There have always been economic migrants – people who swap regions, countries, even continents, to find better wages to pay for a better life. One out of every ten people on the planet either sends or receives money from abroad. And unlike all other forms of financial aid that travel into developing countries, remittances go directly to poor people. Worldwide it’s estimated that amounts to a staggering two hundred billion dollars a year. What impact can it have in the fight against poverty? To find out more, Life has travelled to the United States and El Salvador to uncover this hidden economy.
Don Terry, of the Inter-American Development Bank, explains: ‘Remittances have been around for generations upon generations. But they are accelerating. People move north by the millions and money moves south by the billions’¦ It turns out that remittances to Latin America are more than all of the foreign direct investment and all the official development assistance, all the foreign aid combined.’
Because of the huge sums involved, the way this money is sent from A to B is being revolutionised. Not surprisingly, the banking community is starting to show an interest. As a result, the days of smuggling dollars home may soon be over together with the expense of using transfer agents.
More than 1 million come from El Salvador, a country hard hit by tragedy in the last 25 years. First a bitter 12-year civil war, which ended in 1992, claimed the lives of 75,000. Then came a series of natural disasters. Hurricane Mitch in 1998 followed by a number of earthquakes in 2001. Each has contributed to the country’s poverty’¦ and sent tens of thousands in search of work abroad. As a consequence, remittances leapt from less than a billion dollars in 1994 to $2.5 billion dollars in 2004 – roughly 17.1 per cent of GDP. Today the exodus of workers still continues, and the government has created a special ministerial office for them.
The journey north is often difficult and dangerous, and their troubles are not over when they get there, as Margarita Escobar, Deputy Minister for Salvadorans Abroad explains: “If they manage to achieve this, they have other problems, such as wage levels, labour rights, social security coverage, all the problems of being undocumented that affects migrants to their core.”
In rural areas like Tronalagua, up to a third of the people depend on money from abroad. Julio and Anna Cortez are among them. Each month they get $200 dollars from their elder children in Washington. It’s made a world of difference to Julio and Anna and their remaining children.
Julio Cortez explains how remittances have changed their lives: ‘Here’s the kitchen. Over there you have the utensils’¦. The telephone to call my children. Here is the living room and this is the refrigerator. Here on the entertainment centre, is the television. All of this with remittances.’
Almost four thousand miles away, suburban Washington, USA, some of Anna and Julio’s older children live and work. They arrived here illegally. First Elmer 1998, Hector in 1999 and finally Dalila in 2001. But they are lucky. They may have arrived illegally but they have since been granted temporary protected status – TPS – a kind of amnesty. It was introduced by the US government in 1990 to help people who can’t return home because of conflict or natural disasters. So far it’s been granted to nearly 350,000 Latin Americans. But the permit is temporary. If Dalila and her brothers can return to El Salvador, they would not be allowed back into the United States.
Dalila has heard on the news that those with temporary permits might be given residency but they didn’t say when. She might prefer to live in El Salvador, but there is still a shortage of jobs and there’s a big gap between rich and poor. In 1999 the richest fifth of the population received 45 per cent of the wealth – the poorest fifth just 5.6 per cent.
Margarita Escobar worries about the social effects of migration: “Another effect of migration is the disintegration of the nuclear family. This has had an enormous social impact.”
Increasingly, migrant groups in the US have formed what they call hometown associations, which raise extra cash to send home for community projects. In 2004, they sent back more than $2 million dollars to El Salvador.
Francesco Castro of the United Salvadoran Communities explains: ‘We’ve been building churches, a Red Cross building. We’ve been driving ambulances from here. The last project we had was a reforestation project because that’s very critical in my country right now. We raise money constantly.’
Some communities get enough money so they don’t need to rely on the government to fund local projects. Don Terry, of the Inter-American Development Bank, says:
‘The governments themselves in these developing countries absolutely need to be doing a much better job than they have been doing over the past 25 years. I think it is important to underscore that remittances are not a substitute for sound economic policies at home and remittances are certainly not a substitute for foreign assistance.’
But the El Salvador government is already working with international development organizations’¦ hoping to encourage those who receive remittances to use the money more productively. With assistance from the International Fund for Agricultural Development (IFAD), Julio and Anna have invested some money back into their farm. They used to grow maize and beans, but just for their own consumption. Now they grow fruit trees and rear more animals, all which earn them a profit of $200 dollars a month.
Having opportunities to invest their remittances has helped pull the Cortez family further from poverty. But what about the rest of the community’¦is there a way to spread the benefits? One answer may be to change how remittances are sent. The old methods were well known and dangerous. ‘Mules’ or money smugglers would regularly carry thousands of dollars across the borders – and still do. Money transfer agents are a much more secure route.
Now with the scent of serious money, some banks are getting involved. And that could lead to a reduction in costs, as well as a change in how remittances are transferred.
Katie Klingensmith, of the US Treasury Department, points out: ‘In the US we have seen banks increasingly become interested in this market. It’s partly because they understand that many immigrants in this country stay and become bank customers. Remittances are often called a loss leader. They might be offering five, ten dollar, free remittance service. It’s not free for a bank to offer a remittance service but they use it as a way to get immigrants in through the door.’
To poor people who receive remittances, banking can give them a new financial possibilities. For example, they could get credit to start a business. Anna and Julio Cortez do manage toA make some savings – between $10 and $20 dollars a month. If they – and people like them – put those savings into a banks and credit unions rather than under their mattress, it’s estimated it would add another 250 million dollars to the country’s economy.
Rosemary Vargas-Lundius of IFAD adds: ‘By encouraging financial institutions to enter into the business of remittances, even families that aren’t receiving remittances benefit because they will have a financial institution nearby that can provide them with services which they didn’t have access to before.’
Aiding the flow of money to poor rural areas may be the most important effect in the current transformation of the remittance market. But as remittances increase, and with better ways of harnessing that wealth, perhaps one day the real opportunities will be found in El Salvador. Until then, the exodus of workers is bound to continue.
The Inter-American Development Bank website has pages on Migrant remittances as a development tool. See also Women’s World Banking: Microfinance and Remittances, and the World Bank’s pages on International Migration and Remittances.
The World Bank has also just published a new report on International Migration, Remittances and the Brain Drain. For the website of Inter-American Dialogue, Manuel Orozco’s organisation, go here.
On El Salvador, read World Hunger Notes article on remittances and poverty in El Salvador, and the TravelDocs page on El Salvador’s economy.
The International Fund for Agricultural Development (IFAD) has published a paper on Remittances and Rural Development, and a Factsheet on Remittances.