One of the rare economic success stories of the past year. But there are also downsides and dark sides to the remittances story.
Between January and May of this year the total amount Mexico received in remittances — transfers of money by workers of Mexican descent mainly in the US but also other countries to individuals in Mexico — surged by 21.75% compared to the same period last year, from $15.75 billion to $19.17 billion. Spanish lender BBVA says it’s on target to set another annual record, of around $47 billion. That’s after increasing by 11.4% in 2020, to $40.6 billion. This all happened despite the fact that GDP in the US, where 98% of the remittances to Mexico originate, slumped by 3.5% last year, the worst annual decline since 1946.
Mexico is the third largest recipient country for remittances inflows worldwide, behind India ($83 billion of inflows in 2019) and China ($70 billion), both with populations more than ten times larger than Mexico’s. After nine consecutive years of increases in inflows, Mexico’s economy is receiving more than double the amount it received in 2011 ($19 billion). The most important host regions for remittance outflows are the United States and Canada ($200 billion), the Arabian peninsular ($130 billion) and Europe ($121 billion).
Mexico was not the only country in Latin America to witness a sharp rise in remittances last year. In El Salavador, where remittances account for 24% of GDP, $5.93 billion of remittances arrived in 2020, $275 million more than the previous year. The Dominican Republic saw its total remittance haul surge by 16%, to $8,219 million. A similar trend was observed in Honduras, Nicaragua and Guatemala. Bucking the Trend None of this was expected. In late April 2020, as the global economy seized up and financial markets cascaded, the World Bank released a press release warning that remittances were likely to drop significantly across the world’s low and middle-income economies:
Remittance flows are expected to fall across all World Bank Group regions, most notably in Europe and Central Asia (27.5 percent), followed by Sub-Saharan Africa (23.1 percent), South Asia (22.1 percent), the Middle East and North Africa (19.6 percent), Latin America and the Caribbean (19.3 percent), and East Asia and the Pacific (13 percent).
In the wake of the Global Financial Crisis, there was a six-year downtrend in remittances to Mexico, totalling 21%. Yet the opposite has happened during this downturn — and not just in Mexico. As the World Bank reported in May this year, despite COVID-19, remittance flows remained resilient in 2020, registering a smaller decline than previously projected:
Officially recorded remittance flows to low- and middle-income countries reached $540 billion in 2020, just 1.6 percent below the 2019 total of $548 billion, according to the latest Migration and Development Brief. The decline in recorded remittance flows in 2020 was smaller than the one during the 2009 global financial crisis (4.8 percent).
In some regions remittance income actually increased. In Latin America and the Caribbean it went up by 6.5%; in South Asia, by 5.2%, and in the Middle East and North Africa, by 2.3%. But it fell in East Asia and the Pacific (7.9%); in Europe and Central Asia (9.7%) and in sub-Saharan Africa (12.5%). Most of the decline in flows to Sub-Saharan Africa have been attributed to a 28% decline in remittance flows to Nigeria. Excluding those flows, remittances to Sub-Saharan Africa increased by 2.3 percent.
Six Possible Reasons
It is still not entirely clear why remittances have weathered this crisis — at least so far — so much better than the last one. Here are six possible reasons:
- Fiscal support initiatives. Most countries with large populations of migrant workers have taken measures to support businesses and jobs, allowing remittances to continue to flow. In the US workers with roots in Mexico and other Latin American countries have received government support, such as unemployment benefits and stimulus money, which enabled them to continue sending money back to their families.
- Essential jobs. Many Latino immigrants in the US kept hold of their jobs because their jobs were deemed essential, says Sonia Plaza, co-chair of the World Bank’s Global Knowledge Association for Migration and Development (KNOMAD): “They have been in everything from cleaning services, hospitals and everything that provides services despite COVID-19.” For this reason they have also been disproportionately impacted by the health fallout of COVID-19. According to the CDC, Hispanics and Latinos are 1.9 times more likely to contract COVID-19 than their non-Hispanic white counterparts, 2.8 times more likely to be hospitalized from COVID-19 and 2.3 times more likely to die from COVID-19.
- Acquired human resilience. Most Latin American migrants are well accustomed to big economic crises, says Plaza. As such, when a crisis like this one hits, they are more flexible and willing to shift to other sectors to find new work.
- The economic fallout of the virus crisis in the US last year was not quite as brutal as initially feared. In general, the income from remittances received from the US, where the majority of Latin American immigrants reside, did not decrease last year. One reason for this was the country’s comparatively better — or rather, less bad — economic performance. Last summer, the IMF forecast that the US economy would shrink by 5.9%. In the end, it shrank by just 3.5%. By contrast, some large European economies contracted by more than double that, including France (-8.23%), Italy (-8.87%) and Spain (-11%). It’s worth noting that remittance flows between Spain and most Latin American countries fell sharply last year.
- The formalization of payment transfers. Before the pandemic-induced lockdowns and travel restrictions made it much more difficult to cross borders, many immigrants carried the remittances home with them or sent them via a friend, or with a courier. When the borders closed, they had no choice but to send them through official channels, whether via banks or money transfer companies. And that meant that the money was more likely to show up in official records.
- Heightened solidarity. If things were bad in the US last year, they were orders of magnitude worse in countries like Mexico, El Salvador and the Dominican Republic, which have neither the fiscal firepower or monetary leeway to offset the external and internal shocks unleashed by the pandemic. Against this backdrop, many migrant workers in the U.S. and elsewhere who weren’t overly impacted by the crisis — such as staff at hospitals treating Covid patients or construction workers — sent more money to their families to help them weather the crisis back home.
That money has played a vital role in sustaining not only families and local communities but also entire regional and national economies. Most of the money that gets sent is spent very quickly into the local economy, often on rents, basic provisions or building costs.
In the case of Mexico remittances now account for 4% of GDP, up from just under 3% in 2019. Last year’s haul helped to partially offset the plunging revenues of the oil, construction and tourism sectors, as well as falling foreign direct investment. But it was still a drop in the ocean compared to the losses suffered last year. In the case of tourism, for example, the sector’s revenues provided just 1.5% of Mexico’s GDP in 2020, down from 8.7% in 2019.
Remittances have also provided a vital source of much-needed hard foreign currency for many struggling economies, says Plaza.
“Countries and governments are interested in bringing in more remittances because it helps with their current account and balance of payments. What they need is foreign exchange, and if the flow from tourism is shut down, foreign exchange remittances can at least plug some of the shortfall”.
Downsides and Dark Sides
But there are downsides and dark sides to the remittances story. For example, there is the brain drain effect as many of the most skilled workers in low and middle-income countries move to host countries that offer better employment incentives and opportunities. If this process goes too far, it can exacerbate, rather than mitigate, inequalities between countries by depriving low-income countries of their best and brightest. Some countries end up facing acute labor shortages. The Philippines, for example, where roughly two in five qualified nurses end up working abroad, now has the lowest number of nurses per capita in Southeast Asia.
This can end up perpetuating a vicious cycle. The more that low-income countries function to provide cheap labor to high-income economies, the more difficult it is to develop a strong economy at home. As a result, yet more people leave for greener shores. Of course, there are myriad other pressures, pushing people in the Global South to migrate northwards, including climate change, resource wars and drug wars, political instability and all-round economic hardship exacerbated by the virus crisis.
Another downside is all the money that migrant workers have to shell out in transfer fees, which in some instances can reach over 10% of the amount sent. In some remittance corridors, costs continue to be exorbitant. For example, the cost of sending money to Cuba exceeds 9%, according to the World Bank. Sending money from Japan to Brazil is even more expensive (11.5%).
In 2019, the Mexican government publicly named and shamed a number of financial companies for overcharging on “remittances”. The problem is not just the upfront fees the firms charge, which could reach over $10 per transfer, but also the deceptive exchange rates they bake into their transfer calculator. The two worst offenders, according to Mexico’s consumer protection agency Profeco, were PayPal Holdings Inc.’s Xoom and Western Union Co.
Arguably the biggest danger is that of over-dependence. In some Mexican states, remittances can represent as much as 10% of total revenues. In some Central American states, such as El Salvador, Honduras and Guatemala they account for 20% or more of GDP. If that flow of money were to begin to subside, it would have a significant negative impact on those nation’s economies. As Plaza says, remittances, while a vital source of income and foreign currency for many of the world’s poorest countries, are not a substitute for home-grown development.