Remittances to the Rescue?

Remittances -- the money sent home to families by migrants living in foreign countries -- have been gaining attention in the last few years from international institutions such as the World Bank, the Inter-American Development Bank (IDB), and the International Monetary Fund. These organizations and others have begun to study remittances with an eye to their potential for reducing poverty in the poor and near-poor countries to which most of these funds flow. It turns out that remittances are a mixed blessing. They offer a relatively stable source of incoming funds. At the same time, however, they can create an alarming dependence on behalf of their recipients, heightening their vulnerability to shifting political and economic winds in the host countries over which they have no control.

Remittances have been, until very recently, very much on the rise, with about 10% of the world's population now receiving some remittance income. In 2006, 150 million migrants across the globe sent $300 billion in 1.5 billion transactions. Remittances now represent nearly one-third of total financial flows to the developing world -- more than official development assistance and, depending on the country, more even than foreign direct investment. Fifty-nine countries receive more than $1 billion annually in remittances, and 45 receive more than 10% of their GDP. Moreover, remittance flows have tended to be much more stable than foreign direct investment or portfolio (stocks and bonds) investment.

One-third of the money sent originates in the United States; most of the rest is sent from Europe and the Middle East. A significant volume of remittance money circulates within the developing world as well, however: so-called "South-South" flows account for 30% to 45% of total remittances, according to the World Bank.

Latin America and the Caribbean is the region receiving the highest level of remittances per capita, averaging $102 annually, and the region's remittance flows have risen tenfold in real terms over the last 20 years. In 2006 the region received $62.3 billion from migrants abroad -- five times the amount of "official development assistance" it received -- with remittances to Mexico ($24.2 billion) accounting for over a third. After climbing at double-digit rates in the last decade, the flow now appears to be leveling off: a recent survey by an IDB fund estimated 2007 remittances to the region at $66.5 billion, only a 7% increase over the previous year.

Most of the money received in this region is used for everyday living expenses, everything from food and home repairs to school tuition. What interests economists most, though, is the potential for remittances to contribute to economic development -- when, for example, recipients put the money toward new small business ventures that may over time provide employment to others and expand local economies. According to a 2007 World Bank report, the data suggest that remittances do tend to increase bank deposits, reflecting at least some potential for such investment.

Research has generally found that higher remittance flows are, to a modest degree, associated with lower poverty, better health, and higher levels of education in the developing world. In ten out of eleven Latin American and Caribbean countries examined in a 2006 World Bank study, children from families receiving remittances were more likely to remain in school than those whose parents were not supported by such funds.

Yet the increasing remittance flows have a downside: families and national economies that come to rely on the extra income become vulnerable to far-distant events and trends. Take the case of Mexico. One consequence of the current bust in the U. S. housing market is that construction, which employs many Mexican workers, has slowed -- and along with it, the flow of money back home. Remittances to Mexico grew only 1% in 2007, and in January of this year fell 6% compared to the same period last year, according to the IDB.

And the falloff in construction work is not the only factor depressing Mexican migrants' ability to send money home. Thanks to increasingly visible anti-immigrant sentiment in the United States, stricter border enforcement -- including the threat of incarceration, as opposed to just deportation, for undocumented migrants caught crossing the border -- and penalties for employers who hire undocumented workers, it has become harder for immigrants to enter the country and find decent jobs. As the dollar falls in value against foreign currencies, those who have been in the United States for some time may have to work longer hours and cut their expenses just to be able to send home the same amounts.

Migration and remittances have certainly transformed many Latin American towns, but not always for the better. So-called "migra-villages" have seen their working-age adult population shrink. Remittance money can help build new homes, but they often remain empty in their owners' absence; new schools get built, but enrollment does not necessarily increase. Family members left behind may stop working and wait month-to-month for money from overseas, weakening local economies -- not a sustainable set-up in the long run.

And surprisingly, remittances do not necessarily flow most heavily toward the poorest families that need them the most. In fact, the World Bank's 2006 study found that in the 11 Latin American and Caribbean countries for which data were available, remittance income was actually distributed slightly more unequally than total household income: the top 20% took in 51% of total income, but 54% of remittances. Who receives remittances varies sharply from country to country. Contrast Mexico, for instance, where 61% of the households receiving remittances in 2004 were in the bottom 20% by (non-remittance) income, with Peru, where fewer than 6% were, while 40% were in the top income quintile.

Today, remittance checks are helping millions of households across the global South to keep food on the table and a roof overhead. Although the evidence hardly hails them as a long-term solution to global poverty, as long as remittance flows continue, they should be both facilitated and rigorously regulated.

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