in the latest issue of Foreign Affairs Latinoamerica, which you can find here.
Investing Remittances
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.
Uncertain Causes and Effects of Declining Remittances
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.