Latin America

Migrant Dollars Today Can Stop Migrants Tomorrow

How remittances can kick-start development and productivity in Central America.

Cloudy days ahead for remittances?

Photographer: ALFREDO ESTRELLA/AFP/Getty Images

It's too soon to say just what Donald Trump's presidency will mean for the United States' neighbors and trade partners. But with all the talk about wall-building, deportation, and shredding trade agreements, families in Latin America with relatives up north aren't waiting to find out.

Dollars sent by migrants back home to Central and South America and the Caribbean surged late last year in anticipation of Trump’s election and sharply since then. In Mexico, dollar remittances jumped 25 percent in November from the year before -- a 10-year high -- then another 6 percent in December, and hit $2,055 billion in January, a monthly record. Data compiled by Bloomberg showed similar remittance spikes starting in October in Guatemala (up a record 22 percent in the year to February), Nicaragua (12 percent), Colombia (9.8 percent), and Ecuador (8.1 percent).

Granted, part of this is just connect-the-dots economics. The recovering U.S. job market has allowed migrant dollar-earners to send something extra back home. Consider that two-thirds of Mexican migrants remitted dollars last year, compared with 50 percent in 2015. Many foreign breadwinners, however, may be acting preemptively, wiring funds as fast as they can before Trump, who has talked up a tax on remittances to pay for his border wall, can garnish their outbound dollars, or worse, subject those in the U.S. illegally to mass deportation

Such dire consequences may or may not happen. Yet regardless, the remittances bonanza also highlights a larger challenge for Latin America: how to use remittances to kick-start development and boost productivity at home. Can societies best known (in the U.S., at least) for exporting illegal migrants flip the narrative and leverage hard-won and possibly ephemeral sources of hard currency to keep their talent and energy at home?

For many of the hemisphere's most benighted nations, after all, remittances are the golden goose: Mexico now pulls in more dollars from expatriate workers than it does from oil exports. The $17 billion in migrant dollars Central America reaped in 2015 amounted to nearly 50 percent of income for some 3.5 million households, according to Manuel Orozco, a senior fellow at the Inter-American Dialogue's program for migration, remittances, and development. Together, these households held collective savings of $3 billion that year. “This is great for recipient families and for governments," said Alberto Ramos, a developing markets analyst at Goldman Sachs. "It's money that reaches low-income households, boosts the national current account, and properly stewarded, can be tapped domestically."

That's exactly what Guatemalan Finance Minister Julio Hector Estrada had in mind earlier this month when he proposed selling dollar-denominated bonds at home to sop up some of the record $7.1 billion Guatemalan migrants sent home last year. Government officials hope to dissuade recipients from converting all that hard currency into quetzals, which officials fear could feed inflation, and instead divert some of the bonanza into development projects.

Another related challenge: Only an estimated 30 percent of Latin Americans have bank accounts, and the region trails other emerging markets in what insiders call household financial inclusion. So even though some two-thirds of Central American households manage to squirrel away money, they mostly stash it informally in “under the mattress” savings, which bear low returns and are poorly marshaled. "The challenge is to boost wealth creation in Latin America, and that means investing in human capital and the knowledge economy," Orozco told me.

First, however, the region will have to rethink development strategy. Consider the U.S.-financed, $750 million Alliance for Prosperity, a program that seeks to stem migration from Guatemala, Honduras and El Salvador partly through investments in agriculture, tourism, and low-end manufacturing. While such initiatives are welcome, they overlook one of migration's key drivers: stunted opportunities. Most of the nearly 200,000 Central Americans who attempt to leave Central America every year are not destitute, but lower middle class. They are seeking better jobs, not to be farm hands or work a shift on a maquila assembly line.

Better education would give job-seekers a lift, but good luck with that in local schools. For instance, while nearly all nations in the region have achieved universal primary school enrollment, keeping students in school and improving the quality of education are crucial. A study showed that in 2013 just 7 percent of Guatemalan workers had completed 13 years of schooling, the minimum classroom time experts say is required to escape poverty. Little wonder that for every two workers joining the region's work force each year, one Central American heads for the border.

This is where the wonks and private sector need to lean in. Researchers already know that families who receive dollars from abroad are not only keen to save but more likely than non-remittance recipients to plow that extra income into education. Local authorities must make sure that the investment is worthwhile, while financial institutions can help families formalize their savings.

El Salvador holds out some hope. With as little as 20 minutes of face-to-face counselling, financial advisers convinced walk-in customers at a Salvadoran credit union to open savings accounts; 15 percent of them did so immediately. Orozco reckons that a national campaign reaching just 30 percent of remittance recipients could persuade 200,000 families to take their savings from the sock drawer to the bank, netting up to $100 million in deposits.

Remittances can't fix failing education or stop crime cartels from cherry-picking school-age youth with promises of drug booty or bandit glory. But yoking them to smarter development could help keep aspiring Latin Americans at home, sparing them from parlous journeys to strange lands that are increasingly unwelcoming.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Mac Margolis at mmargolis14@bloomberg.net

    To contact the editor responsible for this story:
    James Gibney at jgibney5@bloomberg.net

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