Remittances are once again a hot topic among economists. The 2006 Nobel Peace Prize was awarded to economists who developed "micro finance" banking, a scheme which ( allegedly) enables small amounts of cash remittances to be leveraged into larger private sector loans.
But the euphoria of past years is gone:
"On the whole, the overall conclusion….is that remittances are an engine for development, but they are neither 'manna from heaven' nor a substitute for sound development policies. First, the migration flows that logically precede surges in remittances are not without costs, both for the households directly affected and their countries. For instance, once reductions in households' earnings-generating potential are taken into account, net income increases fall well below observed remittance inflows—simply because the migrant was usually economically active. As a result, the potential poverty and inequality reduction of remittances is, in most cases, quite modest." [Pablo Fajnzylber, "Close to Home: The Development Impact of Remittances in Latin America," World Bank, October 2006. PDF. See also account in Bob Davis, Migrants' Money Is Imperfect Cure For Poor Nations, Wall Street Journal, November 1, 2006, free reprint here.]
In fact, few of the reputed benefits hold up:
Claim: Remittances flow directly to needy recipients, unlike foreign aid which flows through corrupt government agencies.
Fact: Mexico will receive $23 billion in "Workers Remittances" this year, a whopping four-fold jump since 2000. [Table 1] But the Bank of Mexico classifies any transaction from an individual with an Hispanic name in the U.S. to an individual with an Hispanic name in Mexico as a remittance. [See Migration, the diaspora and development: The case of Mexico, By Agustín Escobar and Latapí Eric Janssen ( PDF) p. 14]
Much of this inflow represents business transactions among individuals and transfers among wealthy people. Still more comes from money laundering by drug traffickers and other criminals. As evidence: the Banks' own statistics show that poor states with very low emigration rates receive disproportionately large shares of remittance inflows.
Bottom line: Remittance growth as reported by the Bank of Mexico is 3 to 5 times greater than the estimates of pro-immigration groups, like Pew, that survey legal and illegal Mexican immigrants in the U.S. As an author of one such study says: "If Mexican households were receiving that much money, we would be overcoming our problems more quickly." [Official statistics on money sent to Mexico too high, study says, By Brendan M. Case, Dallas Morning News, ( pay archive) June 17, 2005.]
Claim: Remittances increase investment.
Fact: Although most remittances are wired to Mexican banks, the recipients are generally not bank customers, and very little of the money is deposited. Mexicans simply do not trust banks. They withdraw the funds as if from a corner grocery store.
And this behavior is impervious to economic incentives. In 2003, for example, the Federal Reserve and the Bank of Mexico launched a system offering low-cost transfers to recipients who opened bank accounts. Only a few thousand of the millions of remittance recipients took them up on it. [ Money Transfers Mounting U.S. Encourages Cash Flow Across Border As Tool To Deter Illegal Immigration, By Binyamin Appelbaum, Rick Rothacker And Franco Ordoñez, Charlotte Observer, Aug. 27, 2006]
Bottom line: 90 percent of the money remitted to Mexico is used for food, rent, health care, and other forms of consumption.
Claim: Remittances reduce Mexico's unemployment rate
Fact: This is true—but not for the reasons you might think. Higher remittance income appears to induce males to leave the formal labor force for the informal—or underground—labor force.
The change is dramatic:
"A 100 peso increase in remittances (about 16 percent of the average monthly remittance amount) is associated with a 32hours/month or 15 percent reduction in formal sector work by men in urban and rural areas, and with an 11 hours/month (5 percent) reduction male self-employment in urban areas. Yet, the same remittance increment is tied to a 30 hours/month (14 percent) and to 28 hours/month (13 percent) increase in informal sector work in urbanized and rural areas, respectively." [Catalina Amuedo-Dorantes and Susan Pozo, "Migration, Remittances and male and Female Employment Patterns", American Economic Association, 2006. PDF]
Among possible explanations from the same paper:
"In particular, the higher incidence of informal sector employment among men experiencing an increase in remittance income may be linked to the disruptive impact of household migration, which induces these non-migrating men to work. If these men experience barriers to formal sector work or urban self-employment, they may turn to 'just-in-time' or informal jobs to compensate for lost household income and to /or to defray household migration-related expenditures (e.g., coyote payments)."
Upon exiting the formal labor force, unemployed remittance recipients workers are no longer counted as unemployed. This helps explain why Mexico's "Formal sector unemployment rate" has remained in an absurdly low 2 percent to 3 percent range for a decade. [International Monetary Fund, Mexico, Country Report, October 2006. Table 1. ( PDF)]
Claim: Remittances are also good for the U.S. economy.
Fact: In the U.S. national income accounts remittances are counted as an export of capital, and therefore a reduction to GDP.
It is often claimed, however, that this reduction ultimately will be more than offset by increased exports to a stronger Mexico. But so far there's no sign of this. (See Table 1.)
Between 2000 and 2005 remittances increased by 205 percent while exports to Mexico rose by just 8 percent. Over that same period the U.S. trade deficit with Mexico more than doubled.