Remittances to Latin America and its Effect on Development

Manuel Orozco,

Project Director, Central America

Inter-American Dialogue

Important Trend and Dynamic of the Late XXth Century

Latino immigrants have become a key factor integrating Latin America into the global economy

•As investors in small and large business projects•As grantors for social development•As consumers of home country goods•As senders of remittances to their families

Family remittances to Latin America

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

U.S. Billions

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$10.00Mexico, US Billions

Colombia

Dominican Rep.

El Salvador

Guatemala

Honduras

Nicaragua

Cuba

Mexico (right axis)

Agriculture and Remittances

1980 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

0%

5%

10%

15%

20%

25%

Rem/GNP Agr/GNP

Dominican Republic: Agriculture and Remittances

1980 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

0%

5%

10%

15%

20%

25%

30%

35%

40%

ELSAGR ELSREM

El Salvador: Agriculture and Remittances

Key economic and development issues about worker remittances

•Macro-economic effect process•Players in the money transfer•Multiplying role•Development Potential of HTAs

Remittances as Percent of GDP

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

El Salvador

Guatemala

Honduras

Dom. Rep.

Mexico

Nicaragua

Cuba

Remittances to Latin America and the Caribbean in 2001*

Country Remittances (US$millions)

As % of GDP

As % of Exports

Mexico $9,273 1.7 6.5 Brazil $2,600 0.4 4.0 El Salvador $1,920 17 60 Dominican Republic $1,807 10 27 Ecuador $1,400 9 20 Jamaica $959 15 30 Cuba $930 5 40 Peru $905 1.7 10.6 Haiti $810 24.5 150 Colombia $670 0.75 2.4 Nicaragua $610 22 80 Guatemala $584 3.1 16 Honduras $460 7.5 17 Bolivia $103 1.25 6.71

*Information for Mexico, Central America, and the Caribbean are provided by the countries’ Central Banks. Statistics for South American countries (Colombia, Ecuador, Bolivia and Brazil), are likely to be undercounted.

Monthly remittances, January 1999-December 2001 (U.S. million)

0

50

100

150

200

250

Jan-99 May-99 Sep-99 Jan-00 May-00 Sep-00 Jan-01 May-01 Sep-010

100

200

300

400

500

600

700

800

900

Mexico

Jamaica

Guatemala

El Salvador

Dominican Republic

Mexico (right axis)

Players in the Transfer of Worker Remittances

SenderMoney Transfer intermediaries

Government involvement

Hometown association Community

Incentives

Delivers assistance

Relationship about carrying out projects

International Money Transfer Agencies

“Encomenderos”, “viajeros”Financial institutions: cooperatives, banks

Household

Changes in the Transfer of Remittances: An imperfect Market

• Change•Proliferation of companies, • Slow but gradual decline in the transfer costs;•New practices and services provided•Growing interest of the banking community and governments

•Continuity•Charges remain high, as well as exchange rate•Competition has yet to affect olygopolies•Little incentives on senders or recipients

Sustained and increasing flow of electronic money transfersMexico: Percent Distribution of Remittance Transfers

46.643.7

8.2

1.4

39.7

51.5

8.1

0.7

36

52.6

9.6

1.8

35.6

54.2

8.6

1.6

34.8

57.76

7.9

1.1

24.5

66.58

8.04

0.87

22.84

69.25

7.76

0.13

0

10

20

30

40

50

60

70

1994 1995 1996 1997 1998 1999 2000

1. Money Orders

2. Electronic transfers

3. Cash and kind

4. Checks

Fee charges and exchange rates

25.58

18.71

6.31

19.25

4.25

18.16

4.22

20.6

1

15.33

4.73

15.17

3.64

17.56

1

11.59

6.54

15.06

0

5

10

15

20

25

30

Cuba Colombia Jamaica D.R. Haiti Average Guatemala Nicaragua Mexico El Sal.

Exchange rate

Fee

Average transfer fee and exchange rate commission to send $200

Multiplying effect of remittances•Consumption effects: consumption increases a demand for goods and in turn investment. In a village $1‘migradollar’ increases income by $1.78

•Savings and investment: Ten percent of all recipients save, a smaller percentage invest the money for some business procurement

•Banking effects: Savings rate increase: > 20% of recipients open bank accounts when money arrives at banks.

Development Potential

•Initiatives for development: Hometown Associations

•Development Activities

• Key issues:• Project identification• Capacity building• Follow-up

Range of Activities Performed by Migrant Communities for their Home Country

PCharity:toys, clothes, church donations,

PInfrastructure: parks, cemeteries, sportscomplexes, street pavements, ambulances, firetrucks

PHuman Development: scholarships, sportutilities, libraries, health equipment,

PInvestment: income generation programs forthe community

POther: fund-raising

Growth of Mexican Clubs in Chicago

0

5

10

15

20

25

30

35

40

Guerrero Jalisco Zacatecas Guanajuato

1994 1996 1997 1998 2000

The New Economies of Latin America

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

$0.00

$100,000,000.00

$200,000,000.00

$300,000,000.00

$400,000,000.00

$500,000,000.00

$600,000,000.00

$700,000,000.00

0%

20%

40%

60%

80%

100%

Remittances (Y1) Coffee Exports (Y1)

Trad. Exports (Y2)

Guatemala: Trade and Remittances

Nicaragua: Traditional Exports, Aid, Remittances and Tourism

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

$0.00

$200,000,000.00

$400,000,000.00

$600,000,000.00

$800,000,000.00

$1,000,000,000.00

Remittances

Trad. Exports

Intl. Tourism

Foreign Aid

Policy Implications

• How can international development organizations address the Latino diaspora as agent of development?

• Rural development and migrants share important feedback

• Empowerment of money recipients

• Local development efforts

The Future of Remittances

Factors influencing People's Propensity to Remit

Ri = Popi + Migri + Socioeci + Commiti + Emergeni + Marketi

Where:Ri = Remittances of person i (or propensity to remit)Popi = Percent of population that remitsMigri = Continued migration flow (total & household)Socioeci = Socioeconomic condition of immigrantCommiti = Commitment retained with home country familyEmergeni = Level of emergency in home country familyMarketi = Market competition

Marketi = Locationi + Costi + Service Friendlinessi

The flow and return of remittances

Migración a los EEUU

RemesasFamiliares compran bienes

importados de los EEUU

(1)

(2)

(3)

Pais de residencia del inmigrante EE.UU.

País de origen delinmigrante

R e to rn o d e re m e s a s a E E .U U(4)

Financial Strategies to Attract Remittances

•Government Regulations on Remittance Income•Government Capture of Remittance Shares•Voluntary "Check-off" Contributions•Government and Private-Sector Remittance Bonds•Migrant Foreign Currency Accounts and Bonds•Influencing Migrant Labor Earnings: Incentives to Invest in Home Country•Micro-finance institutions and credit union involvement•Offering Trading Licenses to Remittances Sender and/or Recipient •Migrant-Sending Government Outreach to Migrants•Migrant-Sending Government and U.S. Community Joint Ventures•Hometown-Community Matching Funds•Hometown-Community Investment Plans

Marketing Strategies• Expand services and distribution networks

• Establish multiple business partnerships with other corporations • Airlines: American, United, Taca • Banks • Stores

• Launch Community Outreach through Institutional Support • Education support for home economics, investment, etc. • Education support to integrate in U.S. society: English, naturalization courses, • Be more vocal about the company's work with the community

• Transparency of service: report where money goes

• Reduce transaction costs

• Fund hometown associations • Sponsor festivities • Donate funds for development projects

• Know your clients better • Identify their profile: the average as well as the outlier, and market accordingly • Become a people's business

Monthly remittances, January 1999-December 2001 (U.S. million)

54.349.5

68.156.760.960.358.859.360.9

54.262.364 64 67.9

74.568.7

60.963.759.963.169.772.369.3

80.179.876 79.877.678.473.9

88.478.780.382.281.183

32 33.136.1

49.4

34.633.725 24.6

30.1

45 45.752.256.3

41.340.752.7

43 41.940.741.143.843.755.859.159.655.7

60.6

41.5

55.647 47.246.8

37.441.445.446.1

106.797.2

115.5117.9119.4108.6

119.1

106.5106.4113.9

121.5

141.1132.1

125.9

140.7

121.7

153.4143.6

152156.2

142.7

159.8155.6167

147.6147.2149.6139.7

179.1

157.8162.9166.8

146.7

169.6158.7

180

117

138.2148.3

113.8

130.6121.5

110.7120.4

130

186.7

170

201.9

132.7136.4

162.6

124.4

142.4

124.6120

126.1

138.1

199.2

187.6

213.7

0

50

100

150

200

250

Jan-9

9

Mar

-99

May

-99

Jul-9

9

Sep-9

9

Nov-9

9

Jan-0

0

Mar

-00

May

-00

Jul-0

0

Sep-0

0

Nov-0

0

Jan-0

1

Mar

-01

May

-01

Jul-0

1

Sep-0

1

Nov-0

1

0

100000

200000

300000

400000

500000

600000

700000

800000

900000

Mexico

Jamaica

Guatemala

El Salvador

Dominican Republic

Mexico (right axis)

Shifting Dynamics in Latin American Economies:Decline of Agricultural Exports in Central American and Caribbean Countries

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

1980 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Costa Rica

El Salvador

Guatemala

Honduras

Nicaragua

Haiti

RepDom

Labor Force in Agriculture

0

10

20

30

40

50

60

70

80

90

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

Costa Rica

El Salvador

Guatemala

Honduras

Nicaragua

Haiti

RepDom

Agriculture as percent of GDP

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

1980 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Costa Rica

El Salvador

Guatemala

Honduras

Nicaragua

RepDom

Transfer ProcessTransfer depends on:

•Technology employed (ET, Fax, e-mail, etc.) •Distribution Network (bank, courier, person)•Location •Regulations•Instrument delivered (cash, money order, checks)

Bank BankRecipient

Bank

Courier

Traveler Delivery person

Sender

Courier

70% of transfer is electronic