The Untold Story: The Untold Story: Remmitances, Migration Remmitances, Migration

and BP in Méxicoand BP in México

Jesús Muñoz* Jesús Muñoz*

* Jesús Muñoz holds a PhD in Economics from the University of Lancaster, United Kingdom. He has been a full time researcher in Universidad Michoacana de San Nicolás de Hidalgo in Morelia, Mexico, the world capital of remiittances.

AbstractAbstractThis paper describes the growing relevance of Mexican migration of Mexican citizens into the US and especially that of remittances in Mexico, particularly during the most recent years. Remittances have had a positive effect in the Mexican economy. But this is only half of the story as it is immediatley described.

As description is not a formal part of science, an

explanation is hereby conducted of the causes,

interactions and consequences of remittances on the

Mexican economy – based on field studies (surveys). In

addition some further suggestions are provided about

the perception of remittances in the long term.

The role of remittancesThe role of remittances

Remittances, the main by-product of migration according to the Mexican view, are shock absorbers, as theye are reghsietres in the Current Account (CA) of the Balance of Payments (BP), according to the current classification scheme of Banco de México.

Remittances, hence play a key role in foreign exchange stabilisation o even in the prevention of currency crises in Mexico, as they are considered as net exports. This is of course due to BP must be balanced in order to achieve foreign exchange stability in developing countries.

Remittances, hence play a key role in foreign exchange stabilisation o even in the prevention of currency crises in Mexico, as they are considered as net exports. This is of course due to BP must be balanced in order to achieve foreign exchange stability in developing countries.

Remittances and BP in MexicoRemittances and BP in Mexico

BP = CA + KA + R

CA: Revenues Non factorial services

Travellers Factorial services Interests, Other Transfers Family remittances Other.

The stabiliser role of remittancesThe stabiliser role of remittances

The Mexican CA has registered deficits since 1995, but remittances (about 92% out of transferencias) have hampered this effect. Remittances actually reduce pressures on reserves and supplement the stabiliser short-term effects of deflationary policies on inflation, interest rates and the exchange rate. This has been happening during the last two years.

The CA deficit in MexicoThe CA deficit in MexicoThe Mexican CA registers deficits as imports are greater than exports, since the latter lack progress in terms of both diversification and competitiveness.

Portfolio capital flows used to be the shock absorber in Mexico, being as they are a part of KA. This is very common in free exchange regimes as that of Mexico since 1995, which has experienced however some interventions and where reserves play a negligible role.

Remittances in MexicoRemittances in Mexico

Mexico is the main receiver of remittances in the world and they are the second source of revenues form abroad for this country (after oil revenues, which represent about 81% of GDP). Although remittances only represent 1.9% of GDP. Their impact is hence qualitative.

Michoacán is the main Mexican entity in

terms of migration, and its BP is in

permanant surplus.

We export people who send $ We export people who send $ homehome

The relevance of remittances has been growing at a growing rate

during the most recent years, especially since 1995, more than other items in CC or

those of KA . This is due, of course, tothat in a free exchange regime reserves

are irrelevant (Graph 6).

Remittances during the most Remittances during the most recent yearsrecent years

Graph 1: Family Remmitances

0

500.000

1.000.000

1.500.000

2.000.000

2.500.000

3.000.000

3.500.000

4.000.000

1 4 7 10 13 16 19 22 25 28 31

Quarterly data: 1996-2003

Th

ou

san

ds o

f D

ollars

Graph 1: Family Remmitances

0

500.000

1.000.000

1.500.000

2.000.000

2.500.000

3.000.000

3.500.000

4.000.000

1 4 7 10 13 16 19 22 25 28 31

Quarterly data: 1996-2003

Th

ou

san

ds o

f D

ollars

Source: Banco de México, 2004

ExportsExports

Graph 2: Exports

0

10.000.000

20.000.000

30.000.000

40.000.000

50.000.000

1 4 7 10 13 16 19 22 25 28 31

Quarterly data: 1996-2003

Th

ou

san

ds o

f

Do

llars

Graph 2: Exports

0

10.000.000

20.000.000

30.000.000

40.000.000

50.000.000

1 4 7 10 13 16 19 22 25 28 31

Quarterly data: 1996-2003

Th

ou

san

ds o

f

Do

llars

Source: Banco de México, 2004

Comparisons: Exports vs.

Graph 3: % in Exports

-40

10

1 4 7 10 13 16 19 22 25 28 31

Q uarterly data: 1996-2003

%Graph 3: % in Exports

-40

10

1 4 7 10 13 16 19 22 25 28 31

Q uarterly data: 1996-2003

%

Remittances in figuresRemittances in figures

Graph 4: % in Remmitances

-40

-20

0

20

40

1 4 7 10 13 16 19 22 25 28 31

Q uarterly data: 1996-2003

%

Graph 4: % in Remmitances

-40

-20

0

20

40

1 4 7 10 13 16 19 22 25 28 31

Q uarterly data: 1996-2003

%

Stability in BPStability in BP

Graph 5: % in BP

-40

10

1 4 7 10 13 16 19 22 25 28 31

Q uarterly data: 1996-2003

%

Graph 5: % in BP

-40

10

1 4 7 10 13 16 19 22 25 28 31

Q uarterly data: 1996-2003

%

Remittances after the currency Remittances after the currency crisis of 1994crisis of 1994

Graph 6: Workers' remmitances

0

5000

10000

15000

20000

1 2 3 4 5 6 7 8 9 10

Yearly data: 1995-2004

Mil

lion

sof

Dol

lars

CausesCauses

MIGRATION IS DUE TO:

Human networks since 1890, and the treaties

In the 20s and 30s in wages: 8/1 the US and Mexico

Unemployment Empleos no deseadospor los estadounidenses

Crisis in the farming sector Financial crisis

Globalisation Low regional levels ofindustrialisation

Remittances are obviously the most straightforward consequence of migration

Providing information and protection, eliminating entry barriers and transaction costs

Macroeconomic consequencesMacroeconomic consequences

VISION 1: Remittances possessseparate causes and consequences,

having a negative impact on national income.They generate moral hazard, due to theexistence of asimmetry and imperfect

information in their markets (Ketkar, 2003).

Remittances and the financial Remittances and the financial systemsystem

VISION 2: An inefficient bankingsystem blocks the allocation of

remittances, so that they do not become intoinvestment. The banking system must be modified in order to solve this problem, where migration and

and remittances are a twin problem, reflecting development levels and the extent of economic

liberalización (Dimsky, 2003). This circle can become a virtous once the financial system achieves

someadvances.

The allocation of remittancesThe allocation of remittancesThe liberalisation of KA is at the heart of financial liberalisation, but may entail some risks. The securitisation of future flows may increase investment and available funds in international capital markets for Mexico. The consolidation of financial supermarkets would contribute to this goal.

This would

contribute

to the

allocation

of remittance

s. So far

remittance

s in Mexico

have only

enhanced

consumpti

on rather

than

investment

(either

productive

or financial).

Positive impact of remittancesPositive impact of remittances

Initially, only bancarisation may increase the productive investment arising from remittances.

Remittances prevent eventual reductions of currencies and hence they

delay the impact of currency crisis. If they are usedefficiently they may enhance the development of

regional communities, especially those ofmigrants, for example in Michoacán,

Zacatecas or Guanajuato

Workers’ remittances in the Workers’ remittances in the worldworld

Table 1

YearsMillions of

dollars

1970-74 1,456

1975-79 11,958

1980-84 23,352

1985-89 25,549

1990-94 42,967

1995-98 59,402Source: World Bank, 2005

Remittances by country of Remittances by country of destinationdestination

Table 2

Country % GDP

Líbano 34.8

El Salvador 5.9

Dominican R. 3.8

Honduras 2.1

México 1.9

Guatemala 1.8

Costa Rica 1.2

India 1.1

Perú 0.6

Source: World Bank, 2005

Remittances by country of Remittances by country of destinationdestinationTable 3

Mill. Dollars % GDP

México 13,266 1.9

India 8,317 1.8

Spain 3,958 0.5

Paquistan 3,554 5.7

Morocco 3,261 9.6

Portugal 3,224 2.4

Egypt 2,983 3.4

Bangladesh 2,848 6 Source: World Bank, 2005

Negative impact of remittancesNegative impact of remittances

Remittances must bring about negative growth. Their apparent positive short term impact differ from their long term effects. An economy sending labour abroad may lose dynamism in certain regions, for instance Huandacareo is a ghost town a well as its neighbouring regions.

The analysis of remittances must not be either temporary or superficial.

Negative consequences of Negative consequences of remittancesremittances

Remittances must only be a temporary macroeconomic solution. Reliance on remittances as a capital item may reduce incentives for reducing the deficit between imports and exports or even for enhancing both direct and portfolio investment.

In microeconomic terms, a damage may be caused on competitiveness, as it must grow in Mexican exports of goods, rather than in people expelling. There is a danger of a vicious circle.

Remittances as investmentRemittances as investment

The communities of origin must benefit from remittances in the long term, rather than creating ghost towns. This can only be achieved through productive investment. In addition, the attitude of he US towards migrants may become harsher in the medium term, especially in future governments.

Remittances are a countercyclical flow

(as portfolio inverstment) which

temporary nature differs from that of

FDI.

Socioeconomic consequences of Socioeconomic consequences of migrationmigration

Remittances obvioulsy impact employment levels, but may also enhance leisure or over reliance on them in the communities of origin. This kind of problems is teh result of surveys and field studies about the role of remittances in certain rural and urban communities in Michoacán.

A sloution may be the liebralisation of the labour market in Mexico and the US. Actualy NAFTA has proven to have a negative impact on the Mexican farming sector, as it is demonstrated by the growing migration levels. Remittances levels are larger in both cities or communities with low (dual) development levels, in Zacatecas and Guanajuato, for example.

ConclusionsConclusionsUnder low income levels, migration overshoots, but must Under low income levels, migration overshoots, but must be reduced in the long term through the enhancement of be reduced in the long term through the enhancement of investment (in the Keynesian sense).investment (in the Keynesian sense).

Rather than enhancing Rather than enhancing remittances, employment remittances, employment must grow in a systematic must grow in a systematic fashion.fashion.

Thus, remittances have an impact upon GDP, consumption, Thus, remittances have an impact upon GDP, consumption, employment, inflation, exchange rate and competitiveness. employment, inflation, exchange rate and competitiveness.

ConclusionsConclusions

Only if remittances have a larger impact upon financial Only if remittances have a larger impact upon financial investment may instead be considered as a part of the investment may instead be considered as a part of the capital account. As a consequence their role in the capital account. As a consequence their role in the Mexican economy would be superior: as a shock Mexican economy would be superior: as a shock amplifier in the long term.amplifier in the long term.

An unexplored topic is the identification of the paths of An unexplored topic is the identification of the paths of existing workers’ networks. Examples are that from existing workers’ networks. Examples are that from Michoacanos to Los Angeles, Texas and Chicago, or that Michoacanos to Los Angeles, Texas and Chicago, or that from Oaxaquenos and Poblanos to New York, as well as the from Oaxaquenos and Poblanos to New York, as well as the current growing migration levels to North Carolina.current growing migration levels to North Carolina.

NOTE: Bibliography about field studies and surveys as well as that on specific problem of remittances in México are included in the main paper.