Remittances – money sent from migrants working abroad to families in their home countries – are a major source of income for many in Latin American and the Caribbean, representing as much as 20% of the GDP in nations such as El Salvador, Honduras, Haiti, and Jamaica. As occurred after the 2008 global financial crisis, remittances typically dry up in the wake of economic recessions. But something remarkable happened during the COVID-19 pandemic. As the pandemic spread and economies shrank, remittance flows to the region rose unexpectedly by over 9% in 2020 and went on to tally double-digit growth in both 2021 and 2022.
Unprecedented economic policies in developed countries and uneven recoveries in the national economies of the region help to explain this unusual trend.
An Unexpected Turn Upward
In late April 2020, as the global economy was shutting down and financial markets were seizing up, the World Bank issued a press release warning that remittances were likely to fall significantly across the world’s developing economies. For Latin America and the Caribbean, the projection indicated a worrying 19.3% drop. While sinking during April and May, however, remittances quickly recovered during the summer and, after that, the upward pre-pandemic trend returned and even accelerated. For Mexico, which accounts to about two-fifths of remittances to the region, money sent from the United States ended up higher by 11.4% during 2020. That was during a year when the US economy suffered a 3.5% decline in GDP, its worst annual contraction in over 70 years. During 2021, remittances to Mexico grew by a record 28%, making it the second highest remittance-receiving country in the world, after India.
Explaining the Surge
With the benefit of hindsight, it becomes clearer why the evolution of remittances during the pandemic defied expectations. To start with, the pandemic triggered an extraordinary fiscal and monetary response in the United States and a few other developed countries. In the US, the fiscal stimulus was swift and considerable. Hispanics received stimulus payments, business loans, and enhanced unemployment benefits. Many Latino immigrants also worked in jobs deemed essential and were thus able to avoid significant unemployment spells.
Border closings and travel restrictions also played a role, as many immigrants to the US were able to stay longer than they planned. By the end of 2020, the economy had re-opened and the labor market had recovered. An even stronger labor market in 2021 meant that there was actual growth in real wages.
Both the value of individual remittances and the volume of remittances went up during the pandemic. Economists at the IMF estimated that most of the increase seen in remittances was due to the growth in remittances’ value, with US government assistance and rising US wages putting more money in migrants’ pockets. The pandemic shock had devastating effects on the labor market and wages for the economies of the region. The greater amounts sent home thus served as a form of insurance to help struggling family members cope with the economic fallout.
The volume of remittances was also a factor, as the number of transactions increased, reflected in part by a switch to digital forms of money transfers. It is also possible that since fewer money transfers were made via friends or courier traveling home, and more via formalized channels like banks, transfer companies, or digital apps, that the large increases seen in the official data partly capture this expanded formalization.
The cost of transactions does not seem to have played a role. Despite competition from digital providers, transfer fees remained in the typical range of around 3-5%. On the other hand, the strengthening US dollar meant that recipients received more national currency for every dollar sent. This provided an added incentive to send money home, as did inflation that grew faster in the region than in the US, intensifying the need for extra help to cover basic living expenses.
Short- and Long-Term Implications
For the countries of the region, the story of remittances during the difficult years of the pandemic represents a bright spot in a bleak economic period. The boost in remittances alleviated some of the economic pain inflicted on families by the pandemic, and at a macro level, provided much needed foreign currency for countries facing current account and balance of payments shortages. This offset plunging revenues from oil, construction, and tourism, as well as falling foreign direct investment. The short-term effects were thus broadly positive.
On the other hand, many countries in the region may be overly dependent on remittances from abroad. This can increase vulnerability to external shocks. A rise in remittances can also signal that out-migration is increasing, and, in the long term, that can significantly deplete the human capital available. If this process persists, it can exacerbate inequalities between countries. This can lead to more migration, perpetuating a vicious cycle. For that reason, remittances cannot in the long-term substitute for internally-driven economic and social development. Governments in the region need to continue to promote policies that create competitive economies, such as good governance and business-friendly regulation, high quality education, and modern infrastructure. Remittances should remain a cushion softening the impact of unexpected shocks. But they should not become the main driver of economic development and macroeconomic stability.
Leave a Reply