Let me begin by thanking my good friend Isaac Lee and Poder magazine for their kind invitation to address such a distinguished audience, and Jorge Hierro for his kind introduction. The topic I was assigned for today, “Creating Prosperity in Latin America” is a large and complex one; a challenge we take very seriously at the Inter-American Development Bank, but one we also approach with humility.
I want to focus on the link between the main subject of this forum—the movement of people—and the prosperity of Latin America. What I intend to do is to spell out a few ideas on this issue in the hope of planting some seeds for the discussion and for future initiatives and action. __As most of you know, the last three years have been very good for Latin American economies. As I often remark when confronted with negative news about the region: the trendlines are better than the headlines. The region is experiencing its healthiest growth dynamic since the 1970s.
Annual growth rates have averaged close to 5% a year since 2003, and they are expected to reach 4.6% in 2006. Average inflation is in the single digits and at 40-year lows. Budget deficits have been trimmed to levels lower than those of many industrialized economies, while debt has dropped from 72% to 53% of the regional GDP between 2002 and 2005. Unemployment is back to its pre-crisis levels of 1997, and median wages have increased 13% in real terms since 2002. It is estimated that 13 million people left the ranks of the poor in the region in the last two years. __
Investors have taken note. The region’s stock markets have lately been among the world’s best performers—nearly tripling in value since 2002—, and the interest rates Latin American governments pay on their dollar-denominated bonds have dropped to record lows__Migrants and prosperity __External factors, like high commodity prices, strong global demand and low international interest rates, have played a key part in this recovery, as have the sound economic management and prudent fiscal and monetary policies conducted by governments throughout most of the region.
But some of the unsung heroes of this recovery are the 30 million or so Latin American migrants living and working in the United States, Europe, Japan and other countries. Like so many diasporas before them, their influence is being increasingly felt at home. Let us not forget that in the late 19th century and the first half of the 20th, Latin America—and in particular countries like Argentina and Brazil—, received millions of migrants, particularly from Europe, who through their remittances, investments and acquired knowledge, contributed significantly to the post-war growth of countries like Italy and Spain. __
The IDB estimates that in 2005, migrants, primarily in the United States, pumped some $53.6 billion dollars into the economies of Latin America and the Caribbean. These flows equal about 2.5% of the region’s GDP. To put them into perspective, they are approximately the size of the annual production of the economies of Ecuador and Costa Rica combined, and represent close to 20 times the level of U.S. annual foreign aid to Latin America, and more than four times the annual foreign direct investment by American companies in the region. In some of the smaller countries in the region, annual remittances equal more than 10% of GDP, and surpass income from exports and/or tourism.
In the case Haiti, yearly remittances of $1 billion dollars are 2 and a half times the government’s annual budget and 20% of GDP. With numbers like these, it is clear that remittances are transforming the daily lives of millions throughout the region, as they are doing throughout the world, as 1 in ever 10 people currently receive them. __
These flows are the converse of a phenomenon that has traditionally plagued Latin American economies: capital flight. Our region has been historically characterized by boom-and-bust cycles and a pronounced volatility, by which the gains of good years tend to be eroded away in the next slump. These fluctuations have been caused or at least intensified by the instability of capital flows to the region. Remittances, on the other hand, have proven to be remarkably stable, and certainly more so than exports—which vary commodity prices—and foreign investment—which often swings with the whims of the market.
While an economic downturn or a tightening of immigration in the United States and other countries could affect the volume of remittances, most studies suggest that they will continue to grow for the foreseeable future. As such, they will not only continue to provide resources for personal consumption and investment, but also precious foreign currency to bolster macroeconomic stability.__
Of course, remittances are no silver-bullet. Like any resource flow, their capacity to generate lasting impact will depend on the conditions of the environment into which they are absorbed. And they certainly don’t come free. They often have substantial human, economic and social costs. Emigration frequently deprives communities of their best talent, and tears families apart. Moreover, there are cases in certain areas of El Salvador, for example, where the profusion of remittances has created perverse incentives for work and led to rapidly rising prices. By stimulating consumption booms and rent-seeking, remittances can have negative effects on local development, as abundant natural resources sometimes have. Unlike commodity windfalls, however, remittances go directly to the people who know best what they need them for. Indeed, remittances to Latin America and the Caribbean are extremely democratic, involving upwards of 220 million individual transactions last year alone.__
In any case, the fact is that these flows are here to stay, and they derive from the autonomous decisions of millions of individuals who have every right to vote with their feet and seek out a brighter future far from their homelands. And the demand for migrant labor, especially in industrialized countries, is on the rise. The Migration Policy Institute estimates that at the present time, the number of people coming into the U.S. workforce is equal to the number of people coming out. This means that, in effect, every additional job position created by the American economy going forward will have to be filled from outside. __
“More development bang for each remittance buck”__
The costs that remittances generate can be mitigated, and, given their magnitude, the opportunities they create to serve as levers for development are vast. The question with which we are grappling at the IDB, one which many countries in the region are increasingly asking, and which this audience should help address, is: how to get more development bang for each remittance buck? We at the Bank believe that the way to do this is not by central mandate or government imposition—these resources, after all, belong to those who work for them and their families—but rather by expanding opportunities for these people to leverage their remittances for their own personal benefit, which could translate into gains for all society.__
In a way, remittances remain financial flows in search of financial products. IDB research estimates that about 20% of remittances to Latin America and the Caribbean, or US $11 billion annually, is available for savings, housing, and other forms of investments such as family owned small businesses. That is about as much as the IDB and the World Bank combined typically lend to Latin America and the Caribbean every year. The trouble is that most of these flows occur outside the financial system, and banking institutions in recipient countries have not adequately developed savings, lending and insurance instruments catered to lower-income citizens. Currently, in fact, less than 10% of remittance recipients are estimated to have access to savings accounts, loans, or other basic financial services. __
It is commonly believed that the poor do not need banks because they do not have the means to save. This is not unlike the chicken and egg problem. Recent research shows that they will not save if they are not given the opportunity to do so. Pilot cases in Mexico show that if individuals have access to formal banking mechanisms, they will save about seven percent of their remittance income. If the financial system embraces this market, enhancing the borrowing, saving and investing capacity of senders and recipients, it would multiply economic impact for millions of families. It would also have the benefit of soaking up resources that might otherwise go to consumption, and helping to create the conditions for more people to stay in their home countries and lead productive lives. __
Traditional banks throughout Central America, Mexico, the Andean countries and even the Southern cone, are aggressively implementing remittance programs and partnerships to expand products and generate new clients. They are transforming the “walk-ins” who come to their agencies to claim cash remittances into full customers, and even trying to cross-sell internationally, contacting remitters in foreign countries to sell products for their families back home. To mention one example the IDB has supported, “Su casita” a market leader in low income housing in Mexico with a $2.1 billion dollar portfolio, recently launched a program to meet demand for Mexican mortgages originating with buyers living and working in the United States, The company has established marketing offices in various US cities and in the last few months has sold 650 mortgages to US customers for purchase of new homes in Mexico. Housing, as you well know, generates a lot of employment and can be a tremendous vehicle for broad wealth creation. __
At the IDB, we believe that over the next five years, remittance systems can be entirely transformed with increased use of technology and more competition, including the entry of banks into the market, full force. The barriers between money transfer companies, retail entities, banks, microfinance organizations and others are rapidly being blurred, and remittances are becoming one of the primary entry points by “unbanked” populations into the formal system, a key mechanism for advancing towards the greater financial democracy that the region desperately needs to make progress against poverty and inequality. __
Beyond remittances
While remittances are the most evident way by which the movement of peoples and emigration can contribute to prosperity in Latin America, they are not the only way. These migrant communities are creating large markets for Latin American companies, from ethnic food producers, to builders of retirement communities, to call centers. They are also catalysts for increasing the demand for Latin products—such as pop music—by other segments of the population in their host countries. And those that have built businesses abroad are increasingly looking back home for expansion opportunities, bringing capital, knowledge and valuable commercial connections. In this area, the IDB has a pioneering program with Brazilians of Japanese descent who are living in Japan and want to start business in Brazil. The Bank co-finances productive investments by these individuals and also their return to Brazil to pursue entrepreneurial opportunities. The opportunities for expanding programs of this nature will expand as countries in the region ramp up Free Trade Agreements with the United States and other countries.
There are many more ways migrants are contributing to prosperity in Latin America. By engaging in philanthropy, political activism and just by providing examples of self-made success, they are increasingly having a positive impact back home. And, going forward, as communities abroad expand, ease of travel increases, the cost of communications and barriers to trade continue to drop, the possibilities for more active involvement and further cross-fertilization of initiatives, businesses and ideas are endless.
I sincerely hope that industrialized countries will have the foresight and good sense, to move towards more equitable and effective immigration policies, not only because these can be a boon to growth and prosperity throughout the world, but because it is in their own strategic interest, especially as their populations age. Studies show that the economic gains from freer movement of peoples are exponentially greater than those that can be achieved, for example, from a successful Doha trade round.
However, there are likely to always be limitations in this area. For example, software and technology companies in the U.S. are increasingly affected by immigration quotas on highly-skilled scientists and engineers. But barriers like these could generate new opportunities for Latin America. Countries like Mexico, which benefit from NAFTA and physical proximity to the U.S. market, could attempt to plug this gap by establishing joint ventures with companies and universities from the U.S. and elsewhere to establish self-contained, high-tech campuses with all the business infrastructure and lifestyle amenities of the developed world.
One could think of a “knowledge maquila” cluster in or around Monterrey, where scientists and technicians from India, China and the world over could work and train in world-class, broad-band enabled environments within easy reach of the U.S. border and without having to worry about visas. This model, which one could call “on-shoring” or “near-shoring”, could have the additional benefit of curtailing illegal immigration, by creating new job opportunities in border areas.
Ideas like these are by no means implausible in today’s world. We only have to dare to be ambitious and to dream. Our countrymen and women who have left their nations of origin to pursue their destinies abroad have shown us just how far dreams can take us.
Thank you very much