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Remittances

Latin American and Caribbean workers living abroad sent some $53.6 billion in remittances back to their homelands in 2005, up by around 17 percent from  the previous year, according to the Inter-American Development Bank’s Multilateral Investment Fund.

The volume of these money transfers has grown dramatically during the past decade, to the point where remittances rival and in many cases surpass foreign direct investment and overseas aid in most countries in this region. In several nations remittances represent more than 10 percent of the gross domestic product.

Remittances are made in small amounts – typically between $50 and $300 at a time – by many of the 25 million Latin American and Caribbean workers living outside of their homelands. Most of the money comes from industrialized nations, although there are also significant flows between neighboring countries in this region.

Mexico continues to be the top recipient of remittances in Latin America. Last year its migrants sent home around $20 billion, up from around $16.6 billion in 2004. As a source of foreign revenue, remittances were only exceeded by Mexican oil exports. Money sent by migrants did overshadow tourism and rivaled FDI and the maquila industry.

In most cases, remittances are spent on ordinary expenses such as food, clothing, healthcare, education and rent. This additional income helps raise the living standards of millions of families and stimulates local and regional economies across the region. Moreover, many families are also able to save or invest part of the money they receive from abroad.

The IDB’s Multilateral Investment Fund views remittances as a tool with great possibilities for development. The MIF holds that these flows, which typically benefit low-income households, can help spread “financial democracy” in Latin America and the Caribbean, expanding access to banking services, home ownership and other asset-building initiatives in the region.

To that end, the MIF supports projects designed to tap the potential of remittances, particularly by encouraging competition among service providers to cut costs and helping to steer more of these flows towards the formal financial system, where migrants’ money can create more options for their beneficiaries to achieve higher living standards and greater security against economic crises.

Neither the IDB nor the MIF believe that remittances are a substitute for successful development strategy. These flows reflect an inability on the part of migration source countries to establish sufficiently attractive political, economic and social conditions for all of their citizens.

Nevertheless, the MIF estimates that, given current demographic trends and economic and income disparities around the world, migrants will continue to move North by the millions and remittances will continue to flow South by the billions for decades.

Spotlight on remittances

Until relatively recently, remittances were obscure footnotes in international financial statistics. The MIF, an autonomous fund administered by the IDB, started to study these flows in the year 2000 with the principal goal of documenting their increasing economic and social impact in Latin America and the Caribbean.

The MIF has analyzed the volumes of money sent by migrants, how these transfers are made to their homelands and how remittances are spent, saved and invested. The findings of this research have helped put the issues of remittances, migration and labor markets on the international community’s development agenda.

One of the first problems tackled by the MIF as part of its activities to promote private sector development and more efficient markets, was the high cost of wiring money to Latin American and the Caribbean. The MIF financed programs to encourage competition among financial institutions and money transfer companies, which have long dominated the remittances business.

Thanks to increased competition and technological progress, remittance costs to Latin America and the Caribbean have dropped by more than half this decade, to an average of around 5 percent for a $300 transfer. The continuing reduction of rates and fees leaves billions of dollars more in the pockets of the people who send remittances and their families.

Besides making remittances cheaper, the MIF has sought to steer an increasing portion of these flows through formal financial institutions, which can offer remittances clients a range of additional services, including savings accounts, ATM cards, business loans or home mortgages. To that end, the MIF has brokered alliances between major financial institutions in industrialized nations and credit unions and microfinance institutions in developing countries.

The MIF is also financing projects to improve the distribution of remittances and financial services in rural areas of Latin America and the Caribbean and to promote remittance-backed financial products such as small business loans and home mortgages.

To further promote competition and transparency in the industry, this year the MIF and a coalition of international partners will score different service providers and rank them according to their results.

In 2005 the MIF published a book on remittances, Beyond Small Change, a compilation of studies on migrants who send money from industrialized nations, their access to formal financial institutions, the links between remittances and microfinance, case studies on Mexico, Central America, Andean countries and the Caribbean, remittances between developing nations and experiences in other regions of the world.

The MIF is also holding a contest for doctoral dissertations and master’s thesis on issues related to remittances. The goal of this project is to foster scholarship, particularly on practical proposals to boost the development impact of these money flows.

The call for papers, which is open to graduate students at universities in the IDB’s 47 member countries, is open until December 31, 2006. The MIF has also requested original papers from faculty and researchers at universities and think tanks in IDB borrowing member countries.

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