US Slowdown Affects Remittances in LAC

April 8, 2008

Washington, DC, April 8, 2008 -- Remittances to Latin America and the Caribbean amounted to almost US$60 billion during 2007, making it the top recipient region in the developing world. But this amount only represents a 6 percent in growth, a very small number if compared to an annual average rate of 19 percent between 2000 and 2006.

“Remittances and Development: Lessons from Latin America”, which examines the profile of Latin American and Caribbean remittances recipients, finds that some of the positive effects of remittances include higher savings, better access to health and education, increased macroeconomic stability and entrepreneurship, and reductions in poverty and social inequality. The report also shows that that the money migrant workers send back to their home countries is linked to lower poverty levels and improvements in education and health indicators. But things could dramatically change if governments don’t take urgent actions to facilitate remittances flows and to maximize their development impact.

The authors of the report Humberto López, World Bank lead economist for Central America; and Pablo Fajnzylber, World Bank senior economist for Latin America and the Caribbean, mention the importance of the cost of transfers —considering the fall in remittances during 2007— and the urgency of linking remittances to financial services to improve the long-term impact of remittances on development.

“The role of remittances in the region cannot be overlooked when they represent about 70 percent of foreign direct investment flows. They help poor families increase their savings and keep children in school,” says Pamela Cox, vice-president for Latin America and the Caribbean region of the World Bank.

Other findings
The report highlights some important policy challenges associated with remittances, such as brain drain, problems of overvaluation of the real exchange rate, and loss of external competitiveness.

Another relevant finding is the fact that in countries like Mexico, El Salvador, and Paraguay households with remittances primarily helps the poorest segments of society, while in other countries such as Nicaragua, Peru, and Haiti; they tend to benefit much more the middle class.

Most migrants from Mexico and Central America come from the segments of the population with the lowest education levels. In contrast, migrants from the Caribbean and South America have a higher education level than the rest of the population in their home countries.

The report explores three main issues and offers recommendations:

Developing the Banking Sector
Remittances have a positive impact on financial development in Latin America, but access to physical banking outlets is more limited than in other countries, and the costs of banking are higher in the region. In the case of Latin America, the large majority of remittances are sent through money transfer operators, with banks maintaining a relatively small share of the market. Linking remittances to the provision of financial services is crucial for improving the long-term impact of remittances on development. To that end, the authors suggest that Governments could create incentives for financial institutions to lower costs and tailor their products to meet the needs of migrants and their families.
Such efforts will increase the likelihood that migrants send their remittances through bank accounts, increasing the impact of remittances on local financial development. They also point out that governments could promote competition in the banking sector by minimizing the regulatory costs of opening branches and other outlets to serve these communities.

Facilitating Remittance Flows
Remittance services are still expensive, with fees of up to 20 percent of the principal sent. Within this scope, regulatory concerns should be aimed at facilitating services at the lowest cost possible to as many users as possible. The report recommends that governments and remittance service providers facilitate transparency through the collection and publication of comparative prices and conditions of service among different providers, and the authors note the example of the Mexican Government, which introduced a Web portal where people can compare costs, levels of security and location of money transfer points to send money from the United States to Mexico.

The Bank also suggests that authorities in recipient countries enable the participation of a greater number of financial institutions in the remittances market by ensuring that there are no excessively burdensome regulatory constraints to their participation. In particular, savings and loans, credit unions, and microfinance companies may be well positioned to act as disbursing agents, as their networks may be closer to the usual recipients of remittances than those of large commercial banks.

Reducing Macroeconomic Effects
While remittances have a number of beneficial effects, they may lead to an appreciation of the exchange rate, potentially reducing the international competitiveness of the respective economies. In this context, the report recommends that governments consider a menu of fiscal measures to increase productivity, as well as possible reforms to reduce taxation on labor income.