EconSouth (Third Quarter 2008)

For families in many developing countries, remittance payments sent back home by family members working abroad are the difference between subsistence and privation. After years of rapid growth, remittances have leveled off amid an economic slowdown in the United States. How are changing migration patterns, economic developments, and new technologies and policies affecting this important payment method?

For the citizens of many developing countries, remittances are a vital source of personal income and, in some cases, survival. Remittances—literally, transmittals of money to a distant place—are generally understood to mean transfers of income from workers who have migrated from a poor to a rich country back to family members who remain in the home country.

The World Bank estimates that recorded remittances reached $318 billion worldwide in 2007. (Unrecorded flows through formal and informal channels likely mean that actual numbers are significantly larger than the reported numbers.) Of this amount, remittances sent home by migrants to developing countries represented $240 billion, more than double the amount sent in 2002 (see chart 1). In 2007, remittances totaled more than the amount of official government aid and more than half the amount of foreign direct investment in emerging economies.

Latin America has some of the highest levels of remittances, both in aggregate and per capita, according to the World Bank report. Mexico, for example, received $25 billion, or approximately 2.5 percent of gross domestic product (GDP), in remittances during 2007. These financial flows are particularly large in Central America and the Caribbean. In 2007, remittances made up 25.6 percent of total gross domestic product in Honduras, 24.3 percent in Guyana, and 21.6 percent in Haiti.

Related Links World Bank Close to Home remittances report Multilateral Investment Fund remittances information FRBA's "Remittances and the Macroeconomy" conference

These high levels of remittances to Latin America are clearly related to the rate of immigration from the region. The World Bank's 2007 report, titled Close to Home: The Development Impact of Remittances in Latin America, estimates that Latin American migrants (both documented and undocumented) in the United States increased from 8.6 million in 1990 to about 16 million in 2000, nearly 10 million of whom were Mexican. About one-third of El Salvador's natives live abroad, mostly in the United States, and almost 50 percent of Grenada's population has migrated to a foreign country.

Boosting welfare and the economy back home
People who migrate from their home countries are typically seeking a higher standard of living for their families. The remittances they send back home can have a remarkably positive impact. (Migration and remittances can also bring their share of problems; see the sidebar.) Because remittances are mainly directed to relatively poor households, they play an important role in reducing absolute poverty and income inequality in recipient economies.

Chart 1 Capital Flows to Developing Economies Source: World Bank, Global Economic Prospects 2006; International Monetary Fund, Balance of Payments Statistics Yearbook 2008, World Development Indicators 2008, and Global Development Finance 2008

The World Bank's analysis of household surveys shows that for most recipient countries, remittance income may help alleviate some inequality in income levels among households. In Mexico, El Salvador, and the Dominican Republic, the report estimates that extreme poverty would be 35 percent higher and moderate poverty would be 19 percent higher in the absence of remittances among recipient households.

Several studies, including Close to Home, indicate that remittances ease constraints on recipient households' budgets and allow families to spend a smaller share of total income on food and more on housing and related expenses (for example, durable goods), health, and education.

Households with migrants abroad have significantly better knowledge of basic health care and a higher probability of a doctor delivering a baby, according to the Close to Home report. "Children from households that report receiving remittances tend to exhibit higher health outcomes than those from non-recipients households with similar demographic and socioeconomic characteristics," the report said.

The World Bank report also points to evidence that "for some specific groups ... remittances increase children's educational attainment. However, the impact is often restricted to children with low levels of parental schooling."

A 2006 World Bank working paper by Pablo Acosta shows that remittances also reduce the incidence of child labor, allowing children to focus on schooling. For example, school enrollment is between 12 percent and 17 percent higher in families receiving remittances in Nicaragua, Guatemala, and Honduras.

Beyond their effects on households, remittances can enhance financial development in migrants' home countries. When remittance payments are made through financial institutions, the receiving banks can reach out to recipients without bank accounts to offer them financial products and services. According to a 2006 World Bank working paper by Reena Aggarwal, Asli Demirgüç-Kunt, and Maria Soledad Martinez Peria, total credit in the economy can significantly increase as banks direct deposited remittances to funds that can then be loaned. This increased availability of credit funding in turn boosts investment expenditures and spurs economic growth. Banked remittances also provide a means for households to finance the opening and expansion of small business and entrepreneurial activities.

From a macroeconomic perspective, remittances tend to be countercyclical in relation to the recipient economy. Immigrants tend to send additional funds back home when their relatives face severe socioeconomic hardship; these contributions reduce disposable income volatility and smooth households' consumption paths in economies historically characterized by economic and institutional instability. Thus, the inflow of remittances can dampen the current account reversal and the decline in most macroeconomic variables (such as output, consumption, and investment) in the aftermath of a financial crisis.

The inexact science of tracking immigration and remittances
Given that remittance payments are originated mainly by immigrants, it is clear that remittances and immigration are strongly linked. Thus, remittances are often used to track immigration trends. But this method has its shortcomings because immigration and remittances are both difficult to measure precisely.

Accurately tracking immigration levels in the United States is virtually impossible because the number of undocumented immigrants is unknown. A 2008 study from the Multilateral Investment Fund (MIF), which is administered by the Inter-American Development Bank, estimates that 47 percent of Latin American and Caribbean immigrants living in the United States are undocumented.

Money can be transferred among countries without any formal record, which makes remittances hard to track, but most remittance transfers are made through formal channels. According to the MIF, in 2006 the percentage of the immigrants who sent remittances through established institutions ranged from 57 percent to 88 percent, depending on the state.

Changing patterns
Growth in remittances from Southeastern states has varied in recent years. Data from the MIF show that in 2004 Florida had the fourth-highest total remittances in the United States at $2.45 billion, and Georgia had the seventh-highest total at $947 million. By 2006 remittances from Florida had increased 26 percent, and Georgia's had increased 83 percent.

This rapid growth in remittances from Florida and Georgia is largely the result of the swift influx of Latin American and Caribbean immigrants. Today about 83 percent of all Latin American immigrants in the United States live in just 10 states. In 2006 Florida ranked fifth and Georgia sixth nationally in the highest concentration of recorded immigrants from Latin America and the Caribbean, according to the MIF.

Recent developments in the United States seem to be affecting the flow of remittances abroad. A 2006 National Bureau of Economic Research working paper by Gordon Hanson argues that a declining number of apprehensions of people attempting illegal entry along the U.S.-Mexican border—despite more stringent border patrols—indicates a decline in the number of people attempting to enter the United States.

The flow of remittances seems to mirror this drop-off; remittances sent to Mexico grew only 1.4 percent year-over-year during the first nine months of 2007 compared with more than 20 percent annual growth during 2002–06, according to the MIF. The recent slowdown in remittances can also be seen on a wider scale. According to the World Bank, total recorded remittances from the United States to Latin America and the Caribbean grew from $17.3 billion in 2002 to $26.25 billion in 2004—a 52 percent increase—and to $38.5 billion in 2006, a 47 percent increase (see chart 2). An April 2008 MIF report, Survey of Latin American Immigrants in the United States, estimates that total remittances from the United States to Latin American countries will increase barely over 1 percent from 2006 to 2008.

The slowing growth in remittance flows was accompanied by a significant decrease in the percentage of immigrants in the United States from Latin America and the Caribbean sending remittances home. According to MIF estimates, from 2006 to 2008 the percentage of immigrants who sent money home fell from 73 percent to 50 percent in Florida, from 85 percent to 53 percent in Georgia, from 57 percent to 31 percent in Utah and New Mexico, and from 88 percent to 59 percent in North Carolina and Virginia.

Chart 2 Remittances to Latin America and the Caribbean Source: World Bank

Some of this decline in the number of remitting immigrants is likely tied to the current weakness in the housing market, which has slowed employment in the construction industry (see chart 3). A 2008 MIF survey found that approximately 14 percent of Latin American and Caribbean immigrants who come to the United States work in construction. When the construction market declines, undocumented workers are often the first to lose their jobs because they are typically just day laborers rather than company employees. Florida and Georgia, which were hit especially hard by the housing slump that began in 2006, also had some of the largest declines in the number of remitting immigrants.

Finding the best policies
Policy can play an important role in promoting an institutional environment that facilitates remittance flows. Remittance services are currently extremely expensive, with fees that can represent 15 percent to 20 percent of the principal transmitted. The World Bank Close to Home study recommends policies that encourage competition among money transfer providers and enhance transparency and consumer protection. Such policies would result in more efficient and effective tracking of remittances and prevent criminal abuse of remittance channels.

Policymaking could also promote technological advances. Mobile banking and partnerships with cell phone companies may constitute an important channel to extend remittance services to unbanked individuals in rural areas. The mobile phone company Vodafone has launched a joint venture pilot program with Citigroup to explore the possibility of promoting such services in the United Kingdom.

In an effort to promote efficient remittances, the Federal Reserve has signed an agreement with the central bank of Mexico to provide low-cost automated clearinghouse (ACH) payments from the United States to Mexico. This service, Directo a México, allows U.S. commercial banks to transfer money from their customers to bank customers in Mexico using the Federal Reserve System ACH network.

Chart 3 Growth Rates of Remittances and Housing Starts Source: Banco de México and U.S. Bureau of Labor Statistics

"The number of financial institutions offering account-to-account transfer services, including Directo a México, is growing steadily, and their customers are responding positively," said Elizabeth McQuerry, assistant vice president in the Atlanta-based Federal Reserve's Retail Payments Office, which administers the program. "Additionally, banked transfers bring remittances into the formal financial system, where individuals can not only have access to credit, but the transfers take place between regulated financial institutions in both countries."

Economics and politics cloud remittances' outlook
Like other money transactions, remittances tend to rise and fall with the economy: The economy drives labor market trends, which drive immigration trends, which drive remittance flows. Current virtually stagnant remittance growth has several possible culprits—a slowing U.S. economy, a number of Latin American and Caribbean countries experiencing relatively robust economic growth, and a lack of jobs in industries such as construction and manufacturing, which typically employ high concentrations of immigrants from these countries.

These conditions are directly affecting remittance growth because they make it more difficult for immigrants to send money home and provide little or no incentive for individuals in poorer countries to immigrate to the United States. Although this slowdown may be cyclical, the growing anti-immigration sentiment in the United States and other advanced economies may pose long-term difficulties for potential remitters. How these factors play out will influence the outlook for a vital source of income for impoverished residents of other countries.

This article was written by Federico S. Mandelman, a research economist and assistant policy adviser at the Atlanta Fed, and Courtney Nosal, an economic analyst at the Atlanta Fed.