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Alejandro I. Canales Remittances and development in Mexico. A critical overview from the macro-economics perspective Papeles de Población, vol. 12, núm. 50, octubre-diciembre, 2006, pp. 171196, Universidad Autónoma del Estado de México México Available in: http://www.redalyc.org/articulo.oa?id=11205011

Papeles de Población, ISSN (Printed Version): 1405-7425 [email protected] Universidad Autónoma del Estado de México México

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Remittances and development in Mexico. A critical overview from the macro-economics perspective Alejandro I. Canales Universidad de Guadalajara Abstract This job presents statistical information with the intention of documenting a critical vision on the remittances issues. It is analyzed from a macro-economical dimension the role and meaning of the remittances in the recent economical growth and development in Mexico, particularly in the relation to the remittances’ volume and economical behavior, in relation to other basic macro-economical variables. The hypothesis are confirmed, that in macro-economical terms, the remittances fundamentally constitute a familiar transference funds which have a scarce or null impact on the growth capability and economical development; besides, in Mexico the remittances have not followed a linear and growing tendency. So in moments of stability and economical growth, remittances have been relatively stable, whereas they are significantly increased in the economical crisis periods. Key words: remittances, familiar transferences, economical development, savings, productive investment, Mexico.

Introduction

Resumen Remesas y desarrollo en México. Una visión crítica desde la macroeconomía Este trabajo presenta información estadística con la intención de documentar una visión crítica en torno al tema de las remesas. Se analiza desde una dimensión macroeconómica el papel y significado de las remesas en la dinámica del crecimiento y desarrollo económico recientes en México, particularmente en lo tocante al volumen y comportamiento económico de las remesas, en relación con otras variables macroeconómicas básicas. Se corroboran las hipótesis de que, en términos macroeconómicos, las remesas constituyen fundamentalmente un fondo de transferencias familiares que tienen un escaso o nulo impacto en la capacidad de crecimiento y desarrollo económicos; además, en México las remesas no han seguido una tendencia lineal y creciente. Antes bien, en momentos de estabilidad y crecimiento económico, las remesas se han mantenido relativamente estables, mientras que se incrementan significativamente en los periodos de crisis económica. Palabras clave: remesas, transferencias familiares, desarrollo económico, ahorro, inversión productiva, México.

T

he remittances sent to the country by the Mexican migrants increased to slightly more than 20 thousand million dollars in 2005, according to the Bank of Mexico’s figures. This amount represents an increment of more than 100 percent in respect to this variable’s value only five years ago. Mexico is not the only country to experience this absolute increment in the volume of remittances. As a matter of fact, it is estimated that in Latin America

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Remittances and development in Mexico. A critical overview... A. Canales

remittances increased to almost 52 thousand million dollars in 2005, a figure 5 times higher to that registered ten years ago (Economic Commission for Latin America, 2006). These volumes reached in recent years have awaken a great political and social interest because of their potential benefits as financing source for local and regional development. In this context, it comes as no surprise that, different development supportive international organizations (World Bank, International Monetary Fund, Inter-American Development Bank, among others) have paid special attention to remittances as an instrument capable of contributing to poverty reduction and to develop the countries where the international migration is originated. Facing this institutional argument on migration and remittances, in the last years there has been a critical perspective that restates the terms in which the relationship remittances-development has been formulated. In particular, it is stressed this approaches suffer from some conceptual and methodological deficiencies, at the time of being supported on hypotheses and analysis’ models which have not been properly contrasted, specially in relation to remittances’ benefits and impacts on development promotion and poverty reduction and social inequity (ECLA, 2006; Cortina et al. 2004; Binford, 2002; Canales and Montiel, 2004). Considering the aforementioned, this work’s objective is to present statistical information which allows documenting a critical vision on remittances. For this, we will take the Mexican case as a reference that since 2002 is the main remittances’ receptor country worldwide. In particular, we are interested in discussing and analyzing, from a macro-economic dimension, the meaning and role in the recent economic growth and development’s dynamic in Mexico. Generally, this is an absent dimension in the reflection and analysis of the remittances’ impact, even though it is fundamental to evaluate their economic impacts. In this sense, we are interested in analyzing the remittances’ volume and economic behavior in function of other basic macro-economic variables’ volume and behavior In this respect, our subjacent hypothesis is that, in macro-economic terms, remittances fundamentally constitute a family transfer fund, and as such, have a scarce or null impact on the growth capacity and economic development. On the one side, their volume is not even remotely sufficient to impulse a self sustained economic growth, at the time that on the other side, the resources are directed to homes in vulnerability, marginalization and poverty conditions, and so they are fundamentally used for financing those homes’ consumption, being

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marginal and insignificant the remittances’ volume and proportion destined to productive investment. Well now, if the remittances are family transfers from abroad, then its behavior is expected to be alike to that of an anti-cyclic variable, this is, it fundamentally responds to the Mexican economy’s crises and recessive cycles. In this sense, we can propose a more specific work hypothesis: in Mexico, remittances have not followed a linear and increasing tendency. What is more, in moments of stability and economic growth, remittances have been relatively stable, whereas they are significantly increased in the economic crisis periods. In this work we present macroeconomic statistical information which allows corroborating these hypotheses, at the time it helps us dimension and elucidate the remittances’ economic meaning. In order to do so, we have divided this work into three large sections. In the first one, we briefly present the main arguments that cause the debate on remittances’ role and potentiality. In the second section we present statistical information which allows us to dimension the Mexican remittances’ macroeconomic meaning. Finally, in the third section we present an analysis on the macroeconomic determinants of the remittances in Mexico, supported by an econometric model of time series.

Remittances and development Official Organisms argument From the second half of the 1990’s decade, from development supportive international organizations closer attention has been paid to the remittances’ flows, stressing their possible impact on the development of the countries where migration is generated. A good example of these expectations is constituted by the Plan of Action, subscribed by the B8 in the Sea Island Summit in 2004: Applying the power of entrepreneurship to the eradication of poverty, where a specific section is dedicated to remittances, paying attention to their effect in the families wellbeing and the small enterprises’ creation in order to impulse the development in the communities where the migration is originated. It is worth mentioning this interest in the role of remittances in the families’ wellbeing levels and as a local development factor comes out in a context characterized by the structural adjustment policies’ failure and by the liberalization of the commercial exchanges when it comes to improve the life’s conditions of most of the population in developing countries.

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In this framework, and in front of the large volume remittances have gained, it is stated, they altogether with other social capitals (social and family networks, family and communal work, migrants organizations, among others), are resources on which the poor rely, and if well used, would allow them to overcome their social vulnerability and economic precariousness conditions, even if the structural environment’s conditions where they live are not favorable at all.1 In this way, among the national governments and international organisms’ strategic development lines, in a distinguishable place appears the need to orient the remittances towards the creation of small and medium-sized enterprises as well as towards another kind of expenses that foment the formation of productive and human capital (Ratha, 2003). In the case of Mexico, this thesis is already part of the official government programs, where self employment and family businesses formation (changarros, Spanish for small informal family business) financed with remittances are offered as alternatives to unemployment and poverty.2 The formulation of this sort of directives is inserted into the new development approaches that appeared in the 1990’s decade. From these approaches the State’s capacity to be the protagonist of an economic and social development process is questioned, and in the view of this they stated as alternative the commercial interchanges’ liberalization and the economic regulations’ adjustment. According to this development approach, the liberalization in the economic relations would also benefit the poorest population sectors, for it would allow them to develop their own capacities, thus far constrained under the state’s control of the economy and the persistence of clientelar networks that, in return for guaranteeing the survival of these social strata, kept alive, however, their poverty and social vulnerability situation.3 In this context, the new development policies impelled in the recent decade are oriented toward poor people to get an advantage in this new economic environment, using in order to achieve this, the diverse resources they have. 1 This proposal is based on the asset/vulnerability approach developed by the World Bank, and according to it this vulnerability situation could be counteracted with an adequate management of the social, economic, cultural, political and demographic assets that poor people have, independently from their scarce incomes, and the conditions the structural context imposes. For more detail, see Moser, 1998. For a critical vision, see Rodríguez, 2001. 2 This is the case, for instance, of the 2x1 and 3x1 programs, through which it was sought to foment productive investment and businesses formation among the migrants or their relatives. About these programs’ reaches, see Delgado, Wise et al., 2004; Torres, 2001; Moctezuma, 2000. 3 We have thoroughly summarized the argumentations expressed in favor of this program, only distinguishing some of its element. For a wider vision of this approach, and considering Mexico’s case, see the Inform on Poverty in Mexico, by the World Bank in 2004. For a critical vision of this approach, see Boltvinik, 2005.

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Differently from the assistance character impregnated in the previous poverty combat policies, this new approach moves the attention axis to the promotion of a rightful poor people’s assets and resources management so that they face and overcome their poverty and vulnerability situation. Measures such as the empowerment, self employment, and the use of the poor people’s human capital would constitute privileged mechanisms to solve their vulnerability situation. According to this approach, the poor can be the protagonists of the development process since they have the necessary resources for such goal, among these; the remittances. In any case, they only need to learn to use them and manage them correctly. In this way, four axis or levels are distinguished, from which the remittances could favor the receiving families’ wellbeing, as well as promote their communities development.

The role of remittances in productive investment Diverse scholars’ studies have documented different examples where the remittances have contributed the financing of productive investments (especially in rural spheres), thus promoting the local development by means of dynamic industries, inserted into the regional economic circuits.4 Based on these findings policies of fomentation and support to migrants’ productive investment have been impelled. Such is the case for the 2x1 and 3x1 programs, where for each dollar the migrant gives to a productive project, the State, by means of diverse local, state and federal instances, gives another two or three dollars. These types of programs have been consolidated in the last decade, especially in the Mexican great migratory tradition regions, as well as in Central America and the Caribbean (Torres, 2001; ECLA, 2000; Moctezuma, 2000).

4

In this respect, see Durand’s works (1994), on the shoes production in San Francisco del Ricon, Guanajuato; Jones’ (1995), on peach production in Jeréz, Zacatecas; as well as the application of econometric models which Durand, Parrado and Massey (1996) have used for estimating the remittances’ investment levels in local spheres. In other geographical contexts, Russell (1992) presents similar examples for the intensive agriculture case in high-migration communities from Sahel, Turkey and Zambia.

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Remittances and social inequity It is widely accepted that remittances contribute to improve life conditions and percipient population wellbeing, and so, to reduce poverty incidence (Jones, 1998). On the one side, the remittances’ volume largely surpasses the income level that could be reached in any other economic or productive local or regional activity. On the other side, their effectiveness in reducing poverty is higher than in the case of any other kind of transfer, for they flow directly to those who use them without passing chieftain or bureaucratic filters (Durand et al., 1996). Finally, and based on probabilistic models, other authors have estimated that remittances usually have a positive impact on the income distribution, especially at regional and local levels (Taylor, 1992; Djajiæ, 1998). In this way, It is affirmed that remittances, above all kinds of transfer, have a stressed progressive aspect in terms of income distribution, specially in the case of Mexico, where the most benefited by them are the rural homes and those in poverty situation (World Bank, 2004).

Remittances and macroeconomic stability Considering the volume reached by the remittances, from diverse official organisms it is also stressed the remittances’ contribution to macroeconomic stability of the countries where migration is originated. In particular, it is confirmed, in front of the traditional income sources, remittances show a higher dynamism and stability, which makes them a more reliable income that also permits affording crisis situations. In fact, the historical series show that in economic crisis times, when the foreign capital and national savings flee, the remittances, in return, were incremented (Ratha, 2003; Canales and Montiel, 2004). Such was Mexico’s case in 1995, Indonesia in 1997, Ecuador from 1999 or Argentina after 2001.

Remittances, bank enrolling process and poverty Another beneficial effect of remittances is that, in the case they are channeled through formal ways they can contribute the development and strengthening of the financial sector in the receptor country. Likewise, at the extent in which families perceive remittances through banking institutions, they could become

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clients from those institutions, gaining access to different credit and financing plans to consumption (housing, health, education, transport, etc.) as well as productive investment. Due to this, it comes as no surprise that from both spheres governmental and banking institutions, the migrants and their families’ enrolling process to a bank (bancarización in Spanish) is being promoted as a mechanism to facilitate, cheapen, and speed up the remittances’ sending.5

Migration and remittances: a critical overview From our perspective, we claim this argument that praises the remittances’ potential suffers from diverse conceptual and methodological deficiencies, at the same time that it is supported on hypotheses and analysis models which have not been duly contrasted to data and empirical evidence. In this way, we present a group of argumentations that, from a critical vision, contribute to restating the debate on the remittances-development relation, at least as this relation has been formulated in the international organisms’ argument. In the first place, the remittances are not a saving instrument, nor are the source for productive investment, but they constitute a salary fund that, as such, is mainly destined to consumption and home material reproduction (Canales, 2002). If we consider Mexican migration towards the United States is an eminently laboring process, then there is no doubt the income obtained by the migrants represents a salary fund, and as any other, tends to be used preferably to their families’ material reproduction. By this means they contribute to improve the migrants’ family life conditions and to counteract their impoverishment derived from the recurrent economic crisis and the neo-liberal policies’ effects of structural adjustment. The difference in respect to other family incomes lies only, in the migrants’ cases, in that this salary is channeled towards their families in the shape of international transfers. In the second place, diverse studies coincide in pointing out that remittances are basically destined to finance the material reproduction in the migrants’ homes, being a very low proportion destined to productive projects (Papail, 2002; Samuel, 2000). Likewise, even though they usually represent an important component of the percipient families’ income, their impact in poverty and social 5

An example of this is some United States’ banks policy that, when opening a savings account, banks take as a valid identification the consular register providede to the immigrants by the Mexican government. This has contributed to the bank enrolling process of a Mexican migrants’ large proportion, that some time ago, did not have the possibility to open a savings account in the United States.

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inequity reduction is rather limited, and it is reduced to very few cases (Paz et al., 2004; Martínez, 2003). That is due to that, even at an aggregate level, the remittances constitute a great magnitude volume, at a micro-social level, whereas, this volume is diluted into a large number of small remittances. As a matter of fact, according to the Bank of Mexico’s data, in 2004 the 17 thousand million dollars in remittances corresponded to more than 50 millions transfers, with just an average of 327 dollars per transfer. In this sense, the impact remittances can have in poverty reduction is circumscribed to what those 327 dollars can contribute to in each home, which is obviously, very limited. In the third place, even in those cases where remittances are destined to investment projects, these usually have little effect on local development since it is normally about small economic establishments, of local reach and marginally regional, with low employment generation and small investment amounts (Canales and Montiel, 2004; Papail, 2002; Ortiz, 1997). In fact, those supposed productive projects are located in the family survival strategies’ level rather than in that of market dynamics. In the fourth place, in relation to the remittances’ stabilizer role, we claim that the terms in which the World Bank and the International Monetary Fund have stated the issue, hide a fundamental fact. If remittances constitute indeed a micro-economic stabilizer of our countries, then it must be equally recognized that the very migrants are, with their remittances, the ones subsidizing the perverse effects of the structural adjustment policies, the very same adjustments performed because of these organisms’ indications. These facts implications force us to go beyond the purely economic aspect, broadening the debate to its political and ethical implications, in the terms it should be explicitly argued why the migrants should carry the costs of our economies’ restructuring, when their vulnerability and precariousness situation is generated by that opening to the global economy (ECLA, 2006). Finally, and from a different level, some authors also pay attention to the fact that the interest in the remittances’ economic impact and their determinants has caused the analysis drop of some other equally important dimensions (Guarnizo, 2003). In this way, it is worth mentioning the remittances’ sending is undoubtedly linked to the existence of transnational homes and communities, not only as a consequence from this phenomenon, but at the time they are also part of the formation process of such communities and homes (Delgado Wise et al., 2004). Actually, in other studies we have demonstrated how the remittances are one of the main mechanisms that make sure this communities’ time continuance

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(Canales, 2004). Because of that approaches that take into consideration this migration and remittances transnational dimension can be, at least, as rewarding as the economic character approaches, and they surely contribute to a better understanding and comprehension of their causes and consequences.

Migration and remittances in Mexico Macroeconomic dimension of the remittances in Mexico According to the Bank of Mexico’s estimations, the remittances have been tripled between 2000 and 2005, from an amount of almost 6.6 million dollars to more than 20 000 million in 2005. Because of their magnitude and time persistence, it can be affirmed that remittances constitute a macroeconomic variable of main importance which generates diverse positive effects in the Mexican economy. However, we sustain these optimistic stances suffer from conceptual and methodological deficiencies which echo as slants and distortions in their estimations of macroeconomic importance and so, in the analysis of their impacts in development promotion, macroeconomic stability and poverty reduction. In this way, we present statistical information that allows us question this supposed relative remittances’ importance. In order to do it we will analyze three aspects which give us the opportunity to dimension the remittances’ macroeconomic meaning that are: their quantitative importance in comparison to other macroeconomic variables, their role in resources generation, and finally, their cycles and tendencies in the last 25 years.

The macroeconomic importance of remittances A first distortion in the remittances’ impact analysis appears when it is intended to dimension the remittances’ global value in relation to diverse macroeconomic indicators. Traditionally, indicators directly linked to resources generation have been used as comparison indicators, such as oil exports, assembled products exports, direct foreign investment, among others. Even if this comparison is not incorrect in itself, the error lies in implicitly assuming that the remittances, being a source of money similar to the previous, would also have similar properties and macroeconomic effects.

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163 Remunerations workers

3.8%

7.0%

Private consumption

1.7%

3.7%

Gross Domestic Product

1.1%

2.6% 42%

75%

198%

175%

321%

Manufacturing Assembly Industry Remunerations Industry salaries salaries agriculture

20%

2004

2000

Source:Own estimations based on data from INEGI and Bank of Mexico.

0%

2%

4%

6%

8%

GRAPHIC 1 MEXICO 2000-2004. REMITTANCES AS PROPORTION OF SELECTED MACROECONOMIC INDICATORS

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In order to be precise, we would have to point out this comparisons give us a good idea of the remittances’ quantitative dimension, but never of their possible impacts and effects on the Mexican economy. In this way, in our case we prefer to use as indicators not only those related to resource generation but also some other which measure other aspects of the national economy, such as the national gross product, remunerations’ total value, the value of the remunerations generated by the assembly industry, consumption budget at home, among other. This indicator gives us a better idea of the impact of the remittances not only as source of money but also as a salary fund. As a matter of fact, although in absolute terms the remittances’ amount is high indeed, turning Mexico into the main perceiver at a global level, in relative terms the situation is rather ambiguous. On the one side, in 2004 the remittances’ total volume represented less than the 3 percent of the NGP’s value and less than the 4 percent of the private consumption’s value generated in Mexico in that same year. In other words, in spite of their great magnitude, remittances represent a very small contribution to Mexican economy as a whole; at the same time they contribute to finance a very little fraction of the homes’ private consumption.6 This data allow us to refute the widely known idea of the Mexican economy great dependency on this resource flow. However, in both cases, the remittances’ specific weight was, in 2004 more than twice of what it represented in the year 2000. i.e., even if it is about a variable with a low relative impact, its recent tendency and evolution stand out, they account of a specific weight more important by the day. Well now, if we consider that remittances shape a salary fund, and we compare it to the other laboring incomes, we will see on the contrary that remittances represent a resources flow comparable to and surpassing employment remunerations generated in diverse national economic sectors. Although at an aggregate level, remittances represented in 2004 a salary fund equivalent to seven percent of the total of remunerations received by the Mexican employed population, when we compare them to the value of the generated remunerations in strategic sectors, the situation is completely different.

6

This is due to the fact that in Mexico less than six percent of homes perceive remittances from abroad, so that their aggregate consumption contribution is limited to what this scarce 6 percent of Mexican homes give to private consumption. In other words, even though it is a large absolute volume, their influence at a macroeconomic level is relatively marginal. In the third section we present even more information on these and other aspects related to the remittances’ reception in Mexico.

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Actually, in 2004 the remittances represented a salary fund equivalent to a 42 percent of the remunerations received by the workers in the manufacturing industry, doubling their relation in respect to the year 2000. Likewise, remittances represented a salary fund that was almost as twice as much as the total of remunerations generated by the exporting assembly industry in 2004; this proportion is 2.5 times superior to that of the year 2000. This last comparison is highly relevant, for it indicates that in terms of direct income generation for homes, remittances are not only much more important those generated by the most dynamic economic sectors, but also shows a highly superior dynamism. Finally, remittances represented in 2004 a salary fund three times the volume of the remunerations generated into the farming and natural resources sector. This datum is also highly relevant, for we must not forget in Mexico almost two third parts of the receiver homes are of a rural origin.

Remittances’ role in the generation of foreign currency It is usually pointed out that due to its magnitude that remittances frequently constitute an irreplaceable income source for the country, contributing to keep the necessary external macroeconomic equilibriums. However, normally it is never mentioned that this happens in the wider context of the Mexican external commerce structure transformation. As a matter of fact, in 1990 oil constituted the main resources provider in Mexico. The oil exports those years represented a similar value to that of the assembly industry, tourism, direct foreign investment and the remittances altogether. In 2004, on the contrary, even when the oil is in the first place as income generation source, outstanding also is the importance the direct foreign investment as well as the assembly industry’s net exports and the remittances have acquired. Altogether, the resources generated by these three activities are 2.3 times superior to those oil-generated. As a matter of fact, in the beginning and in the end of the 1990’s decade, remittances’ value is similar to that of the direct foreign investment and that of the assembly industry’s net exports. The interesting fact is that these three variables have experienced a similar and important boost in the recent 15 years. In this way, it is false to suppose the current strength of the external balance is because of the sustained and increasing remittances’ flow. On the contrary, the macroeconomic equilibriums maintenance is not dependant on the dynamics of an isolated variable, but in a structural transformation process wider and deeper,

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which has derived into a higher diversification of the resources origin, and in it the remittances are just another component that shares its importance with the other.

Remittances’ evolution and tendency In relation to the remittances’ tendency and evolution, it is usual to make a grave methodological mistake, for their (remittances’) nominal value is taken with no considerations on deflation, prices’ level evolution or exchange rate.7 In this way, when considering the nominal values, what everybody repeats is observed, remittances show a sustained and systematic increment rate, defining a linear tendency, if not exponential. However, when we consider not their nominal value but the real value, this is, their deflated value based on the prices index and the exchange rate, a completely different tendency is observed. As a matter of fact, contrary to what is usually believed, in the last 25 years the remittances have not followed an ascendant linear tendency, but they have a peculiar behavior, which combines growing cycles with stability cycles. Actually, if observed in detail, it can be proved that growing cycles exactly coincide with the Mexican economy’s crisis and stagnation moments. It looks as though remittances follow an opposite trend to that of the Mexican economic cycles. As illustrated in graph 3 that compares the remittances’ global amount evolution to the remittances’ average remuneration in Mexico, at the beginning of the 1980’s, remittances were in 1.4 million dollars; between 1982 and 1983, at the time of a substantial reduction of the real remunerations provoked by the economic crisis during those years. With the 1994-1995 economic crisis and the following real remunerations’ reductions, remittances rise again up to 6 000 million dollars.8 7

Nominal value’s remittances increment has two possible causes: on the one side, prices inflation and on the other, the real increment. In order to obtain the latter it is necessary to deflate the series’ nominal values based on the prices’ tendencies and exchange rates. Once this correction is made, the deflated values’ tendency is the one we describe in the text and that appears in the graph. 8 The Bank of Mexico reports an improvement in its remittances’ reception system from the year 2001; this partly explains the great increase in remittances’ flow from that moment. In particular, the electronic transfers’ accounting has been improved; they go from 13.6 million operations a year by the end of the 1990’s decade up to 30 million in the last three years. However, the average remittance has been stable at a level close to 300 dollars per electronic transfer.

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5

10

15

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25

Assembly

Direct Foreign investment Remittances

Tourism

Oil Assembly

Remittances

2004 Direct Foreign investment

Source: Own calculations based on data from the Bank of Economic Infomration of INEGI.

Oil

1990

GRAPHIC 2 MEXICO, 1990 AND 2004. MAIN SOURCES OF INCOME ENTERING MEXICO (BILLION DOLLARS AT 2004 PRICES)

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This remittances’ peculiar behavior allows us to define their tendency as ‘anti-cyclic and dropping inflexible’,9 which illustrates their compensating mechanism character in the families’ economy in the origin communities (Canales y Montiel, 2004). In economic crisis’ contexts a disarrange in the domestic economies’ consumption-income balance takes place: devaluations rise the consumption goods’ costs, at the same time they reduce salaries’ acquisition power and other income sources. In such situations, remittances in dollars let us keep the same consumption level prior to the crisis. This behavior reinforces the thesis we have already mentioned, in the sense that remittances are a ‘salary transfer’ the migrant sends his relatives in Mexico, and whose effects and uses are the same as for any other salary: financing the families’ material reproduction. The anti-cyclic and dropping inflexible remittances’ character can be also proved when considering the amount of Mexican homes who receive them. Between 1992 and 2002, remittances receptor homes did more than double, going from 650 000 to 1.4 millions in that period. However, it is not a linear and continuous tendency. As it can be appreciated in graph 4, it is between 1994 and 1996, in coincidence with one of the most serious economic crises in Mexico, when the most increment happens, in 1996 there was an increment from almost 700 thousand receptor homes to almost 1.1 millions, which represents an increment superior to 50 percent in only two years. Later, the increment in the number of remittances receptor homes has been lower: 7.4 percent between 1996 and 1998, 8.9 percent between 1998 and 2000, and 12 percent between 2000 and 2002.

Remittances’ macroeconomic determinants The data presented in the previous section allow us to affirm that, contrary to what is said in the official arguments, the remittances’ macroeconomic impact does not seem to be so significant, specially in terms of their capacity to promote a process of economic growth and social development. In this way, in the present section we are interested in proving if the remittances’ macroeconomic behavior is much more sensible to the population’s socioeconomic and life conditions, or on the contrary, directly responds to each country’s investment and economic growth conditions. 9 This means, their slant is normally inverse to that of remunerations’ evolution, although it seldom is negative. In fact, between 1980 and 2000, the Pearson’s correlation index among remittances and remunerations is negative, with a significance level superior to 96 percent.

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169 REMITTANCES

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

Remunerations (annual pesos)

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Remesas

REMUNERATIONS

Remunerac iones

Source:Own elaboration based on information from the Bank of Mexico and INEGI.

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Remittances (millions of dollars)

GRAPHIC 3 MEXICO 1980-2003. EVOLUTION OF FAMILY REMITTANCES AND ANNUAL AVERAGE REMUNERATIONS (DOLLARS AND PESOS AT CONSTANT PRICES OF 2003)


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In the first case, remittances would be much more like a family income, whereas in the second they could be considered as a savings fund or productive investment. This distinction is not casual; there are different impacts and potentialities from the remittances in terms of economic growth promotion and development. In order to demonstrate this thesis, we are presenting an econometric model that relates the remittances’ volume to different macroeconomic variables. It is about a linear regression model of time series, by means of which we will be able to estimate the remittances’ macroeconomic determinants. In the following table we present the macroeconomic dimensions and variables included in the model. The independent variable corresponds to the remittances’ annual volume estimated by the Bank of Mexico, and the data refer to every calendar year between 1980 and 2004. Among the independent variables we have included three types which are: 1. Those that measure the population’s life conditions evolution. 2. Macroeconomic variables that measure the national economy dynamics, its cycles and tendencies. 3. Variables that measure saving and investment financial conditions at every moment. According to our perspective, if remittances are a sort of family income, then they are expected to be more sensible to the population life conditions, also responding to each economy’s cycles. On the contrary, if remittances rather constitute a saving-investment fund, then they are expected to be more sensible to the financial conditions at each moment. In table 1 we present the model results from the better adjustment. The interesting in this model is that the variables are automatically selected out of those that have a statistically significant meaning in the dependant variable explanation (Annual volume of the remittances in Mexico), and this excludes from the model other variables that do not contribute significantly to the explanation of the behavior (variance) of the dependent variable. This model’s results from the same adjustment allow us to infer the following: 1. In all of the cases, the population’s socioeconomic conditions are a determinant factor of the remittances’ volume. In particular, the remittances’ volume tends to increase when the minimum salary falls in Mexico or increments in the minimum salary in the United States, destination for most of the Mexican migrants.

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171 1994

695

1996

1998

1,150

Source: Own estimations based on ENIGH, selected years.

1992

650

1,070

2000

1,252

GRAPHIC 4 MEXICO 1992-2002. HOUSEHOLDS RECEIVERS OF REMITTANCES (THOUSANDS)

2002

1,402


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TABLE 1 VARIABLES OF THE MACROECONOMIC REMITTANCES MODEL

Time series model Socioeconomic conditions Minimun wage in Mexico Minimum wage in the United States Mexican National Pricing Index (inflation) Macroeconomic conditions Exchange rates (pesos/dollars) GDP growth Mexico GDP growth US Competitiviness index Financial conditions and foreign commerce Interest rate in Mexico Interest rate in the US Balance of trade balance Direct foreign investment Exports value

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Remittances and development in Mexico. A critical overview... A. Canales TABLE 2 ECONOMETRIC MODEL OF MACROECONOMIC OF REMITTANCES

Variables included in the better adjustment model Socioeconomic conditions Minimum wage in Mexico -0.329 Minimum wage in the US 0.186 Macroeconomic conditions Exchange rate (pesos/dollars) 0.662 GDP growth Mexico -0.128 Variables excluded from the better adjustment model Socioeconomic conditions Mexican National Pricing Index (inflation) Macroeconomic conditions GDP growth US Competitiveness index Financial and foreign conditions Interest rate in Mexico Interest rate in the US Balance of trade balance Direct foreign investment Exports value R2

0.967

2

0.959 18 24

R adjusted Freedom degrees of the better adjustment model Total freedom degrees

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In the first case, this shows us remittances configure a fund that allows counteracting the crises’ negative effects on the income levels of the families, or in other words, facing falls in the family income (salaries), migration and remittances are a feasible option to keep, as much as possible, the same standard of life and family consumption levels. In this way, it can be inferred that remittances seem to contribute to reduce crises’ effects on the population’s poverty level. In the second case, the increment in the remittances’ volume before increments in the salaries at the destination places is expectable, for it indicates us remittances depend directly on the migrants’ available income level. 2. As for the role of the Mexican economy structural macroeconomic conditions, once again a systematic relation is observed, which indicates us that remittances usually respond in an inverse way to the economic cycles’ dynamics. In fact, the remittances volume increases in crisis contexts, characterized by falls in the internal gross product, as well as exchange rates’ devaluations. 3. It is also interesting to prove that remittances do not show any statistically significant relation to the financial and investment variable. In fact, the best adjustment model indicates us that remittances do not seem to be determined by the interest rate prevailing in Mexico or in the United States and neither do they have a similar behavior to that of other investment funds, as direct foreign investment. In other words, the econometric model shows us that there is no statistic evidence that permits us defining remittances as a productive investment fund. On the contrary, the model indicates us that the macroeconomic remittances’ behavior does not have any kind of statistically relevant relation with the traditional productive investment’s determinants. All in all, the remittances’ determinant analysis lets us conclude that in macroeconomic terms, their dynamics and behavior do not correspond to those of a saving or investment funds, but to those of a family income that, under the shape of family transfers, contributes to compensate the negative effects of the recurrent currency devaluations, the loss of acquisition power and the competitiveness loss of our economies due to recurrent crises and the recessive cycles of the Latin American economies. These results allows us to corroborate a thesis we have already mentioned, which we have also exposed in other works, in terms that remittances correspond to an ‘anti-cyclic and dropping inflexible’ macroeconomic variable (Canales and Montiel, 2004). The anti-cyclic character, besides, lets us reinforce our general thesis of understanding remittances as a family income rather than an investment fund. 174

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Conclusions Remittances are, no doubt, an important income source for the receiving families. If we add the magnitude they have reached in the last years, then we will not be surprised by the optimism shown in the national governments and international organizations’ argument. It is common to read public organisms’ arguments and to hear governmental functionaries’ declarations where the significant remittances’ contribution to poverty reduction, development promotion and the wellbeing of the families, among many others supposed benefits. However, when the same reports are reviewed in detail, it is observed though, these reports are rather supported in a group of good wishes and better intentions than statistic data and empiric evidence. In this work we want to document for the Mexican case a critical vision, not pessimistic though, on the remittances’ role and impact. In this respect, we support that remittances have a very limited and restricted impact on the development promotion and poverty reduction, for they are essentially, a salary fund which is transferred among families in similar socioeconomic conditions. As a matter of fact, remittances are usually sent by precarious and vulnerable migrant workers towards their relatives who live in poverty and social marginalization contexts. In this way, remittances are able to contribute to improve the receiver homes’ standard of life, but they are far from representing a strategy which permits to overcome and solve the structural problems that perpetuate poverty. Actually, the annual remittances’ volume (the 20 000 million dollars that the Bank of Mexico estimated for the year 2005), does not change the monetary illusion generated by the methodologies of the national accountancy. As such the remittances’ volume has never existed. What really exists is, in turn, the millions of small, periodical and recurring transfers. On average, in 2002, it is estimated that in each receiver home got 200 dollars a month, they represent a monetary flow of less than 55 dollars per capita. It is worth mentioning however, that same year the poverty line defined by the Ministry of Social Development was 93 dollars per capita a month in rural zones and 140 dollars in urban zones. In this context, the impacts in development terms (productive investment, social infrastructure) and population’s wellbeing (poverty reduction, social mobility) are circumscribed to what can be done with those few dollars monthly received. In other words, this small monthly transfer amount that every family receives reinforces the remittances’ economic and social character and meaning. On the

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one side, they are a salary income, and as any other, it is destined to family consumption. On the other side, the reduced average amount per home indicates us it is mainly about families and workers with scarce resources immerse in social vulnerability and economic precariousness situations. They are poor strata, with many shortages, living where remittances can contribute to alleviate that poverty situation, but they can not in any way solve it. All in all, this general framework lets us understand the anti-cyclic remittances’ character. Actually the remittances and migration constitute, more often every day, the only resource that broad population sectors have in order to face the impoverishment of their life conditions generated by the recurring crises in the Mexican economy. Because of this reason, rather than being a savings fund, remittances constitute a resource from the poor to survive the impoverishment generated by the failure of the macroeconomic structural adjustment policies.

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