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Latin America Remittance Update

August 31, 2006

Volume of Remittances

Step aside foreign direct investment (FDI) and net official development assistance (ODA), the volume of remittances going to the Latin America and Caribbean region has again exceeded the combined totals of these monies in 2005. According to the Multilateral Investment Fund (MIF) at the Inter-American Development Bank, remittances to the region reached over $53.6 billion in 2005, a 233% increase in just four years. To put this number in perspective, remittances are equivalent to approximately 10% of the region’s total exports of good and services – about $536 billion in 2004 – and exceeded the combined gross domestic products of Bolivia, Ecuador, Honduras and Nicaragua in that same year. Looking country-by-country, Mexico received the largest amount of remittances in 2005 ($20 billion), followed by Brazil ($6.4 billion), Colombia ($4.1 billion), and over $2 billion each to Guatemala, El Salvador, the Dominican Republic, Peru and Ecuador. Mexico is a prime example of the recent increase in remittance flows, more than tripling from $6.6 billion in 2000.

Where is this money coming from? The United States is the largest source for remittances destined to the region with almost 75% originating north of the Rio Grande, and looking state-by-state, California, New York, Texas, Florida and Illinois top the list of largest remittance senders. More recently, Western Europe, especially Spain, Italy, Portugal and the United Kingdom, has jumped to represent almost 15% of remittance monies. MIF statistics also show the Japan to Brazil and Peru and the Canada to Jamaica and Haiti linkages as other prime remittance routes. Approximately 65% of the 25 million adults living outside the region regularly send money home, generally in amounts ranging from $100 to $300 per month. The most frequent U.S. remitters are somewhat recent arrivals with less than five years total in the country. For them, a decline in transaction costs, from 15% in the late 1990s to 5.6% of money sent in 2006, has likely contributed to people frequently sending their foreign earnings back home.

Local Economic Effects

The local economic effects of this large flow of remittances are both positive and negative for the recipient communities. On the one hand, these monies can serve to increase the welfare and improve the livelihood of receiving households, helping to purchase basic necessities and expand access to health and education. The sheer size of remittances can be a significant catalyst for improving recipient country financial systems. As financial institutions increasingly recognize the merits of tapping into this market and recipients likewise gain access to financial systems, both local communities and banks stand to benefit from more savings opportunities. This would be a true feat in a region where approximately 70% of the population lacks access to the banking sector. Greater savings translate into increased personal financial security and more bank funds available for small business and personal loans, multiplying the development impact of these funds. However, with the majority of banks that distribute remittances merely serving as agents for a money transfer operator, many remittance clients have yet to be turned into deposit account holders.

On the flip side, remittances have been criticized for flooding local markets with cash and pushing up the relative prices of goods and services, as well as creating a disincentive to work. The large sums of flows from abroad may result in exchange rate appreciation, inflation and higher interest rates. While enhancing the quality of life for individual recipients, remittances can also lead to greater inequality in recipient countries. Looking at the case of El Salvador, remittances have been criticized for expanding import consumption and leaving local production and exports in a lurch.

Increasing the effectiveness

Increasing the effectiveness of remittances hinges upon the continued formalization of the market. From the financial sector perspective, greater competition and use of technology in recent years have helped to substantially reduce transaction costs. As banks and wire transfer companies work to encourage greater depository savings, remittance money will increasingly be available for local development needs that reach beyond individual recipients. In recent years, Mexico has opened up its market by reversing laws and regulations that had prohibited financial institutions like rural credit unions from receiving remittances. Reinvesting these funds in local industries and micro and small businesses can serve as a significant catalyst for the development of local economies, creating quality employment opportunities and curbing future migration.

 


 

This update is published by the Americas Society and Council of the Americas, non-partisan organizations founded to promote better understanding and dialogue in the Western Hemisphere, working in collaboration to advance their respective missions.  The Americas Society is a public charity described in I.R.C. Section 501(c)(3), and Council of the Americas, a business league under I.R.C. Section 501(c)(6).The positions and opinions expressed in this publication are those of the authors or guest commentators and speakers and do not represent those of the Americas Society and the Council of the Americas or its members or the Boards of Directors of either organization. No part of this publication may be reproduced in any form without permission in writing from the Americas Society and Council of the Americas.