According to respective corporate websites, there are now more than seven times as many Western Union agents globally than McDonalds and Starbucks combined. Recent capital account liberalization, technological improvements, and migration have had enormous impact on the expansion of money transfer entities, and while relatively little research has been done on the subject, remittances are playing an increasingly important role in the economies of many countries. The debate continues about the costs and benefits of immigration and remittances, including concerns about the dependency factor, fleeing work forces, and the fact that generally the poorest of the poor do not receive or benefit from them. Remittances, however, are not the cause of underdevelopment and continue to be an important resource, as an action based on rational decision making and given what is available, for many Latin-American families to contribute to economic growth locally and provide for what is needed. Economic adjustments in Latin America as a result of globalization and remittances also seem to promote the protection of biodiversity, especially in the case of El Salvador, and forest resurgence. Although these facts are promising, the reality is that the current system in place to send remittances does not offer cost-efficient services, is outrageously overpriced, and does not cater to the needs of those most in need of what remittances can provide. Moreover, though it is widely accepted that the gains from international free trade are ‘beneficial’ for all participants, labor mobility, which would facilitate desirable economic growth, persists as an outrageous proposition in the minds of policymakers.
Latin America and the Caribbean are the largest remittance receiving area in the world, bringing in over 66.5 billion USD in 2007, 75% of which originated from the United States (IDB). In seven Latin American countries, remittances account for more than 10% of gross domestic product (Ibid). Remittances have remained a stable source of capital, far less volatile than even foreign aid from 1980 to 2003 (Singer 11). The Inter-American Development Bank (IDB) projects that remittances in 2008 will reach 67.5 billion USD, a 1.7% real decrease from 2007 (adjusted for inflation and exchange rate variations) (IDB estimates). According to the IDB, several factors have contributed to this first year of real remittance contribution decreases:
1) Inflation: The significant rise in the price of food and fuel makes life more expensive for migrants sending money home. At the same time, these price rises also increase the needs of families dependent on remittances from abroad.
2) Economic downturns: The downturns in the US economy, and more recently in Spain, have made it more difficult for immigrants to find well-paying jobs.
3) Migration Climate: In remittance sending countries, the migration climate is becoming more restrictive, affecting migrants’ ability to send money home.
4) Value of the dollar: Many non-dollarized economies in Latin America and Caribbean have seen their currencies appreciate against the dollar. As a result the dollars sent home are not going as far as they used to (Ibid).
The ability of migrants to send money home is closely tied to the economic performance of the economies of the U.S. and Spain and recent economic downturns in both have affected significantly this ability. IDB surveys show that 17% of remittance senders are employed in construction, which has shed over one million jobs in the past year. The United States Bureau of Labor Statistics shows an obvious correlation between Hispanic unemployment and the recent construction bust. Tighter border controls and a crackdown on illegal immigration in the U.S. have also contributed significantly.
In the short term, migrants will respond rationally and proportionally to the economic performance of the nation, however responses usually display great versatility and resilience. Migrants generally will “move to other sectors or states to meet the needs of their families in the medium to long term…any decline is likely to be modest, because migrant workers have proven their ability to adapt to changing demand for their labor” (Ibid). The IDB also recognizes the first emergence of “intra-regional remittances”, as those considering working abroad seek employment closer to home because of rising unemployment in the U.S. and Europe.
The largest portion of remittances are used to purchase necessities while the remainder is saved, invested in housing, small businesses, or education. Remittances play an important role in poverty reduction and economic growth and are vital to people during crises. Development potential is also highly dependent on their receipt.
The term micro-remittances has also emerged as a result of globalization, referring to the relationships and connections between home and migrant communities. These tightly knit networks of communities that transcend boundaries and made possible by new communication technology are defeating nationalism and harboring integration. Physical travel between communities is also increasing extensively as a result of decreased airfares.
The realities of remittances are often ignored by skeptics. It is often argued that migration and the ability to remit promotes a ‘brain-drain’ from developing nations to the developed world. Young and aspiring Latin Americans are given the incentive not to contribute developmentally to their own locality and move elsewhere. It is also argued that dependency on the remittance sending country prevents development. Poorly educated agricultural workers are also sapped from the land of developing nations. The inadequacy of these arguments, however, is drastic. Remittances simply are not the cause of underdevelopment. “The hard reality is that remittances exist because many countries cannot provide adequate employment and income for their citizens” (Terry 378). Manuel Orozco and Steven R. Wilson continue to point out that social conditions would be much worse without this source of income. Also, “remittances may not yield optimal economic results in recipient countries – but neither do any other economic activities in environments where poor economic incentives and weak institutions discourage households, businesses, and investors from saving, investing, and undertaking risks” (Ibid).
The mostly countercyclical nature of remittances shows the importance of remittances to the families of developing nations. When economic growth is slow, decreasing, or hard in the home country, remittances sent back home increase proportionally and vice-a-versa when economic times are good in the home country. Of course, the same rationale applies when economic performance is decreasing in the country that remittances are being sent from – remittances decrease. The difference is between the long-run and the short-run. The opportunities available to those in the developing world are far fewer than those who have migrated.
The idea of successful migration is key to the proper development and to realized benefits of migration and remittances. Phillip Martin in Global Crises, Global Solutions explains the “3 Rs” of migration and development: remittances, the recruitment of workers, and the return home.
The second “R”, recruitment, concerns labor mobility and the ability of migrants to find jobs. It seems immensely manipulative for a nation to promote a ‘free trade’ that disadvantages the least of the globe because domestic industries may become uncompetitive while also pursuing policies to restrict border migration when both are proven, in the real sense of the phrase ‘free trade’, to increase welfare for all.
The theory of labor demand illustrates the wage equalizing action of free labor mobility, where, as migrants move from areas of lower wages to areas with higher wages, relative wage differentials are eliminated and, in fact, “it is this parity between the real wage and marginal physical product that attains profit maximization for employers in a purely competitive market” (Kubursi 5) According to Atif Kubursi, Professor of Economics at McMaster University in Ontario, once workers move to the place that provides the best opportunities given their skills, there will no longer be “incentive to move, and the economy would have attained its maximum output as workers of given skills will have the same value of marginal product of labor in all markets” (Ibid) This is a pareto efficient allocation and no other distribution could raise national wages.
Most important is what freer mobility means to poverty. Empirically, a one percent increase in the share of remittances in a country’s GDP has been shown to lead to a .4 percent decrease in poverty (Fajnzylber). “Remittances are more than an economic phenomenon; they demonstrate how cultures – shared understandings and responses concerning family and communal responsibilities and obligations – can provide economic security for families” (UNFPA). Illegal traffickers exploiting migrants also seems to be directly connected to labor mobility. Opening borders has greatly increased the flows of legal capital and goods while Europe and North America’s greatly restrictive policies have driven many migrants into trafficking in the hopes of attaining better opportunities once across the border. It can be seen that freer mobility and remittances couple to form a solution to both short and long-term problems of poverty and income gaps.
The return home of migrants is the third “R”. The application of skills back home is immensely important to the further development of the region and returning migrants “usually provide energy, learning, creativity, and entrepreneurial acumen for many communities of origin” (Terry). The Inter-American Development Bank notes the case of Brazil as “illustrative of the fact that when conditions improve, migrants move back” (IDB). The continued economic growth of Brazil has enticed many Brazilians to come back home and apply themselves to their own communities (See Figures from IDB).
For the impact of remittances on development in the home country to be most productive, there must be significant cuts in sending costs. This both increases the amount of support that makes it home, gives the migrant greater ability and greater incentive to return, and allows for more investment to be brought back home. “Increasing the range of financial options and products, expanding financial literacy, and improving the regulatory environment will greatly help people better leverage their remittances” (Terry). These new incentives given to migrants and potential migrants will change completely the way people think about their money and allow contribution to the financial economy. “Without such changes, remittances will remain private flows in search of financial products and public opportunities – with greatly diminished benefits to the development of migrants’ homelands” (Ibid).
There are also exciting benefits of remittances to the environment, specifically forest resurgence. In an article titled “Globalization and forest resurgence: changes in forest cover in El Salvador”, Susanna B. Hecht and Sassan S. Saatchi study the effects of remittances in El Salvador. El Salvador has been drastically affected by globalization and was almost completely deforested by the end of the 1970s. Agro-industrial and livestock expansion during the 1970s left less than 6% of its natural forest standing. The following civil wars imposed complete disregard for the environment. War in general, through massive carpet bombing, wildlife slaughter, and the use of biocides, has dire consequences for both humans and plants. By 2000, peace accords and market-led reforms had caused the contraction of real agricultural returns to 27% of its value in the 1970s (Hecht 665) “The national development model shifted from export agriculture to one based on industrial and banking services, even as half the population remained rural” (Ibid).
Hecht and Saatchi’s study, using socioeconomic data, land-use surveys, and satellite imagery documents significant forest cover. “Such increases occurred in all provinces at the 30%[tree cover] level, and in most of the provinces at the 60% level. In terms of the entire country, these changes translated into a 22% increase in the area of 30% tree cover , and 6.5% increase in the area of denser forests with greater than 60% tree cover” (Hecht 667). The study showed absolutely no correlation with population density, but a “significant positive correlation of forest resurgence with remittances” (Hecht 668). At 30% tree cover, a one point increase in remittances led to a .25% increase in forest cover. In an interview with mongabay.com, Hecht states that “remittances are an element of globalization producing forest recovery rather than forest destruction. A real structural change in peasant economies has occurred. They can no longer compete with industrialized farming so their markets have contracted. This means that small-scale farming for export is no longer viable and rural populations are reliant on remittances and other sources of income. This is a story of a major transformation” (Butler).
The Inter-American Development Bank concludes that for 2008 “many remittance recipients are finding it more difficult to make their remittances stretch as far as they used to” and that “remittances are key to achieving financial independence” (IDB). Non-exploitive access to financial services to send and invest remittances poses to help correct the developmental imbalance between Latin America and the north, curb environmental disregard, and cast in a better light certain aspects of globalization.
Butler, Rhett, A. “Can remittances and globalization help the environment?” Mongabay.com 6 Sep 2007. Accessed 12 December 2008.
Fajnzylber, P. and H. Lopez. 2006.
Close to Home: The Development Impact of Remittances in Latin America. Washington D.C.: World Bank.
Hecht, Susanna B. Saatchi. “Globalization and forest resurgence: changes in forest cover in El Salvador.(Report).” BioScience 57.8 (2007): 663-673.
Inter-American Development Bank. http://www.iadb.org/mif/remittances> Accessed 12 December 2008.
“IDB estimates of 2008 remittance flows to Latin America and the Caribbean.” Inter-American Development Bank. October 2008. http://www.iadb.org/mif/remittances> Accessed 12 December 2008.
Kubursi, Atif. “The Economics of Migration and Remittances Under Globalization.” 24. .
Martin, Phillip. Migration.
Global Crises, Global Solutions. Ed. Bjorn Lomborg. Cambridge; Cambridge University Press. 2004.
Singer, David. “Migrant Remittances and Exchange Rate Regimes in the Developing World.” 1 Jul 2008. .
Terry, Donald F.; Wilson, Steven R.
Beyond Small Change: Making Remittances Count. Inter-American Development Bank. Washington, D.C. 2005.
United Nations Population Fund. State of World Population 2008.
Reaching Common Ground: Culture, Gender, and Human Rights.