By Lucy Conger
As a US downturn gathers pace, Latin America faces the prospect of its first ever drop in remittances since the data started to be collected. The consequences could be severe
Latin economies have benefited almost universally in recent years from one constant: the steady rise in the homeward flow of cash transfers from workers outside the region. The growth has been staggering: remittances now outstrip foreign investment and foreign aid combined.
But now, the region faces the prospect of its first ever drop in remittances since data started to be collected a decade ago, as foreign workers find themselves squeezed by a variety of forces including US economic slowdown and rising anti-immigration sentiment, while the economies they left behind have improved markedly.
Although in absolute terms remittances rose to a new record of $66.5 billion in 2007 (7% more than the previous year), there are some disturbing data in the mix, according to a recent IDB report. “The rate of increase of flows has slowed dramatically,” Donald Terry, manager of the IDB’s Multilateral Investment Fund (MIF), tells Emerging Markets.
Flows to Brazil, one of the top recipients of the cash flows, dropped by $400 million in 2007 from the previous year – the first time any country in the region has seen a decline in remittance flows since 2000, says Terry, whose office conducts annual surveys of remittance flows.
A strong domestic economy coupled with a declining US dollar are part of the reason why Brazilians abroad are sending less money home. The country’s economy grew at over 5% last year, a performance robust enough to improve employment and living standards in the principal recipient states of Bahia, Minas Gerais and Mato Grosso, Terry points out. The dollar has fallen by 50% against the Brazilian real in recent years, which has meant that money sent home hasn’t stretched as far as before, so workers are sending less.
In Mexico, remittances have remained in a virtual steady state. The country is the region’s leading recipient by a huge margin, but growth in the value of transfers dropped sharply in 2007. Although remittances to Mexico reached the impressive figure of $24 billion last year, the increase over 2006 was only 1%, a notably weak performance for a country where the value of transfers quadrupled from 2001 to 2006. This year, remittances have already shown a clear drop, falling by nearly 6% in January compared with one year ago, the central bank, Banxico, reported last month.
Across the rest of Latin America – which accounts for more than half of the region’s annual remittances – migrant workers last year sent on average 11% more to their home countries. But even here, that rate will slow this year, according to predictions from central banks in the region.
The job market
The picture is especially gloomy for Mexico: 20% of Mexican workers in the US – the major source of remittance dollars – are employed in the construction industry, which has taken a beating amid the housing slump, says Manuel Orozco, remittances specialist with the Inter-American Dialogue policy centre in Washington DC.
Unemployment among Hispanics hit 8% in 2007, Orozco adds. Deportations doubled in 2007, as they have every year since 2004. Both facts could undercut homeward payments.
Meanwhile, a growing backlash against immigration and free trade, acute in a US election year, is also taking its toll on remittances as heightened xenophobia often translates into layoffs for migrant workers. “The more anti-immigration an area is, the sooner migrants lose their jobs,” says Orozco.
Such attitudes are especially virulent – and so tend to hit migrants hardest – in US states where waves of immigration are relatively new, such as the Carolinas, Georgia, Oklahoma and Tennessee. A new law in Arizona hostile to migrant workers is expected to drive many from the state.
“This situation has disproportionately affected Mexicans because they are the predominant group in those states,” says Terry.
What they mean
A diminution in remittances could wreak havoc on millions of households across Latin America and the Caribbean. In El Salvador, Haiti, Guyana and Jamaica, the flows are equivalent to 17% or more of national GDP, while in Honduras the cash transfers make up a whopping 25% of national product, according to a recent World Bank report.
But the good news is that relatives tend to send money home in good times and bad, so the cash transfers could have a counter-cyclical effect, helping reduce the vulnerability of the national economy to external shocks.
Ana Beatriz Rodriguez, chief of the international department at the central bank of the Dominican Republic, points out that remittances are increasingly important to the central American nation’s economy: this year the flows will grow by up to 9%, topping $3.5 billion. That amount is double the country’s foreign direct investment and about half a billion less than tourism revenues in the Caribbean nation.
Stemming Poverty
The impact of remittances on poverty is also apparent: recipient families on average spend between 50% and 75% of the funds on food, clothing, education and health costs, according to central bank data for Guatemala and the Dominican Republic.
Jesus Cervantes, director of economic measurement for Mexico’s central bank, says the transfers have raised incomes significantly among recipient households in Mexico, two-thirds of whom are among the poorest 40% of the population.
The pattern repeats itself across Latin America and the Caribbean. In Paraguay, 42% of recipients are under the poverty line, and in Ecuador, El Salvador and Guatemala, families in poverty make up 30% of those benefiting from the cash flows.
In Mexico, they roughly equal foreign direct investment, are close to double the total of border and non-border travel income and are two-thirds of receipts from crude oil exports. It is difficult to determine if there is a significant effect on th exchange rate, says Cervantes. Evidence suggests that remittances are spent mainly in consumption, including expenditure on education. Also a substantial amount is used for the acquisition or improvement of housing, he says.
Pablo Fajnzylber, senior economist for Latin America and the Caribbean at the World Bank, points out that among families who receive remittances, school enrolment rises while health indicators improve, as was shown in research on Guatemala and Nicaragua, where children in such families gained in height and weight. In Haiti, remittances have slashed extreme poverty by 15% among those who receive the flows, Fajnzylber says.
But the ability of remittances to reduce poverty across national economies should not be overestimated. In Haiti, poverty and extreme poverty nationwide have fallen four percentage points, to 53%, thanks to migrants’ transfers. More broadly, in the 11 countries that receive the largest amount of remittances, the percentage of people living on less than $2 a day has fallen by nearly three percentage points, to 27.8%.
“That’s not going to solve the big social problems that lead people to migrate,” says Fajnzylber.
Whatever the case, the hope is the current slump in remittances to Latin America and the Caribbean is a passing phenomenon. “It is a snapshot in time, the first and only slowdown [since 1990]”, says the IDB’s Terry.
How long the decline lasts will depend on the depth of a likely US recession as well as on the extent of growing protectionist and anti-immigration sentiment. But if proposed US immigration reform is approved by 2010 – as many experts envisage – the hostility towards undocumented workers may abate, especially if such reform grants de facto amnesty to many migrant workers.