E.g., 09/15/2014
E.g., 09/15/2014

Remittances, the Rural Sector, and Policy Options in Latin America

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Remittances, the Rural Sector, and Policy Options in Latin America

Introduction

Development has long regarded foreign savings as key to increasing a country's capital-output ratio. In the past 30 years, significant changes in the global economy spurring migration have influenced economic and development thought.

The relationship between development and migration or the movement of people, and the resulting effects of economic ties between diasporas and home country economies (household and business sectors) are becoming more relevant for development policy.

The networks resulting from the prevailing ties of labor migration have contributed significantly to the integration of countries into the global economy. This latter point is important on various levels, including donations, investment (small and large-scale), trade, tourism, and unilateral transfers.

The mobilization of migrant (and their relatives') savings and investments at home (in the acquisition of land, property, or small businesses) are important to areas traditionally neglected by the private and public sectors. Worker remittances, and donations made by migrant associations, constitute key building blocks of economic growth and subsistence in many countries.

In short, there exist at least five "Ts" that integrate many countries in the global economy through migration (namely, transfers of remittances and grants, transportation, tourism, telecommunication and nostalgic trade). The share of these factors in national income in some cases exceeds half a country's GDP.

The current effects of migration through family remittances and other forms of migrant capital pose an important policy option linking financial opportunities in rural Latin America. Specifically, the demand for financial services by remittance receiving households intersects with micro-finance institutions and rural sector development.

Remittances and the Rural Sector

Emigration from rural Latin America represents an obstacle in so far as those migrating are people with more skills and abilities. Although emigration affects agricultural production in a decline in the available labor force, the influx of remittances helps to compensate for the adverse effect on agricultural productivity by generating a demand for goods, which in turn has a multiplier effect on the local economy.

A significant flow of remittances go to rural areas in countries like Mexico, El Salvador, the Dominican Republic, Haiti, and Nicaragua. The top 10 remittance-receiving states in Mexico come from a combination of urban and rural settings—Guanajuato, Jalisco, Michoacán, San Luis Potosí, Guerrero, Zacatecas, el Distrito Federal, el Estado de México, Chihauhua, and Durango—and receive over two-thirds of all remittances sent to Mexico.

Moreover, remittances play a larger role in rural Mexican economies than in urban ones. In 1996, 10 percent of all rural households reported receiving remittances while less than four percent of urban households reported receiving remittances.

In El Salvador, the departments which lose the highest percentages of their populations to migration—San Vicente, Cabañas, Chalatenango, Morazán, La Unión, and Sonsonante—are the most ecologically deteriorated states, they have the lowest standards of living, and lack significant infrastructure. About 40 percent of remittances receiving households are in the rural sector.

In Nicaragua, people predominantly migrate to the United States and Costa Rica. Four in 10 people living in Managua report having a relative abroad, against 35 percent in the Pacific region and 29 percent from North-Central Nicaragua, with predominantly rural areas. The majority of those reporting outside Managua had relatives working in Costa Rica, whereas those living in Managua had relatives predominantly migrating to the United States.

In the rural sector, a portion of remittances are utilized to purchase land. Mexican remittance recipients in mostly rural areas typically spent more money on machinery and other equipment than their counterparts in higher-density populations.

Savings Mobilization and Remittances

As foreign savings, remittances are influencing not only spending but also investment behavior. A portion of remittances is saved or invested on education, health, or wealth generation. Therefore, remittances are already connected to savings mobilization in many Latin American countries.

Remittance-receiving households not only save a portion of their money, but also play an investment and insurance function. In the case of investment, immigrants send money back home with the specific purpose of procuring an investment opportunity. Immigrants buy land, materials to work the land, or seed to plant.

A recent study in Mexico showed that remittances were responsible for 27 percent of the capital invested in micro-enterprises in Mexico, and 40 percent of the capital in the major remittance-receiving areas of the country (Woodruf and Zenteno 2001).

Other studies have shown that immigrant remittances also operate as a form of insurance to protect before future uncertainties. Susan Pozo argues that when remittances continue an incremental trend, although immigrants face income risks, the money is sent home "to purchase assets" as a form of precautionary savings (Pozo and Amuedo 2002).

Pozo stresses that "older migrants, female migrants, migrants with a greater fraction of family members working for pay, migrants who came accompanied by friends/family to the United States, and migrants with greater educational attainment are more likely to remit for asset accumulation."

Remittances also have a positive effect in the rural sector when they alleviate the restrictions that limit local production due to the creation of employment.

Most of these connections are spontaneous and often occur under conditions of incomplete information for the entrepreneur about affordable lending opportunities. Within this context, micro-finance institutions and credit unions are poised to play a key role in bringing financial services to an already existing demand for economic transactions.

Financial Democracy

Of significant importance for savings mobilization are credit union operations in the rural sector. One of the major constraints in development has been the lack of adequate credit to individuals in rural areas. The end result has been that the average citizen, and especially lower-income cohorts, have not had access to financial services, nor have banks relied on them to draw assets.

A recent study on Latin America's income inequality points to the deficiencies of banking institutions as a major source of inequality. "Financial markets are underdeveloped in Latin America and the blame goes beyond the region's history of inflation and financial instability. Weak institutions to support credit markets are also at fault" (IPES 1999).

Less than five percent of established small business entrepreneurs receive loans from commercial banks. Moreover, credit unions and micro-finance institutions that supply a demand for financial services to those outside the preference of commercial banks do not have a large loan portfolio. Such portfolios are one percent or less of what commercial banks hold in Latin America (IPES 1999, 164-165).

Financial institutions have traditionally placed a high risk on lending and investing in agriculture and the rural sector. With a recurrent flow of remittances, households have posed a demand for financial services that is not supplied by commercial banks. However, local savings mobilization intersects between remittances and local development.

In the rural sector, remittances not only take longer to arrive, but recipient households spend time picking up the money in other cities, which sometimes, if not often, are one hour from the hometown. Costs thus increase for households.

One solution to this situation is the use of financial institutions already operating in the areas, such as micro-finance institutions and credit unions.

The participation of alternative financial institutions throughout remittance receiving areas, such as community banks, savings and credit cooperatives and micro-finance businesses, is critical and becomes a form of financial democracy.

These institutions provide access and outreach to lower-income communities and isolated rural areas that large commercial banks have traditionally ignored.

In the Dominican Republic, many credit union branches operate in rural areas and sectors less served by banks. Moreover, cooperatives also offer a more welcoming environment and approach for remittance recipients, as they seem to be less "formal" than banks. One example is San Jose de las Matas cooperative, which transferred half a million dollars in remittances during a 12-month period in 2001. Since using the cooperative service, many remittance recipients have themselves become members.

Because of the success in this and other cooperatives, and the existence of remittances going to the rural sector, the Association of Cooperatives in the Dominican Republic is expanding its services by providing ATMs to the cooperative network while setting up a more effective and inexpensive money transfer system than the one currently offered by remittance agencies.

In Mexico, the micro-bank in the Mixteca region in Oaxaca, Xuu Ñuu Ndavi (Money of the Poor People) was created with help from immigrants. Of the $170,000 received in remittances after the first year of operation, the micro-bank's 168 members (83 of whom are women) accumulated $160,000 in savings.

El Salvador's federation of credit unions, FEDECACES, has an estimated 80 percent of affiliated credit unions located outside of San Salvador. Once the cooperatives became involved in money transfers from the U.S., the flow of money rose to $22 million in 2002 from less than $2 million in 2001, with a corresponding significant increase in membership that incorporated recipients into formerly inaccessible financial services.

Looking Forward

The link between remittances and development is growing stronger as multiple players connect in a broader web of relationships that move from social to financial interactions. As these interactions consolidate, the opportunities to improve the quality of life for many in rural areas expand. Governments, donors, foundations, and migrant groups must join in partnerships to further advance social change by identifying projects that add value to remittances.

Sources

IPES 1998/1999: Facing Up to Inequality in Latin America Washington: IADB, 1999.

Pozo, Susan and Catalina Amuedo-Dorantes, "Remittances as Insurance: Evidence from Mexican Migrants", July 24th, 2002. Paper presented at the Norteast Universities Development Consortium Conference, Williams College.

Woodruf, Christopher, and Rene Zenteno, Remittances and Micro-enterprises in Mexico, unpublished manuscript, 2001.