‘Dollars wrapped in love’ – remittances as post pandemic recovery

When I taught human security and peacebuilding, I used to introduce learners to the ‘money’ question in international development by showing them Dilip Ratha’s powerful TED Talk on remittances. It always surprised them to learn that remittances – the money sent home by migrants working in another country – was at least three times as large as official development assistance – the money contributed by one country to another – or private investment flows.

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It changes your perspective on immigration considerably when you realize that people come to countries like the USA in order to earn money to support their families back home, and that the money they send home – in addition to supporting US companies like Western Union – improves the lives of their families far more effectively than any international aid. The children of such families are healthier, better educated, and live in better homes.

And as a recent report says, the under-appreciated power of remittances is becoming ever more important as the world struggles with the question of how to recover from the COVID 19 pandemic. Because the people who send money home are what they call ‘economic first responders’, benefitting their countries as well as their families.

The remittance statistics are massive. Says the report:

“According to the World Bank, international remittances totalled $717bn in 2019, with more than three-quarters of these flows ($548bn) bound for developing countries. These flows now exceed ODA by a factor of three and have also now overtaken FDI to become the largest inflow of foreign capital (excluding exports) to developing markets. Despite the indispensable role played by remittances, their position in the world economy is somewhat underappreciated.”

“Three notable facts about migration are often drowned in the stringent debate surrounding migration policies,” Ratha explained a few years ago. “First, the contribution of migrants to their host and home countries is enormous, over $500 billion in remittances alone (of which over $400 billion went to developing countries in 2012). Second, South-South migration is actually larger than South-North migration, implying that not only emigration, but also immigration matters for the developing countries. Third, internal migration is nearly four times the size of international migration and is an integral part of an economy’s structural change and development process. Yet, movement of people is rarely included in the development strategies of countries.”

The World Bank had predicted that COVID 19 would cause a big reduction in the amount of remittance monies sent home. But to everyone’s surprise, remittance flows to Mexico actually increased by more than 10% because the pandemic meant many Americans were working on home improvement projects and so there was greater demand for migrant labour in agriculture, construction, as well as meatpacking. Additionally, more Mexicans living in the US had access to social security benefits through American citizenship or work permits. So while Mexico saw a reduction of 8.5% in its GDP in 2020, remittances were equivalent to almost 4% of GDP that same year, Reuters reported. Over 95% of those remittances came from the US, with much of this money going into health care and housing in Mexican communities.

Research institutes documented how access to US social security made Mexican remittance flows more resilient than flows to other Latin American countries, which experienced drops of about 20%. Sixy per cent of Mexicans living in the US have been there for at least two decades, according to the Migration Policy Institute. The percentage of Mexican migrants holding US citizenship has risen significantly since the 2008-9 financial crisis –  in the past decade, while the number of Mexican-born people registered in the US has dropped, the numbers of Mexican-born people holding US citizenship rose by ‘nearly a third to 37% of the total’, Reuters reported.

In January 2021 alone, there was a 25% increase in remittances, with more than $3 million arriving in that month alone. It is predicted that in 2021, remittances could grow by seven per cent, to US $43.45 million. The 2020 remittance total of $40.6 million – equivalent to more than 875 billion pesos – was more than the Mexican departments of public education, health, labour, welfare and culture were slated to receive in the country’s 2021 federal budget. (Sadly, remittances to El Salvador dropped by 40% in 2020 – the sharpest drop ever recorded – and some speculate that was a function of immigration uncertainty which caused Salvadorian migrants in the US to focus on saving money to cope with possible expulsion.)

That matters greatly, because the thing about remittances is that they are individually earned and individually sent – the way they are spent is determined by the family, not by government or by international aid organizations. This is self-directed development, a pot of money that many international development organizations have been wondering how to tap for many years (diaspora bonds are one idea), and studies have shown its effectiveness in improving health and education outcomes in particular. But it is not just one-way; migrants make important contributions in the countries where they work as well as their home countries.

“In earning the privilege to serve our customers, we know first-hand of the dual role they perform in advancing their own economic prosperity while supporting their families thousands of miles away,” Western Union CEO Hikmet Ersek says in the introduction to a new 2021 report on pandemic recovery. “We know they contribute the human capital that helps the functioning of a robust economy. They serve on the front lines in their host communities, as medics, scientists, grocers, bus drivers, construction workers, and teachers. We also know that they close the distance gap with their families by sending love and support in the form of money. We have seen that when this money moves fluidly, good things happen: A child goes to college, a business expands, emergency aid arrives the moment it is needed, and whole nations thrive.”

“This report illustrates what we already know: the crucial role global remittances play in developing economies often impacting families and economies much more rapidly than governments and private direct investment can do,” he adds. “These individuals quickly and efficiently put money directly into the hands of their loved ones; back in their home countries, those loved ones then use the money to fund a broad range of economic activity.”

Many Mexicans have invested in creating businesses at home, with the goal of having a way to make a living when they return home from the US, and home town associations allow migrants to support community development infrastructure through collective remittances. The Mexican government has long had a fund matching program called 3 in 1, which matches government aid nationally and to states and municipalities based on the percentage of remittances they receive, and in recent years, Western Union – which does well from transmitting remittances – has made it 4 to 1.

Western Union CEO Hikmet Ersek made a key point in 2019 about the national and geopolitical importance of remittances: “Remittances are an important way to move capital from one place into consumer spending in another. But they also serve as major stabilizers for struggling economies. When times are hard in a country, emigration goes up. If those emigrants wind up in a host country with lots of work, they send more money home, strengthening the struggling economy they left in the first place. Conversely, drops in remittances, in some countries, lead to reduced tax revenue and less public-sector development, further weakening an economy that may already be struggling.”

COVID has made this ‘economic first responder’ role ever more important for the coming years, according to a recent report by Oxford Economics and Western Union, “The Remittance Effect: A Lifeline for Developing Economies Through the Pandemic and Into Recovery.” 

Remittances, says the report, will play an indispensable role as countries work to overcome the pandemic’s after effects – not least because while foreign direct investment and official development aid can be subject to political fluctuations, remittances continue steadily and usually increase in times of trouble and crisis at home.

“The value of remittance flows into developing countries in recent years is widely underappreciated,” the report notes. “Remittances support stable macroeconomic growth, benefiting recipient households in developing countries by providing additional income and lowering incidences of extreme poverty. This money acts as a form of ‘social insurance,’ helping recipients to support spending on essential goods and services, invest in healthcare and education, and build both liquid (cash) and fixed (property) assets.”

Ersek puts it this way in the report’s introduction:

“When times get hard in developing economies, remittance-senders become front-line providers of economic security. Simple arithmetic shows us that remittances’ magnitude, reliability, and cascading effect make them a crucial building block in developing economies’ efforts to return to normalcy. When these streams are well organized, good things naturally happen. Struggling developing economies are boosted, an emerging generation is educated, and an overall improved standard of living, especially during and post pandemic. Policymakers, development experts, and economists must give cross-border remittances the consideration and priority they deserve as a significant global economic engine. I advocate for policymakers across the spectrum to prioritize legal, smart, safe, and equitable cross-border migration systems, which will uplift developing nations’ economies. Equally important is the need to create capacity and capability for the funds they send home to be turned into productive investments and help pave the path for economic prosperity for all.”

Sadly, as long as immigration continues to be a politically-driven football in the US, I fear this eloquent plea may not be heeded in terms of the US relationship with Mexico. But it does point the way to a different kind of relationship between what we used to call the ‘developed’ world and the ‘developing’ world – a more equal and interdependent one than it has often been in the past. We can make sending remittances easier and less expensive, and thus support migrants in building their own countries as well as our own. And we can figure out how to support this individually-driven flow of money as part of global recovery from a pandemic that has affected us all, wherever we live and work.

Sources:

Remittances report sheds new light on ‘economic first responders’

Leveraging Migration and Remittances for Development

Mexicans defy pandemic blues with record remittance surge

The invisible billions: remittances (TED Talk)

The hidden force in global economics: sending money home (TED Talk)

Mexican remittance strength outpaces even the most optimistic

The Fed – Remittances and COVID-19: a Tale of Two Countries.