Alejandra Viveros (202) 473-4306
Stevan Jackson (202) 458-5054
WASHINGTON, October 31, 2006 — Workers’ remittances are largely positive for growth and poverty reduction in Latin America and the Caribbean (LAC), but they are no replacement for sound development policies in the countries, says a new World Bank report released today.
According to Close to Home: The Development Impact of Remittances in Latin America, the money that migrant workers send back to their home countries has helped to increase growth, reduce poverty and improve education and health indicators in the region. Nevertheless, the benefits of these flows have been largely overestimated without taking into account some of their costs.
“Remittances are an engine for development but they are not a substitute for sound national policies in the countries,” said Humberto Lopez, World Bank senior economist for Latin America and the Caribbean, and co-author of the report. “Although positive, the impact of remittances on poverty and inequality is in most cases quite modest.”
For each one percent increase in the share of remittances to Gross Domestic Product (GDP), the fraction of the population living in poverty is reduced by about 0.4 percent. In addition, the 1.6 percent jump of these flows as a share of GDP from 1991 to 2005 is estimated to have led to an increase of 0.27 percent in per capita GDP growth.
Close to Home says that workers’ remittances have become a major source of financing for developing countries and are especially important for LAC, which is the top recipient region in the world. In 2005, remittances to LAC totaled about $48.3 billion. In terms of volume, Mexico is the largest world recipient of remittances, receiving an estimated $21.8 billion that year. Colombia ranked as 9th with $3.8 billion, and Brazil as 11th with $3.5 billion.
Remittances are particularly important in Central America and the Caribbean. In 2004, they represented 52.7 percent of Haiti ’s GDP, whereas in Jamaica, Honduras, and El Salvador they were about 17, 16, and 15 percent of GDP. Remittances to Guatemala, Nicaragua, and the Dominican Republic also surpassed 10 percent of GDP.
“Remittances help poor families deal with negative economic shocks, increase their savings, and keep children in school,” said Pablo Fajnzylber, World Bank senior economist for Latin America and the Caribbean, and co-author of the report. “In order to maximize the benefits, policy makers need to step up efforts to improve the business environment, include migrants and their families in the banking system, and deal with possible reductions in labor supply and real exchange rate overvaluations.”
According to Close to Home, the impact of remittances on poverty and inequality varies across countries. In places like Mexico, El Salvador, Guatemala, and Paraguay, households with remittances come primarily from the poorest segments of society, while in others, such as Peru and Nicaragua, they tend to benefit much more the middle class. Likewise, U.S. census data shows that most of the migrants from Mexico and Central America are drawn from the lower end of the education spectrum of their home countries. In contrast, migrants from the Caribbean and South America tend to be proportionally more educated than those who remain behind.
Positive effects of remittances include poverty reduction, higher savings, better access to health and education, increased entrepreneurship, as well as macroeconomic stability and reduction in economic volatility and inequality.
Some negative effects include the potential losses of income associated with migrants’ absence from their families and communities, since remittances are not exogenous transfers but a substitute for the home earnings they would have had if they had not left. Likewise, remittances reduce the labor force in the countries of origin, lead to overvaluation of the real exchange rate and, therefore, to a decrease in competitiveness of the recipient country.
Brain drain is also an important cost, especially affecting the Caribbean countries. Some 30 percent of the labor force of many Caribbean Islands has migrated, as opposed to about 10 percent in non-Caribbean LAC countries. Over 80 percent of people born in Haiti, Jamaica, Grenada, and Guyana who have college degrees live abroad, mostly in the U.S.
The study says that to increase the positive impact of remittances, efforts to reduce their transaction cost should continue. In addition, countries need to improve their investment climate, strengthen the regulatory environment for remittances transactions, and increase access to financial services among migrants and their families, including through smaller financial institutions such as credit unions and microfinance companies.