Why are Mexicans sending less money back home?

PH-remittances-11-2013-1-01Migration is a much debated subject around the world. We are investigating the impacts that migration on countries, migrants, business and more. Read more on Migration Matters.

The 2008 financial crisis slowed down the breakneck growth of remittances in Latin America. With the world recovering, remittances are once again growing across Latin America, except in Mexico.

The amount of money sent home by migrants working somewhere else roughly tripled between 2000 and 2006 from about $10 billion to $30 billion, in 15 Latin American Countries. Their total and trend was roughly the same as that of Mexico. Both then saw rates fall as a result of the global financial crisis. However, Mexico has not rebounded, while the other countries are again heading in an upward direction.

Given the fact that remittances far exceed the amount of money spent on foreign aid, it is important to know what is going on. Money sent home is an important source of income for households around the world. The commonly held idea is that reducing transaction costs will allow people to send more money home and for the recipients to have more to spend.

Maybe that’s wrong.

 

Reuters columnist Felix Salmon poses a theory as to what is happening in Mexico:

[W]hen the cost of remittances is high, the providers of those remittances have every incentive to make it as easy as possible for as many people as possible to remit as much money as possible back home. And when the cost of remittances falls, those incentives weaken, and it’s easier to sever ties to merchants and generally discourage the use of services which you formally pushed aggressively. Maybe remittance services are sold, just as much as they are simply purchased. As a result, when they’re cheaper, and not sold as hard, the migrants end up spending more money where it’s earned, and sending less back home.

In other words, he thinks that banks will promote activities that will make them more money. Tiny interest rates on remittances are not much for business, hence no reason to promote their use. He differs from analysis by Pew Research, who cited the jobs lost due to the burst of the US housing bubble coupled with a flattening growth of Mexican migrants in the US.

Timothy Ogden seemingly agrees with Pew, but for different reasons. The Managing Director of the Financial Access Initiative, based out of NYU, says the wrong question is being asked, in a blog post responding to Salmon.

When a household decreases spending, our first instinct is not to suspect that advertisers are failing to properly stimulate demand. In the case of remittances, migrant breadwinners are generally going to transmit as much money as they can through the most convenient and effective mechanism they can.

Ogden recently proposed, alongside Michael Clemens of the Center for Global Development, that remittances need to be seen differently. They argue that remittances are not something sold to a migrant worker, it is a part of his or her everyday financial behavior. The sending home of money is just like taking home a paycheck or getting a direct deposit. If rates of remittances are falling, something else is happening.

“If remittances to Mexico are falling we should begin looking at what migrants are earning, not the behavior of large providers of financial services,” says Ogden.

He shows that there is evidence that remittances increase when costs fall. A study on US to El Salvador remittances and one on the Philippines give reason to believe that Mexico should see remittances increasing, not falling. He also cites research showing that people who are not already sending money home are not more likely to do so after hearing a about a sick family member.

“It’s hard to imagine any bank marketing campaign being more powerful in generating remittances than word that someone at home needs urgent medical care,” challenges Ogden.

The lesson here is that banks and even researchers are not sure what the poor need when it comes to banking. Divergent understandings of the exact same problem illustrates the fact that viewpoints are not aligned. However, understanding the reasons and uses for remittances are invaluable from the perspective of offering services to migrants and to understanding what motivates and incentivizes their actions.

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About Author

Tom Murphy

Tom Murphy is a New Hampshire-based reporter for Humanosphere. Before joining Humanosphere, Tom founded and edited the aid blog A View From the Cave. His work has appeared in Foreign Policy, the Huffington Post, the Guardian, GlobalPost and Christian Science Monitor. He tweets at @viewfromthecave. Contact him at tmurphy[at]humanosphere.org.