Remittances ebb and flow with the immigration tide

EconSouth, Fall, 2008 by Federico S. Mandelman

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For families in many developing countries, remittance payments sent back home by family members working abroad are the difference between subsistence and privation. After years of rapid growth, remittances have leveled off amid an economic slowdown in the United States. How are changing migration patterns, economic developments, and new technologies and policies affecting this important payment method?

For the citizens of many developing countries, remittances are a vital source of personal income and, in some cases, survival. Remittances--literally, transmittals of money to a distant place--are generally understood to mean transfers of income from workers who have migrated from a poor to a rich country back to family members who remain in the home country.

The World Bank estimates that recorded remittances reached $318 billion worldwide in 2007. (Unrecorded flows through formal and informal channels likely mean that actual numbers are significantly larger than the reported numbers.) Of this amount, remittances sent home by migrants to developing countries represented $240 billion, more than double the amount sent in 2002 (see chart 1). In 2007, remittances totaled more than the amount of official government aid and more than half the amount of foreign direct investment in emerging economies.

Latin America has some of the highest levels of remittances, both in aggregate and per capita, according to the World Bank report. Mexico, for example, received $25 billion, or approximately 2.5 percent of gross domestic product (GDP), in remittances during 2007. These financial flows are particularly large in Central America and the Caribbean. In 2007, remittances made up 25.6 percent of total gross domestic product in Honduras, 24.3 percent in Guyana, and 21.6 percent in Haiti.

These high levels of remittances to Latin America are clearly related to the rate of immigration from the region. The World Bank's 2007 report, titled Close to Home: The Development Impact of Remittances in Latin America, estimates that Latin American migrants (both documented and undocumented) in the United States increased from 8.6 million in 1990 to about 16 million in 2000, nearly 10 million of whom were Mexican. About one-third of E1 Salvador's natives live abroad, mostly in the United States, and almost 50 percent of Grenada's population has migrated to a foreign country.

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Boosting welfare and the economy back home

People who migrate from their home countries are typically seeking a higher standard of living for their families. The remittances they send back home can have a remarkably positive impact. (Migration and remittances can also bring their share of problems; see the sidebar above.) Because remittances are mainly directed to relatively poor households, they play an important role in reducing absolute poverty and income inequality in recipient economies.

The World Bank's analysis of household surveys shows that for most recipient countries, remittance income may help alleviate some inequality in income levels among households. In Mexico, E1 Salvador, and the Dominican Republic, the report estimates that extreme poverty would be 35 percent higher and moderate poverty would be 19 percent higher in the absence of remittances among recipient households.

Several studies, including Close to Home, indicate that remittances ease constraints on recipient households' budgets and allow families to spend a smaller share of total income on food and more on housing and related expenses (for example, durable goods), health, and education.

Households with migrants abroad have significantly better knowledge of basic health care and a higher probability of a doctor delivering a baby, according to the Close to Home report. "Children from households that report receiving remittances tend to exhibit higher health outcomes than those from non-recipients households with similar demographic and socioeconomic characteristics," the report said.

The World Bank report also points to evidence that "for some specific groups ... remittances increase children's educational attainment. However, the impact is often restricted to children with low levels of parental schooling."

A 2006 World Bank working paper by Pablo Acosta shows that remittances also reduce the incidence of child labor, allowing children to focus on schooling. For example, school enrollment is between 12 percent and 17 percent higher in families receiving remittances in Nicaragua, Guatemala, and Honduras.

Beyond their effects on households, remittances can enhance financial development in migrants' home countries. When remittance payments are made through financial institutions, the receiving banks can reach out to recipients without bank accounts to offer them financial products and services. According to a 2006 World Bank working paper by Reena Aggarwal, Asli Demirguc-Kunt, and Maria Soledad Martinez Peria, total credit in the economy can significantly increase as banks direct deposited remittances to funds that can then be loaned. This increased availability of credit funding in turn boosts investment expenditures and spurs economic growth. Banked remittances also provide a means for households to finance the opening and expansion of small business and entrepreneurial activities.