Mar 12, 2008

Remittances and Foreign Investment Trends Tell a Mixed Story for Latin America

by Laura Starita

Latin American migrant workers who go abroad to work and send a portion of their wages back home play an important role in poverty alleviation. According to the Inter-American Development Bank, remittances to Latin America from its emigres totaled $66.5 billion in 2007—that is equivalent to more than 20 percent of all US charitable giving, and more than twice the estimated US charitable donations given to international causes; it is also more than Latin American countries received in either direct foreign investment or foreign aid in 2006.

Despite the large totals, the Financial Times reports that while US to Latin America remittances had been growing at double-digit rates since the late 1990s, that growth shrank to only seven percent in 2007. Brazil and Mexico—two of the largest remittance recipients—saw their remittances decrease by four percent and increase by only one percent, respectively. Although analysts say this could be a small glitch, evidence suggests that the slow down is the result of a few longer-term factors: the strength of the Brazilian economy (which makes it less necessary for overseas Brazilians to send cash home); the slow-down of the US economy, especially in the construction sector which is a big employer of Latin American immigrants; increased Mexico-US border security; and decreased official work permissions for temporary workers in the US. Though Central American and Andean countries are seeing little change, the impact to Mexico alone could cause poverty rates to soar.

At the same time that less immigrant money is going home, investors are sending more capital to emerging markets in search of higher returns than are currently available in the US and Europe. A report from the Institute of International Finance (IIF) reports a marked increase of investment in emerging markets during 2007, mostly attributable to a more than fifty percent growth in foreign direct investment, from $167 billion to $255 billion. While “emerging Europe” (e.g. Russia, Poland, Slovenia, Slovakia) was the largest dollar recipient of investment in-flows, Latin America benefited from the greatest percentage increase, from $46.8 billion in 2006 to $129.4 billion in 2007. A finer look at the numbers again shows that over half the funds went into Brazil, with Venezuela, Colombia and Peru also benefiting. Private capital flows to Mexico, however, decreased. (An interesting counterpoint to this investment trend is a 20 percent decline in emerging market mutual funds, a sign that while casual investors are wary of emerging markets given the economic downturn, professionals are embracing them).

Foreign direct investment is a critical element of poverty reduction in emerging market economies because it correlates directly with the creation of businesses, and therefore formal jobs, in those countries. By that calculation Brazil appears to be on a promising path. The cause of its drop in remittance income seems to be economic growth. While statistics may mask the struggles of many families, the overall environment is one of economic hope; more so as investment in Brazilian businesses soars. Peru also is on the upside of the equation given that its remittance rates have remained unchanged and it is benefiting from foreign investment. Mexico, however, is a bleaker story. Remittance decreases are not corresponding to decreased demand, but rather to decreased supply due to their link with the US economic slow down and the concomitant loss of demand for Mexican goods and Mexican labor. So Mexico is potentially experiencing the worst of all possible worlds: its exports are suffering from a drop in demand from the US, while domestic consumer spending, which is heavily supported by remittances, also declines. This situation is a prime example of the need for both rational immigration reform in the US but also efforts to improve the developmental impact of remittances.