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Economic crisis just one of many intersecting variables determining remittance trends

By Allison Fritz
November 10, 2008

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“At what point can migrants no longer deal with the situation?” This question posed by Robert Meins, remittance specialist at the Multilateral Investment Fund of the Inter-American Development Bank, was central to today’s discussion of Recent Trends in Remittances to Latin America, hosted by the Inter-American Dialogue. At issue is the capacity for migrants to endure a recession.

“Remittances are primarily a family obligation,” said Meins, and because remittances to Latin America are used overwhelmingly to cover everyday expenses and are considered necessary inflows, “they do not follow a profit driven model.” Historically, migrants have responded to economic struggles in their home countries by increasing the amount and frequency of their remittance transfers.

“The difference this time is that the crisis is actually originating from the wrong direction – the crisis is coming from the US and now it is skirting through the developed world, through the major destination countries, to developing countries. We are in unknown territory now because both the source countries and the destination countries are not doing very well,” stated Dilip Ratha, senior economist specializing in migration and remittances at the World Bank.

As the economic decline in the United States settles in, migrants are likely to take the financial burden on themselves in order to sustain the amounts remitted to their families back home. Manuel Orozco, director of Remittances and Development at the Inter-American Dialogue, noted that there is no difference between migrants’ response to the crisis and the response of the mainstream. Like many Americans, migrants are expected to cut their personal spending in the coming months and to devote income to family essentials. Additionally, in order to combat a drop in wages, migrants may change jobs, take on a second job, or move to a more economically viable state.

A counter-cyclical pattern in remittance sending was observed in response to the 2001-2002 US recession, and the question now is whether migrants will be able to act similarly to such a deep economic crisis. “Probably, [remittances] are going to be countercyclical but there will be a significant difference in terms of people’s ability to remit,” Orozco said, “You may expect a relative decline in the flow overall.”

“Remittances will fall, but not as much as people are making it out to be - and definitely not as much as Mexico is saying – or is not saying,” stated Ratha. Mexico reported a drop in remittances for the month of August, but recently released figures for September that were more optimistic. “In August they [Mexico’s Central Bank] made a lot of noise and in September they got quiet,” Ratha said, “I think that the interpretation of remittance data coming out of Latin America has some sort of angle…I don’t know what it is.” 

The adaptation of new transfer methods may offer an explanation for the exaggerated drop in officially recorded remittances numbers. Orozco noted that the number of Mexican immigrants who own bank accounts in the United States has grown from 38 percent in 2003 to 58 percent today. Migrants with access to personal banking sometimes issue a debit card to a family member back home – a form of remitting that goes unrecorded as such by Mexico’s central bank.

Uncertainty in commodity prices, exchange rate movement, and the fact that the financial crisis permeates both the sending and receiving countries all create a unique crisis situation whose ramifications for remittances vary country by country. Current evidence suggests that when migrants’ currency strengthens vis-à-vis Latin American currencies, migrants are motivated to remit more. In spite of their own economic challenges during a recession, migrants are likely to continue sending a fixed amount knowing that the exchange rate is favorable for their families abroad, thus mitigating any possible decline in remittances in the long term. 

While anti-immigration sentiment, deportations, and increased Hispanic unemployment (9% in October) may create a negative migration scenario, as long as the development imbalance between Latin America and the United States persists, immigration will continue to grow. “Only 3% of the world’s population are migrants…93% [of these migrants] are actually economic migrants,” Ratha concluded, “If migration is motivated by economics, then you have to find an economic-based solution to the migration problem…Walls reduce the ability for people to migrate but they also create more incentive to migrate…more border control equals more migration.”

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