D&S: Remittances to the Rescue?

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Remittances—the money sent home to families by migrants living in foreign countries—have been gaining attention in the last few years from international institutions such as the World Bank, the Inter-American Development Bank (IDB), and the International Monetary Fund. These organizations and others have begun to study remittances with an eye to their potential for reducing poverty in the poor and near-poor countries to which most of these funds flow. It turns out that remittances are a mixed blessing. They offer a relatively stable source of incoming funds. At the same time, however, they can create an alarming dependence on behalf of their recipients, heightening their vulnerability to shifting political and economic winds in the host countries over which they have no control.

Remittances have been, until very recently, very much on the rise, with about 10% of the world’s population now receiving some remittance income. In 2006, 150 million migrants across the globe sent $300 billion in 1.5 billion transactions. Remittances now represent nearly one-third of total financial flows to the developing world—more than official development assistance and, depending on the country, more even than foreign direct investment. Fifty-nine countries receive more than $1 billion annually in remittances, and 45 receive more than 10% of their GDP. Moreover, remittance flows have tended to be much more stable than foreign direct investment or portfolio (stocks and bonds) investment (see “Remittances versus Other External Financing”).

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Most of the money received in this region is used for everyday living expenses, everything from food and home repairs to school tuition. What interests economists most, though, is the potential for remittances to contribute to economic development—when, for example, recipients put the money toward new small business ventures that may over time provide employment to others and expand local economies. According to a 2007 World Bank report, the data suggest that remittances do tend to increase bank deposits, reflecting at least some potential for such investment.

Research has generally found that higher remittance flows are, to a modest degree, associated with lower poverty, better health, and higher levels of education in the developing world. In ten out of eleven Latin American and Caribbean countries examined in a 2006 World Bank study, children from families receiving remittances were more likely to remain in school than those whose parents were not supported by such funds.

Yet the increasing remittance flows have a downside: families and national economies that come to rely on the extra income become vulnerable to far-distant events and trends. Take the case of Mexico. One consequence of the current bust in the U. S. housing market is that construction, which employs many Mexican workers, has slowed—and along with it, the flow of money back home. Remittances to Mexico grew only 1% in 2007, and in January of this year fell 6% compared to the same period last year, according to the IDB.

More here: http://www.dollarsandsense.org/archives/2008/0508thuotte.html