Credible Future - Can Micro Loans Make a Macro Difference?, Development & Aid, Economy & Trade, Headlines, Human Rights, Labour, Latin America & the Caribbean, Migration & Refugees

DEVELOPMENT-LATAM: Workers Abroad Transform Life at Home

Ulysses de la Torre*

MEXICO CITY, Jun 15 2006 (IPS) - Rising migration and soaring remittances from abroad are creating the so-called “multiplying effects” that economists have long been waiting for, and they are influencing a range of economic activity.

During the last quarter-century, agricultural exports and remittances have traded places in terms of importance for El Salvador’s earnings from abroad. In 1978, the two income sources accounted for 81 percent and 8 percent of the country’s total foreign exchange earnings. By 2004, these proportions had changed to 5 percent and 70 percent, respectively.

Mexico’s 20 billion dollars of remittances last year constituted the country’s second largest source of foreign exchange income after oil exports.

The local ripple effects of such macroeconomic shifts are no less palpable. Anecdotal evidence suggests that remittances to rural communities cause price inflation, implying that remittances may aggravate unequal income distribution locally while improving national income distribution statistics.

In the case of El Salvador, the fact that its economy is dollarised means that there are constraints on the amount of money circulating inside the country, so inflation should in theory be limited. But as Pamela Starr, a Latin America analyst at the Eurasia Group consultancy explains it, this is being check-mated by the disproportionately large inflow of remittances in dollars.

Because the remittances are never converted into a different currency, there is no foreign exchange fee, so an even greater proportion of the money goes into the hands of recipients, further fuelling inflation.

Although Mexico’s economy is not formally dollarised, at least one Mexican microfinance institution has indicated that informal dollarisation on a local level has forced it to pull out of certain municipalities in its region.

“Whatever demand for microcredit that existed in those communities was purely in dollars,” said Juan Antonio Moreno, the business director for Fundación Cinco de Mayo in the Mexican state of Puebla. The upshot is that anyone without a license to conduct business in dollars – which in rural Mexico means just about everyone – is out of luck, driving the business wholly into the hands of the informal economy.

Moreno added that while other parts of the region may not be dollarised, the demand for microcredit is too geographically dispersed to justify the cost of maintaining a branch in the area and local remittance volumes are nowhere near the level required to cover overhead costs. In a region that overall receives an estimated 70 percent of the one billion dollars in remittances that go to Puebla, this implies a 700-million-dollar market foregone.

Remittances to El Salvador have altered local economic activity to the extent that rural employment in typically urban activities – commerce, industry, construction and services, for example – is now equal to agricultural employment.

The Inter-American Dialogue, a Washington think tank, has pointed to four industries in El Salvador that are receiving an extra boost from economic activity propagated specifically by migrants abroad: telecommunications, tourism, air travel and the so-called “nostalgic trade” in home-grown goods, the last of which accounts for 450 million dollars annually, or 10 percent of El Salvador’s exports.

Real estate has also received a boost as private sector players in both El Salvador and Mexico seek to channel some portion of the remittances flow into home construction.

The United Nations Development Programme (UNDP) offers another lens through which to view the effects of migration and remittances in its latest human development index, which compares poverty, literacy, education, life expectancy, childbirth and other factors for countries worldwide. The proportional size and influence of the Salvadoran diaspora has led the UNDP to analyse it in terms of being a separate country – not El Salvador, not the United States, but something in between.

Accordingly, poverty rates and income levels for this “in-between” country fall in between the U.S. and Salvadoran equivalents. But what may be more telling about the potency of diasporas is how they compare against international standards.

The UNDP’s human development index ranks the Salvadoran diaspora as 40th in the world, putting it alongside Chile, Lithuania and Kuwait. As it stands, El Salvador is in 103rd place out of 177 countries, stuck between the Palestinian territories and Guyana.. Mexico comes in at 53rd, right behind Cuba.

If there is indeed strength in numbers, it follows that the marginalised masses will continue migrating – in all senses of the word – toward whatever is needed to fulfill the basic needs of survival and providing for one’s family.

The persistence of this economic self-determination is one result of what happens when barriers that keep people marginalised are not removed fast enough. The basic impulses of both capitalism and human nature – to the extent that they are separable – are converging in a manner that allows the masses to control their own economic destinies more than ever before.

How this movement advances will determine the prospects of these masses to be their own sources of financial power and achieve true financial democracy.

*Ulysses de la Torre is a journalism fellow at the Instituto Tecnológico Autónomo de México in Mexico City. This article is the fourth of a five-day series that examines the ripple effects of remittances and microfinance from social, economic, development and marketplace perspectives.