Saturday, December 16, 2006

Millennium Challenge Grant and remittances

Worth reading is Marcela Sanchez's column last week in the Washington Post. Sanchez talks about the fact that the almost $3 billion of remittances entering the country do little for economic development:

Salvadoran immigrants are frustrated that their cash isn't reaping more development rewards back home. Although remittances have proved to be a lifeline to thousands of families in extreme poverty, immigrant Salvadorans fear that the money is creating a culture of dependency in the home country.

With that background, Sanchez describes the US Millennium Challenge Accout grant of $461 million to El Salvador as a missed opportunity to leverage the flow of remittances into a source of economic development. The grant process did not include any provision for partnerships with Salvadorans abroad looking for ways to help development in their home country. While the MCC grant is substantial, it is still small compared with the size of the flow of remittances into the country.

6 comments:

El-Visitador said...

From M Sanchez's column:

"He lamented further the corruptive consumerism that drives, for instance, a Salvadoran immigrant in the Washington area to fix a roof in the cold and snow just to pay for "a pair of the latest name-brand shoes" demanded by his kids back in El Salvador."

I guess she'd be happier if a Kommissar were to tell our immigrant roof-fixer to report to "the people's re-education" so he can learn what shoes he can or cannot buy with his own money.

wally said...

A great lesson in how to make a $461,OOO,OOO (all those zeros mean MILLIONS) gift, (meaning it was FREE, didn´t come out of the government, or the people´s pocket) sound like a bad thing. Amazing how you spun that one. Shame on you.

Solavá said...
This comment has been removed by the author.
Solavá said...

I don't see why this is being interpreted as an issue of freedom by El Visitador. Clearly, people can do whatever they want with their money and that's what they do. The critical issue here is that El Salvador receives 3 billion dollars a year in remittances but this incredible amount of money does not contribute to the develpment of the country. How is that possible? What are we doing wrong as a nation? The Millenium Challenge Grant only puts this issue into perspective.

Clearly, this a serious problem which has been addressed by salvadoran economists, by the bank system and by the private sector on numerous occasions. Sanchez quotes a study by the World Bank, which agrees with what salvadoran analysts have been saying for many years: "In "Close to Home: The Development Impact of Remittances in Latin America," the World Bank found that if aid flows are consumed rather than invested, their impact on economic growth is nonexistent. This is certainly true for El Salvador -- the largest per capita recipient of remittances in Central America has had the lowest economic growth for at least four years. To revert this negative trend, governments in recipient countries should, according to the World Bank, provide incentives for investment and promote human capital development".

The key concepts here are "incentives for investment" and "human capital development". This was the first year that I heard sound plans to have Salvadoran inmigrants invest in real state, and it began to happen, but this is a drop in the bucket. The question is how to channel investments by migrants in order to generate productivity in the areas where they come from. Illegal inmigration to the United States has profound social consequences and social costs for El Salvador, since most migrants tend to be adults who leave children behind; without a doubt, migration disrups families, and links have been found between young men growing up without parents and social violence, since many young people join violent gangs due to their loss of social capital. Now, human capital is the result of education, of providing people with new and marketable skills; this is the best policy to generate employment, stop illegal migration and cut dependency. A policy to promote human capital in Costa Rica during the 1960s and 70s provided great results and helped that country atract greater and greater levels of foreign investment.

A good and sound economic policy would mean that ten years from now, a young salvadoran man's dream wouldn't be to migrate illegally to the United States, but instead to develop his skills and get a good job in El Salvador so that he can buy "a pair of the latest name-brand shoes" for his kid if he wants to. And that should become the rule, rather than exception.

For those who want to read more, here's an excerpt from "The trouble with sending money home", another column by Sanchez published on december 8, 2005, and I place it here not for her opinion on these matters, but simply because she does a good job summarizing the results of a study done by the United Nations:

"Money coming from abroad, however, has handicapped a part of El Salvador's economy at home. Far from becoming an export economy, Salvadoran consumption of foreign goods has increased dramatically. In other words, as soon as remittance money comes in, it leaves, tilting the economy more toward consumption and imports, and away from local production and exports.

"Economic growth has slowed to a trickle over the last few years -- 1.8 percent in 2003, 1.5 percent in 2004 and 2 percent in 2005 -- lower than any other Central American country.

"If remittances stayed longer in the country, they would have what the UNDP report coordinator William Pleitez calls a "multiplying effect" that would allow the money to touch more hands than those of retailers and importers. Pleitez argues that money doesn't stick around because the government is not taking action in crucial areas such as tax policy and job creation, relying too much instead on market forces to improve the fundamentals of the economy.

"Some of UNDP's most revealing findings come in a comparison between two Salvadoran municipalities, Santa Catarina Masahuat in Sonsonate province and Concepcion de Oriente in La Union province. Santa Catarina Masahuat has the lowest number of households that report receiving remittances in El Salvador (0.6 percent) while Concepcion de Oriente has the highest (63 percent).

"The significantly larger amount of remittances in Concepcion de Oriente does not appear to be making the local economy more dynamic, nor is it generating new jobs. In fact, Concepcion de Oriente's unemployment rate (19.3 percent) is three times that of Santa Catarina Masahuat (6.9 percent).

"What's more, despite the fact that Concepcion de Oriente brings in more than $200,000 a month in remittances, it pays 46 percent less tax annually than Santa Catarina Masahuat (both cities have a similar number of taxpayers). The most revealing aspect of this tax differential is that people in Concepcion de Oriente are not finding opportunities to spend their money locally and are heading to malls in urban centers to do so, it is only then that the government can tap remittance dollars through value added taxes".

El-Visitador said...

Solavá,

In my opinion, the only "incentives" the émigrés need is a safe investment climate, currency stability, a dependable and predictable judicial system, good roads, and plenty of cops in the streets.

Let ES provide such a safe environment, and watch people abroad (both native and non-native) start snapping up assets in El Salvador. You know, Provence, Tuscany, Costa Rica, and the Costa del Sol in Spain are awash with investment/2nd home cash... with no "incentives" at all other than good ole' basic elemental "safety."


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PD: interesting comparison between SC Masahuat and Concepción de Oriente. Helps to demonstrate the principle that emigration is a losing strategy. Thanks for posting it.

HODAD26 said...

and i urge all reading this blog in regards to this 460 Million Millennium Account
to write your Congressmen[women] and Senators to ask how this money will be spent, and to it goes to.
I will be doing the same.
If this is to alleviate poverty in ES, then as US citizens you need to know how,why,where,and to who this tax money will go to, and especially in regards to this present corrupt El Salvador government
seems most in ES know this money will NOT be used for the people to eliminate poverty
but for self interests in the ruling class

thanks for your efforts.