A river of gold

The money that migrants send home buoys families and bolsters national economies. Can it do more?

By Peter Bate

Every month, Lucas Zelaya, a supervisor at a Washington, D.C., parking garage, sends at least $200 to his mother in San Alejo, his hometown in El Salvador. His remittances, together with those made by millions of other migrant workers in the United States, snowball into billions of dollars a year, a massive movement of capital that has already surpassed the financing multilateral lending agencies provide Latin America and the Caribbean.

According to the Inter-American Development Bank’s Multilateral Investment Fund (MIF), the region receives about $20 billion a year from its migrants working abroad. In six Latin American nations, income from remittances represents more than 10 percent of gross domestic product. In El Salvador, for example, expatriates in 2001 will probably wire back home around $2 billion, a sum that would exceed the estimate of the economic damage caused by the earthquakes that struck that country in January and February. In a larger country like Mexico remittances may not represent such a large portion of national income, but they easily rank among the top sources of hard currency. They also make a big difference at the local level. Across Mexico, hundreds of low-income communities survive on the money sent home by their migrants in the United States.

Given the current demographic trends, the region might receive as much as $300 billion over the next decade from remittances. These injections of money are unquestionably helping to alleviate poverty, as well as giving many countries a much-needed economic boost. But can they become an effective engine for development?

MIF Manager Donald F. Terry believes they can, as long as governments in the region work to overcome a series of hurdles that have long kept their financial systems from growing and serving every segment of the population.

Terry points to the experience of nations like Portugal and Spain that have successfully capitalized the contributions of their migrant workers. It is a reasonable goal to cut the costs of sending remittances by at least one half, he said, and use the remittance process to help mobilize savings to invest in local development initiatives.

To better understand remittances and discuss how their economic muscle might be harnessed, the MIF organized a two-day conference at the IDB’s headquarters in Washington, D.C., last May, the first regional event on this topic. The conference focused on two main issues: how to cut the costs of money transfers to Latin America and the Caribbean and how to encourage migrants to invest some of their hard-earned funds in long-term savings and community development initiatives in their native countries. (See link at right for more information on the conference.)

Bane to boon. Remittances were not always regarded as a blessing. Until recently many experts held that these capital flows could foster a culture of dependence among beneficiaries in developing countries. Easy money, they argued, stoked consumerism and stifled entrepreneurial efforts among the poor. It also exacerbated the income gap between those lucky enough to have relatives working in rich countries and their less fortunate neighbors.

That school of thought has not been abandoned completely. At the MIF conference, Rodolfo de la Garza, vice president of research at the Tomás Rivera Policy Institute at the University of Texas, pointed out some of the drawbacks for the people who send money back home. Just like previous waves of immigrants, he said, most Latin Americans currently living in the United States plan to stay here for good. Given that fact, de la Garza said, it would be grossly unfair to expect these migrants to remit more money when they might be better served by building up their own communities in the United States. Traditionally, other immigrant groups invested heavily in their homes, their businesses, and their children’s education, allowing the new generations to prosper in the American mainstream.

While such arguments remain valid, academic opinion on the impact of remittances has shifted, particularly as they have grown in volume and as globalization and integration have effected their own profound changes on migration. Remittance flows quadrupled over the past decade. Moreover, thanks to improvements in transportation and telecommunications, migrants can now keep in closer contact with their homelands than they did in the past.

Susan F. Martin, director of Georgetown University’s Institute for the Study of International Migration, remarked at the conference that recent studies of remittances paint a complex picture. Experts now are willing to acknowledge that even remittance-fueled consumption of goods and services stimulates economic activity, particularly at a community level. “The multiplier effects of remittances can be substantial, with each dollar producing additional dollars in economic growth for the businesses that produce and supply the products bought with these resources,” she wrote in a paper presented at the MIF event. (See link at right to read Martin’s paper.)

Migrant workers are also being courted by authorities in Latin America. Mexico’s president Vicente Fox, who calls these expatriates “heroes,” has appointed a cabinet-level representative to mind Mexican migrants’ affairs. He even raised the issue of remittances at the Summit of the Americas held in April 2001 in Quebec City, Canada, where he urged other Western Hemisphere nations to work to cut the costs of wiring funds.

More players. While money transfer fees have decreased over the past few years, costs continue to be relatively high and widely variable, especially when they involve foreign exchange fees. On average, Latin American and Caribbean remitters wire around $250 a month back home. However, depending on the service they use, their relatives may receive as little as $200. The MIF’s Terry says that by using market forces, governments could ensure that a greater share of these modest payments ends up in the pockets of the intended beneficiaries.

One way to reduce the cost of remittances is to foster competition by bringing more players into the game. In the United States, wire transfer fees have dropped as competition has increased, especially in the large urban areas where immigrants tend to concentrate. Traditional companies such as Western Union and MoneyGram have seen smaller firms elbow their way into their markets and compete on the basis of price. Some of their challengers have roots in destination countries, such as Bancomercio, the U.S. subsidiary of El Salvador’s Banco de Comercio, which opened two money transfer offices in the Washington, D.C.,area and two in Los Angeles, California, to service the huge Salvadoran communities in those areas.

How low can remittance fees go? How about to zero? That’s entirely possible, according to Pedro Belo, Chairman of the New York-based BPA Bank. This institution, which has long served the Portuguese expatriate community in the northeastern United States, has offered free money transfers as a perk to its account holders.

However, it is harder to cut the cost of remittances in smaller cities and rural areas of the United States where there are fewer competitors in the market for these services. But it's not impossible. In Durham, North Carolina, a group of foundations, banks, credit unions, community groups and churches pooled their efforts to help create the Latino Community Credit Union (LCCU), which opened in June 2000 to serve the area’s growing Hispanic population.

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Date posted: October 2001

Conference: Remittances as a development tool

Publication: Remittance Flows and Impact, by Susan Martin (PDF Document)