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Tuesday, May 15, 2012
Perspectives

Behind the Remittance Growth

Remittance growth to Latin America is being driven by an increase in the average transaction size, say some experts. (Photo: Central bank of El Salvador)


Experts analyze what is driving new growth in remittances to
Latin America.

 

BY LATIN AMERICA ADVISOR
Inter-American Dialogue 

 

Overall remittance levels to Latin America grew to an estimated $69.3 billion in 2011, an 8 percent increase from the prior year and the highest level since before the depths of the global financial crisis, according to a report released last week by the Inter-American Dialogue. Despite slowing flows of migrants from Mexico to the United States, Mexico still registered an increase in remittances last year, to $22.7 billion from $21.2 billion the previous year. What is driving remittance growth to Latin America? Which countries and industries in Latin America are most affected by the growth, or fall, in remittances? Are remittances turning out to be as useful a tool for improved economic development that experts anticipated a decade ago? 

 

Kai Schmitz, senior financial sector specialist at the Payment Systems Development Group of the World Bank: The remittance markets in many traditional send countries are undergoing significant change. Technology, changing migration patterns, economic developments and regulatory reforms influence how remittances are sent and also the way the remittance flows are,  and can be, captured by research. The economic crises in traditional send countries and new opportunities in emerging markets have redirected, and in some cases reversed, migration patterns. Spain and the United States, for example, have become less attractive for migrants from Latin America while countries in the region have become more attractive. New technologies such as online and mobile remittances have been introduced to the markets in sending and receiving countries. In addition, governments are enacting regulatory reforms that make it easier for migrants to use these technologies. Efforts by the G8 and G20 group of countries to reduce remittance prices are beginning to show results and have led to an increase in competition and more choice for consumers in some countries. All this is beginning to change consumer behavior away from the traditional preference to send money through a physical location and toward an increased use of electronic remittance services. This may also be leading to an increased use of regulated remittance services which are captured in official statistics and away from informal means which are often not. The evidence available at the moment may not be sufficient to draw a conclusion whether remittances to Latin America are actually growing again or whether there is a shift of existing flows to channels more easily captured. Much research has shown that remittances do make an important contribution to economic development. The size of remittance flows has triggered many additional objectives related to remittances which surely have not all been fulfilled since they range from financial inclusion to small business investments and even diaspora bonds to prop up government budgets. However, where such objectives are appropriately aligned with the concerns and wishes of migrants-that is, where they meet demand-remittances have indeed shown to be a successful facilitator.

 

Hugo Cuevas-Mohr, director of IMTC Conferences:  Remittances to Latin America are growing for a number of reasons, and each country tells a different story about why that is happening. The main reasons are an increase in the use of formal channels, better record keeping by central banks, an increase in other types of money transfers besides workers' remittances and the capacity of migrants to change jobs in the United States and Europe to move to other countries and do whatever is necessary to survive. Mexicans are not taking cash to Mexico or sending it with friends or relatives as much as they were before new anti-money laundering rules took effect, making it difficult for  them to exchange dollars. Thus, they are sending remittances instead. I hate to think that money laundering might also be a reason for higher levels of remittances, but many people do believe that is the case. Remittances are definitely a tool for economic development of individual families, but not necessarily in the way some institutions see or want to see development. Remittances help families buy more food, clothes, electronics, get better education, health, do minor construction work and purchase housing or land. This helps the local economy. Like rain falling over a crop, it is difficult to measure the relative impact of this rain, but it definitely makes the crop grow.   

     

Paul S. Dwyer, Jr., CEO of Viamericas Corporation in Bethesda, Md.: Remittance growth to Latin America is being driven by an increase in the average transaction size, which had dropped sharply in 2009 and 2010 and recovered in 2011. Viamericas saw average sends drop from $382 in 2007 to $350 in 2009, recover to $366 in 2011 and continue to climb in 2012. In my opinion, the increase in average transaction size was driven by improved employment opportunities for senders in 2011. In spite of the reduced flow of migrants to the United States from Mexico, the fact remains that many U.S. industries rely on foreign workers. As the supply of those workers contracts, average wages for those who remain rise, and workers have more disposable income to send home. As private, intra-family flows, remittances have helped countless families improve their living standards. The increased competitiveness of the industry has led to lower transaction costs and thus more resources on the receive side.

 

David Landsman, executive director of National Money Transmitters Association, Inc. in Great Neck, N.Y.: Remittances have not fulfilled expectations for their use as an economic development tool because those kinds of systemic improvements must come from the public sector. Private sector efforts can help, but they can never completely make up for deficiencies in public policy. While remittances do of course help a country enormously, they are not properly seen, in themselves, as 'tools for development,' except to the extent those private recipients use those funds to save, construct houses, buy businesses and go to school-all of which they do. Those are private funds, going to people who are generally needy. If I am not wrong, the preceding 'investment' uses are all dwarfed by the proportion that is used for subsistence and consumption.

 

Ernesto Armenteros, vice president of Banco de Ahorro y Crédito Unión S.A.:  Several drivers interplay constantly and in different measure to increase or decrease remittance volumes (i.e. country or state of origin of recipient, geographical concentration of the different diasporas, concentration in different industries, average number of years living in the United States, etc.). They've been studied exhaustively and one thing always holds true: generalizations are often wrong. This happens because remittances from Dominicans, mostly concentrated in grocery retailing and transportation in New York, are impacted by a different employment and legal environment than remittances from Mexicans that have settled in Arizona to work mostly in construction and agriculture. With that caveat, I will venture a couple of generalizations to try and answer the questions. The U.S. economy is doing better now than it has in the past few years, and the remittances increase is a reflection of that fact. Reading recent immigration patterns can be deceiving. It has been established, for example, that there is an upsurge in the frequency and amount of remittances an immigrant sends, and it peaks after a few years, when they still send regularly but can afford more money as they climb up the economic ladder. It has also been demonstrated that many immigrants will resort to sending their savings until they get another job. The short answer to the last question about remittances meeting expectations as a tool for economic development is 'yes'; although not in the way many of those experts envisioned. Plus, it will take decades before they reach their full potential and we can see their full impact.

 

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter

 

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