Sending Money Home: Closer Look at Remittances to LAC

According to the World Bank, remittance flows to Latin America and the Caribbean (LAC) are projected to increase from $64 billion in 2008 to $77 billion by 2014. In 2010, Official Development Assistance to LAC totaled only $10.8 billion. Remittances, on the other hand, can amount to 10-20% of the GDP of LAC nations. For instance, remittances to Honduras account for 19.3% of its GDP.  This demonstrates the importance of remittances to the continual economic development of this region.

Remittances to LAC Region

There are many reasons for the increase in remittances to the LAC countries. According to a 2012 report published by the Inter-American Dialogue, US economic recovery and the decline in US unemployment rates have played a role in the growth of remittance flows to LAC. More importantly, increased access to financial tools such as online banking in host and home countries has a significant effect on remittance flows to the region. People’s access to financial institutions has grown to 51% in Latin American countries.

In addition, female migrants are also having a significant impact in increasing remittances to the region. More female migrants have tertiary education degrees than their male counterparts. Since 2008, female migrants with tertiary education have remitted just as much or even more than men. Also, they are migrating to higher income countries with the increased demand for highly skilled female laborers. For the first time, women amount to 50% of the total migrant population. This shows a remarkable change in the gender dynamics of remittances.

Although remittance rates have increased, what is the impact of this flow? According to the World Bank, the money that migrant workers send home does indeed have a positive effect overall. Remittances lead to higher investment rates, higher savings, greater access to health care and education, and reduce poverty. However, the positive impacts of remittances vary by country.

Money Transfers

According to a World Bank report published in 2008  the children of families who receive remittances attain a higher level of education than children in families that do not receive remittances. In countries such as Nicaragua and Honduras, enrollment rates for children ages 12-17 increased by 12% and 17% respectively. One reason for this drastic increase in education attainment is that remittances tend to relax household budget constraints. As a result, more children stay in school instead of prematurely entering the labor force to support their families.Though the overall impact of remittance flows to LAC positive, it varies by country. A previous 2007 World Bank Report states that overall, for every percentage point increase in the share of remittance to GDP, the fraction of the population living in poverty is reduced by 0.4%.

However, there are many challenges associated with remittances. First, remittances do not necessarily flow poorest of a country’s population. For example, in Bolivia, Haiti and Honduras, less than 30% of remittances flow to the most marginalized. In many cases, they flow to better off households such as those in Peru and Nicaragua. Second, the departure of migrants who were active in the local labor market might lead to reductions in household income. Sometimes, household income lost as a result of a migrant’s departure is not made up through their remittances. Additionally, in the small Caribbean nations, members of the educated segments of the population migrate most, leading to an overall “brain drain.” For instance, countries such as Haiti and Jamaica have lost over 80% of their college graduates.

Latin American economist Humberto Lopez has argued that countries that benefit the most from remittance flows are countries that have implemented better policies, a more favorable investment climate, greater institutional capacity, and more educated populations. Thus, in a healthy environment remittances can indeed provide great benefits to people in developing countries, but it’s up to the policy makers to maximize those effects.

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