Monday, March 27, 2006

The side effects of remittances

As the US Senate debates immigration reform, mention is often made of the money which migrants send home to their families. In a recent article titled
Latin America's Faulty Lifeline, Catherine Elton at the MIT Center for International Studies argues that an economy propped up by remittances may be hiding deep structural problems. She points in particular to El Salvador:

In El Salvador, where studies show that anywhere from 10 to 40 percent of the population has emigrated, remittances are an astounding 16 percent of the GDP. They are 133 percent of all exports, 655 percent of foreign direct investment, and 91 percent of the government budget.

While El Salvador's migration patterns to the United States are usually linked to the nation's bloody civil war in the 1980s, migration rates during the late 1990s and first half of this decade were higher than during the armed conflict. Once celebrated, along with Chile, as the honor roll student of the Washington Consensus, El Salvador went from the country with the second highest growth in region in the early 1990s to the second lowest, behind Haiti, in the second half of the decade.

According to some Salvadoran economists, remittances are not spurring growth and development because they are spent overwhelmingly on consumption. El Salvador's level of private consumption as a percentage of GDP is the seventh highest in the world. But some of the remittance literature says this isn't a problem, maintaining that even when remittances are spent for consumption, they are multiplied throughout the local economy, supporting local industry and creating jobs.

Much of the literature describing this "multiplier effect" focuses on Mexico. In a small and very open economy like that of El Salvador, however, remittances aren't multiplying, some complain, because they leave the country as fast as they come in. Since embarking on the reforms, El Salvador's imports have gone from 27.7 percent of its GDP in 1990 to 42 percent in 2004. And when they don't produce new jobs in the home country, remittances actually cause migration, as people try to keep up with remittance-receiving neighbors....

In El Salvador, remittances are also said to have distorted the labor market, increasing wages in relation to neighboring countries, even while they have declined in real terms since the nation embarked on the reforms in 1989. High wages in El Salvador make neighboring countries more attractive for investment. And remittances are now provoking a scarcity of labor in some sectors of the economy because they allow many Salvadorans to live better without working at all than they could on the wages paid for agricultural or domestic work. In eastern El Salvador, farm owners are hiring Nicaraguan and Honduran migrants to fill the jobs Salvadorans won't take.

Immigration reform in the US is certainly needed and may help ensure the just treatment of millions of economic migrants, but it does nothing to solve the root causes of that migration. The cycle of migration and remittances may actually make it harder to stimulate economic growth in a way which will generate jobs that will keep people from leaving the country. If the US wants to stem the tide of migration, it must take significant steps, not just free trade agreements, to help El Salvador and other Latin American countries increase sustainable types of development.


El-Visitador said...

Let me get this straight:

"increasing wages in relation to neighboring countries, even while they have declined in real terms since the nation embarked on the reforms in 1989."

OK... if real-terms wages in ES declined, but still increased in relation to our neighbors that did not embark on reforms... it follows that real-terms wages in the other countries decreased even more.

I.e., she is saying that, the countries that did not implement the same reforms we did are even more miserable! Salvadoreans have more buying power for everything, from books to medicine, than our neighbors! This kind of ruins the rest of her anti-neoliberal arguments, don't you think?

Miguel Lerdo said...

El Visitador,

You rightly point out that the author is incoherent and I have no idea where she gets the idea that real wages have declined over the past 17 years. However, it is clear that she attributes the rise in wages compared to El Salvador’s neighbors to remittances, not neoliberal reform. There is an interesting point here.

1) The wage at which Salvadorians willing to work has gone up because so many of them receive free money from abroad. A lot of Salvadorians would rather sit at home than work at Third World wages (can you blame them).
2) Such a wage is not justified by Salvadorian productivity, so investment goes elsewhere.
3) The only way to get wages back in line with productivity is increased investment in human capital or reduced remittances (i.e. starve people into working).
4) The obvious solution is for all the parents working in the U.S. sending money to their children in ES to threaten to cut the kids off unless they are in school or otherwise using their time productively. This is easier said than done when you live 2000 miles away and can’t even go back to visit.

Part of me thinks this is really a concern for families. If hard working immigrants want to send money so their families in El Salvador can take it easy, who are we to judge? “The cycle of immigration and remittances” seems better than the alternative offered by El Salvador’s neighbors. If you had to choose where to be born under a Rawlsian veil of ignorance, who wouldn’t choose El Salvador over its neighbors? If you are lucky, you get to sit at home and watch the checks come in. If you are unlucky, you get to work in the fields next to Hondurans chasing those higher Salvadorian wages.

Having said all that, I think one may be able to make a case that the combination of easy money (i.e. remittances) and children growing up without their parents (because of immigration) is a recipe for gang activity.

El-Visitador said...

Agreed that choice in use of remittances is a private, not public problem.

Agreed that easy money with absent parentage can be a recipe for personal disaster. Again, not a public problem.

You are correct that the journalist attributes the wage rise to remittances, but then she says mass emigration was either caused or dramatically accelerated by neoliberal reform. Methinks she is wrong in this, as in much of the rest. I can think of other countries that liberalized in the late 20th and did not cause emigration: Ireland, Poland, Czechia, Estonia, New Zealand, and Great Britain. These examples could undercut her arguments, except all of these other nations were highly educated and wealthy when compared to ES.

But what other countries had mass economic emigration and remittance growth, and yet failed to liberalize? The Philippines?

It would be interesting to know, for comparative purposes

Tim said...

I appreciate this exchange, but I think you are both missing an important point. Nicaragua and Honduras do not have the same level of remittances as El Salvador. They have higher levels of poverty because El Salvador reduced poverty through the receipt of remittances, not through any success of the government's policies. (The only successful policy has been getting the US to keep TPS in place).

With the higher levels of poverty, Nicaraguans and Hondurans travel to El Salvador to take jobs offered by landowners who don't have to raise wages to a level which will induce Salvadorans (who have the remittance safety net) to work.