Remittances Soar to Record High in Latin America, Providing a Lifeline for Desperate Economies

Remittances Soar to Record High in Latin America, Providing a Lifeline for Desperate Economies 1

Remittances are a vital source of income and foreign currency for many countries but are no substitute for home-grown development.

Between January and November of 2021 Mexico received $46.83 billion in remittances — transfers of money by workers of Mexican descent largely in the US but also other countries to individuals in Mexico. It is a 27% increase on the same period of 2020, which itself was a record year for remittances. According to El Financiero, it’s the highest rate of increase in 18 years.

The Bank of Mexico still hasn’t published the data for December 2021 but barring a sudden, sharp reversal, Mexico’s remittance haul for 2021 will surpass $50 billion for the first time ever. That’s after increasing by 11.4% to $40.6 billion in 2020, a year when the U.S. economy, where 98% of the remittances to Mexico originate, suffered its worst annual contraction since 1946.

Mexico has registered 19 straight months of rising remittance inflows. Between January and November 2021, almost 124 million remittance payments were registered, 14.2% more than in the same period of 2020. Mexican migrant workers are not just sending money back home more often; they are sending larger amounts each time. The average remittance in the period was $378, 11% higher than in 2020.

“A Blessing” for Mexico

On Friday, Mexico’s President Andres Manuel Lopez Obrador (AMLO) described the trend as a “blessing” for the country he leads:

“It is the main source of income for Mexico. The data for December is an estimate, but I can tell you we have figures before the Bank of Mexico [releases its data] and we make a projection and it generally matches up, and we are calculating that by December… we will be at $51.63 billion… the equivalent of eight thousand pesos a month for 10 million families.”

Mexico is not the only Latin American country to have seen a sharp rise in remittance flows in 2021. According to the World Bank’s latest projections, published in November, Latin America and the Caribbean would receive a record remittance haul of $126 billion dollars in 2021, which would represent an increase of 21.6% on 2020. Mexico would account for just over 40% of the total.

In most parts of the world, remittances increased in 2021. Though the full data for the year is not yet available, the World Bank estimates that remittances to low- and middle-income countries grew by 7.3% in 2021, to reach a record $589 billion:

For a second consecutive year, remittance flows to low- and middle-income countries (excluding China) are expected to surpass the sum of foreign direct investment (FDI) and overseas development assistance (ODA). This underscores the importance of remittances in providing a critical lifeline by supporting household spending on essential items such as food, health, and education during periods of economic hardship in migrants’ countries of origin.

The bank expected remittances to grow by 9.7% in the Middle East and North Africa, 8% in South Asia, 6.2% in Sub-Saharan Africa and 5.3% in Europe and Central Asia. The only region where remittances were forecast to fall in 2021 was the Asia Pacific.

The rapid recovery and dramatic resurgence of remittances is one of the big — and largely pleasant — economic surprises of the pandemic era. In April 2020, at the onset of the pandemic, the World Bank painted the bleakest of pictures for global remittances. As the global economy seized up, financial markets plunged and many migrant workers lost their jobs or hurried home, the multilateral lending institution warned that remittances would drop precipitously, just as had happened in the wake of the Global Financial Crisis:

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).

Fortunately, the forecasts were wildly off target. In the end, global remittances declined by only 1.7% in 2020 and in some regions, such as Latin America, they actually ended the year in positive territory. That trend accelerated sharply in 2021.

The adverse impact of the COVID-19 pandemic and Hurricanes Grace and Ida encouraged migrant workers from Mexico and Central America to send more funds to their struggling families back at home. Other big drivers include the recovery of job markets and fiscal and social assistance programs in host economies as well as the formalization of payment transfers, which mean the money is more likely to show up in official records.

Another key factor is the recent surge in northward migration from Central and South America to Mexico, the United States and Canada, as economic and political instability rises across the region.  Venezuela, for example, saw a 664% increase in outbound migration between 2015 and 2020. In 2021, Mexico alone received ten times the number of migrants from Venezuela than it did in 2020, many of whom are trying to reach the United States.

More Migration = More Remittances

The total number of migrant workers in the world has more than tripled since 2010, from 53 million to 170 million, according to the International Labor Organisation (ILO). Migrant workers often end up doing jobs that are deemed essential, many of them low paid. In the U.S. “they have been in everything from cleaning services, hospitals and everything that provides services despite COVID-19,” says Sonia Plaza, co-chair of the World Bank’s Global Knowledge Association for Migration and Development (KNOMAD).

Demand for migrant workers could increase sharply in the coming months if the governments of advanced economies carry through with their vaccine mandates, thus consigning millions of unvaccinated domestic workers to the scrapheap at a time of acute labor shortages. They will include untold thousands of doctors and nurses. In their absence, the heath care systems of advanced economies will grow even more reliant on overseas workers — according to the United Nations, close to one third of all doctors in the UK and the United States are already from overseas — while exacerbating the chronic shortage of physicians in developing countries.

The arrival of more and more low-skilled migrant workers is also likely to further drive down the wages of low-wage workers in advanced economies while helping to drive up profits for wealthy corporations. As the U.S. immigration economist George J Borjas noted in a 2016 article for Politico magazine, while “the influx of immigrants can potentially be a net good for the nation, increasing the total wealth of the population… for many Americans, the influx of immigrants hurts their prospects significantly”:

When the supply of workers goes up, the price that firms have to pay to hire workers goes down. Wage trends over the past half-century suggest that a 10 percent increase in the number of workers with a particular set of skills probably lowers the wage of that group by at least 3 percent. Even after the economy has fully adjusted, those skill groups that received the most immigrants will still offer lower pay relative to those that received fewer immigrants.

Both low- and high-skilled natives are affected by the influx of immigrants. But because a disproportionate percentage of immigrants have few skills, it is low-skilled American workers, including many blacks and Hispanics, who have suffered most from this wage dip. The monetary loss is sizable…

[I]mmigration redistributes wealth from those who compete with immigrants to those who use immigrants—from the employee to the employer. And the additional profits are so large that the economic pie accruing to all natives actually grows. I estimate the current “immigration surplus”—the net increase in the total wealth of the native population—to be about$50 billion annually. But behind that calculation is a much larger shift from one group of Americans to another: The total wealth redistribution from the native losers to the native winners is enormous, roughly a half-trillion dollars a year.

There are other downsides and dark sides of the remittances story, which I laid out in the July 20, 2021 article, “Remittances to Latin America Surge, Even As Virus Crisis Continues to Bite in Host Economies“:

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.

In Mexico, remittances account for around 5% of GDP but in some states, such as Puebla, they can represent as much as 10% of total revenues. In smaller, weaker economies the degree of dependence is even greater. In El Salvador, Honduras and Jamaica, remittances respectively account for a staggering 26.2%, 26.6% and 23.6% of GDP. In all three countries remittances increased by more than 20% in 2021, in part due to the increased flow of migrants to Mexico, the U.S and other countries. If that flow of money were to begin to subside, the impact on those nations’ already fragile economies would be huge.

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