Latin America's Faulty Lifeline

[Editor's Note: This essay is part of a series of Audits of the Conventional Wisdom, a project of the Center for International Studies at MIT.]

In recent years, the money that migrants send back to their native countries has become a hot topic in international development circles. Multilateral banks, the governments of migrant-sending nations, the U.S. government, and international development organizations laud the potential that remittances have to reduce poverty and promote development. Remittances are being exalted as "the new development finance," and a ticket to "high human development," while the migrants who send them are hailed as heroes back home. But the current remittance euphoria is both overblown and troubling when considered in a larger context of international development.

Nearly 40 percent of the $126 billion in remittances sent to developing countries in 2004 went to Latin America and the Caribbean, making it the region with the largest and fastest growing remittance flow. Remittances are more than the combined total of foreign direct investment and official development aid to the region. Not only are remittances a considerable amount of money, but they are a stable source of finance that goes straight to the hands of some of the region's most needy, are immune to the whims of global capital, and even have the unique quality of increasing in times of economic crises back home.

Nevertheless, the remittance hype largely misses the point: Some of the very entities now celebrating remittances as a remedy for underdevelopment prescribed and promoted policies that created the conditions for increased emigration from many countries across Latin America and the Caribbean since the late 1980s. In addition to taking remittances out of their larger context, the current ballyhoo exaggerates their potential and obscures some of their more deleterious effects.

In some studies, migration is mentioned as one result of the neoliberal reforms in the region, but there is a surprising dearth of empirical work linking the so-called Washington Consensus policies and emigration flows. Nonetheless, there is a great deal of scholarly literature on the effects of the neoliberal reforms and on the causes of migration. And there are some striking similarities among them.

Coming on the heels of the debt crisis of the 1980s -- known as the "lost decade" in Latin America -- the neoliberal reforms implemented throughout the region in the 1980s and 1990s focused on reducing state intervention in the economy and integrating the region into the global economy. Some of the pillars of the reforms were the privatization of state industries and services and the liberalization of trade, foreign direct investment, exchange rates, prices, and interest rates. The expectation was that these reforms would unleash growth, reduce poverty, and improve social conditions across the region. The outcome was far different. While the reforms brought inflation under control and improved macroeconomic indicators, the Washington Consensus failed the region in a number of ways. Growth in the region was sluggish between 1990 and 2003, an average of roughly 2.5 percent per year.

While this is moderately better than the 1.6 percent average annual growth during the lost decade of the 1980s, it pales in comparison to the average 5.5 percent annual growth from 1950 to 1980. Poor growth meant scant job growth and rising unemployment rates between 1990 and 2003. Before this time frame, Latin America had never before experienced such a long period of high unemployment, nor an urban unemployment rate as high as the 2003 rate of 10.3 percent.

While the quantity of jobs created was poor, so was the quality. Privatization of state industries and liberalization of trade resulted in a contraction of formal sector jobs and the so-called flexibilization of labor, in which labor relations were deregulated and contracts made more flexible with the goal of attracting investment. The result has been an increase in informal sector jobs, precarious labor relations, and lower social security coverage across the region.