REMITTANCES: Keeping the faith

Migrant dollars are flowing home again as the US economy recovers, and new schemes are proliferating to put the funds to work

  • By Greg Brosnan
  • 22 Mar 2010
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Daniel Rosas almost gave up. The US credit crisis had ravaged the construction industry in Durham, North Carolina, and the undocumented worker from Pahuatlán in the Mexican state of Puebla was barely able to send a dollar home all summer.

Then in November, just as he was about to cut his losses and head home, his wife Alma Delia Aguilar got a call. “He said things were starting to get better again,” she said. “That there was work.” By January, Rosas was regularly wiring her cash again.

With the US suffering a devastating recession last year, remittances sent home by migrants to their relatives in Latin America and the Caribbean plunged as much as 15% in 2009, the worst ever recorded decline, sinking families across the region into hardship.

Now, as the US economy starts to recover, the main international institutions monitoring the flows say the declines are moderating and are predicting remittance levels will remain flat – at just under $60 billion – or even see a single digit increase in 2010.

“You’re not seeing these huge drops from month to month,” says Greg Watson, a remittance specialist at the Multilateral Investment Fund (MIF), a member of the IDB group. “We think we’re seeing the bottoming out of the drops, and we’ll probably see a small growth this year.”

In and around Pahuatlán, a lush coffee-growing town cradled between mountains in Mexico’s Sierra Madre, anecdotal evidence seems to bear out the data.

The economy here revolves almost exclusively around money sent home by migrants living in Durham, NC. Just a few months ago, say locals, the mood in town was universally bleak. But while some households and businesses say things are still getting worse, a significant few are now noticing an improvement.

In San Pablito, an outpost of Pahuatlán scattered across a steep mountainside, part-time mayor and butcher Jose Santiago Lopez says some families who cut out meat altogether during the worst of the crisis are now adding it to their menus, albeit once a week.

Pahuatlán’s cement vendor says sales are still terrible – people aren’t resuming their home improvements yet. But the small clothes boutique across the street, on the other hand, has noticed customers venturing in again.


Owing to different methodologies, total Latin American remittance estimates vary wildly among the main monitoring institutions – the MIF, the World Bank, the UN’s International Fund for Agricultural Development (IFAD) and Washington DC think-tank the Inter-American Dialogue – even though they are mostly in agreement over the wider trends.

While the 2009 decline was dramatic, experts have been encouraged by the relative resilience of remittance flows during the credit crunch.

“There was never a global crisis before,” says Dilip Ratha, the lead remittance expert at the World Bank. “We knew that if there was a financial crisis or natural disaster in a country that receives a large amount of remittances, then post crisis remittances go up,” he says. “What we didn’t know was what happens in a synchronized global crisis, especially one that begins in the major destination countries. Remittances do not fall as much as private capital flows do.”

That stability has a lot to do with the depth of the commitment migrant workers have to their relatives back home, says the MIF’s Watson, citing a study last year that showed a quarter of unemployed migrants in the US were still sending money back – proof that spending on remittances was not discretionary.

“It’s not like, ‘I have $200 dollars left at the end of the month, I’m going to send it to my grandma,’” says Watson. “If I’m unemployed, I’m going to tap my savings. I’m going to pick up odd jobs. If I’m already employed, I’m going to take a second job. I’m going to cut back on my own expenditure. The reason for the migration is sending money home, so that’s the first payment that goes out the door, not the last.”

It will likely be a long time until Pahuatlán, and thousands of places like it dependent on migrant cash across Latin America and the Caribbean, have real reason to celebrate. Most economists say that with the US economic outlook uncertain, it could be years before remittances to the region rebound to 2008 levels, and some say it may be premature to talk about growth at all.

Robert Meins, a remittance specialist at IFAD in Rome, points out for example, that Mexico, Latin America’s largest collector of remittances by far, received only $1.32 billion in January according to the latest central bank figures – nearly a 16 % drop year-on-year and the country’s lowest monthly dollar total since February 2004.

“The number of downside risks outnumber the upside risks,” he says. “There has been no major change in US immigration policy, the economy isn’t getting better, and the construction sector has seen a drop in how badly it’s declining, but it hasn’t improved significantly.” With those risks in mind, experts in the field are busy chasing strategies and new technology that can make remittances cheaper to send, make them go further when they arrive at their destination, and hopefully turn them into a catalyst for development.


The science of remittance economics is barely a decade old, but from the outset, experts who cut their teeth in Latin America have been at the forefront. One of the pioneers, Nicaragua-born economist Manuel Orozco, first began studying the phenomenon in the mid-1990s, looking at the impact of migrant money sent to Colombia, Guatemala, El Salvador and Nicaragua. All were then either mired in brutal civil wars or just emerging from them.

Before the advent of remittance transfer companies such as Western Union, money was sent back through human ‘mules’, bank wires that took three weeks, and later, money orders. Data was at best hard to come by.

“There was almost nothing available,” says Orozco, who works for the Inter-American Dialogue. “We started by looking at official statistics on migrants and on remittances, then realized very quickly that there was no correspondence between the two.”

By conducting groundbreaking surveys in sender and receiver countries and helping central banks improve the way they collect data themselves, Orozco and his peers have alerted governments to the sheer size of these flows, and private-sector players looking for investment opportunities are also taking notice.

The market is widely seen as the key motor for harnessing the development power of remittances, but while global institutions like Citibank are playing a major role, development economists see small local banks and microfinance institutions as their natural partners.

The wisdom of linking microfinance institutions to remittances became clear in the aftermath of Haiti’s devastating earthquake. Coordinated by the MIF, the US Treasury, State Department and US armed forces, which helped with cash drops, Haitian microfinance institution Fonkoze was able to deliver life-or-death remittances to 34 remote villages within days of the disaster, while the country’s banking system lay literally in ruins.

While less dramatic, economists believe microfinance institutions’ increasing use of remittance flows to bring people into the banking system for the first time could have an even more profound long-term effect on regional poverty reduction. Studies show that if people put their money in bank accounts, instead of stuffing it in their mattresses, they manage it better and spend it more wisely. Institutional saving protects people’s nest eggs from thieves and inflation and opens the door to credit.

Research has also shown a strong correlation between receiving remittances and saving money, and the IDB in particular has been instrumental in backing projects linking the two. In just one example, IDB-backed microfinance project Apoyo Integral in El Salvador is taking remittance flows into consideration in a home-grown credit-scoring system that has enabled people to take out $2.3 million in loans for small businesses.

“If you’re smart and you build the right incentives, you can convert remittances into deposits,” says Martin Holtmann, chief of microfinance at the International Finance Corporation (IFC), the private investment arm of the World Bank, which has a quarter of its $1.3 billion total investment in microfinance, working in Latin America.

Converting remittances into savings is a particularly good idea for microfinance institutions as it reduces their exchange rate risk by weaning them off foreign currency financing. “You can make money, you provide additional services, which your customers like, and you stabilize your funding base,” Holtmann says.


Local large to medium-sized banks as well as US titans are embracing the idea. Financiera El Comercio, Paraguay’s largest financial institution, for example, kicked off a programme in December giving financial education to about 10,000 remittance receivers. By mid-February it had brought in 900 new customers and their savings, largely made up of remittances sent from Spain.

“It opens a new market for us,” says Carlos Heisecke, president of Financiera El Comercio. “It’s a social service, but it has to be sustainable and it has to make money.”

A remittance pioneer among the big US banks, Citigroup uses the Swift payment system to channel remittances for a low $5 fee from the Citi accounts of Ecuadorean migrants in the US, straight into their relatives’ accounts in its local partner banks Banco Solidario and Banco Bolivariano.

“Often in neighbourhoods with significant immigrant communities, you see someone taking cash out of an ATM and crossing the street to wire money home,” says Robert Annibale, head of microfinance at Citi. “In contrast, for example, where Citi has forged partnerships with Ecuadorian banks, sending remittances directly through us brings down the cost to the sender, who is a banking client of ours.”

Not all is rosy. While average sending commission fees, for example, have come down in the region from more than 10% to just over 6% in just five years, many experts say they could still come down a lot more compared to other regions, and that technological innovation like mobile phone transfers is also lagging other parts of the world.

“Latin America is a shining light,” says Meins of IFAD. “It is my pleasure to watch what happened in Latin America happen in Africa as well, where they are beginning to realize how important these flows are to their economies.”

The ease of having money directly deposited has been a major pull for thousands to open their first ever bank accounts here.

Customer Fabiola López, a 21-year-old indigenous Otomí and single mother, used to keep the money her parents wired her from Durham in an envelope. She always spent it too quickly and on occasions lost it altogether. “The good thing about saving is that you keep your money safe and you get interest too,” she says. Now, even though her parents have sent her less cash because of the crisis, through better management of her finances she’s been able to save enough to begin building the family’s first flushing toilet, ready for when they eventually return. Soon she will ask the bank for a micro-loan to help her buy materials for her small traditional jewellery-making business.

Through its Envíos Confianza programme, AMUCSS, a Mexican non-governmental microfinance umbrella group, intermediates between US wire merchants such as Western Union and 141 rural points of payment throughout the country. Customers of their local microbank receive the remittances, saving them a costly bus journey, fraught with the danger of robbery, to the nearest large town.

Enviós Confianza national director Angel Lopez is a rising star in Mexico’s commercial bank system. He moved into remittance microfinance hoping to make a greater social impact. Visiting Lopez in the hillside hamlet of Xochimilco outside Pahuatlan, he reflected on why he loves his job. “Before I used to spend all day selling people financial products they didn’t need,” he says. “Now I get to give people products that can change their lives.”

  • By Greg Brosnan
  • 22 Mar 2010

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