The effect of remittances

Since the outbreak of the Covid-19 epidemic, dollar income from remittances in Mexico has increased from its upward trend observed more than a decade ago.

In May 2021, the volume of these inflows was the highest in any month since it was recorded in 1995. Similarly, during the first five months of the year, the annual growth of these inflows was 21.7 percent, more than eleven and thirteen percentage points. Compared to corresponding annual increases in 2020 and 2019.

Moreover, despite the global economic downturn, remittances continued to expand during 2020, in contrast to the decline recorded during the 2008-2009 global financial crisis.

The remittances reflect the solidarity of workers abroad with their families in Mexico. Income comes mainly from the United States and, to a very low degree, from Canada and other countries.

For this reason, the primary determinant was the level of employment in the United States, the fluctuations of which tend to be reflected in the dynamics of remittances. Of course, during recessions, increased unemployment in that economy reduces the ability of immigrants to send resources to our country.

An additional factor is the exchange rate of the peso against the dollar. Since Mexican families receive remittances in the national currency, and thus multiply as the exchange rate depreciates, it usually happens that amounts increase during times of peso weakness.

These two factors can help explain the recent dynamism of remittances. Indeed, according to CEMLA, after declining in March and April 2020, the employment of Mexican workers in the United States showed a trajectory of recovery from May until, during the first quarter of 2021, it reached levels similar to those observed before the pandemic. .

Likewise, during March-October last year, the peso came under heavy pressure, with the exchange rate averaging 22.47 pesos per dollar, an increase of nearly twenty percent compared to the average in the first two months of that year.

However, without denying its explanatory potential, these two elements seem insufficient to explain the contrast with what happened in the global financial crisis, where the devaluation of the peso was more severe than the global financial crisis.

Two additional reasons can help explain. The first was the unprecedented fiscal packages in the United States, aimed at supporting families and easing business closures and declining employment. Mexican immigrants can benefit from this aid, directly, receive government transfers, or indirectly, thanks to the rapid recovery of this economy and the consequent increase in demand for labor.

The second reason is the strength of the US economy before the pandemic. In contrast to the previous financial disaster, the sectors in which Mexican immigrant employment is concentrated did not show prior weaknesses, as was the case with construction, which could have put workers in a better position to send money.

The Mexican government celebrated the remittance boom as a success. Although the factors reported are mainly external in nature, an additional component can come from the negative economic situation of the country, which was, to a large extent, the result of the absence of appropriate policies to deal with the crisis. In this sense, management can contribute to attracting remittances.

Finally, some commentators have suggested that increased resource flows from immigrants are a driver of economic recovery.

There is no doubt that remittances act as aids until families face economic constraints and can maintain a certain stability in the consumption of basic goods and services, including food and health needs. There is also evidence that these entries significantly support the activism of some communities and countries, and are a poverty alleviating factor.

However, conversions can hardly be an additional economic driver to get off the ground. Empirical studies have confirmed that its contribution to GDP growth is marginal.

Rather than encouraging immigration and celebrating remittances as an achievement of its own, the government should promote sustainable economic growth and broad-based job creation through a public policy framework that protects individuals’ trust and rights.

Former Deputy Governor of the Bank of Mexico and author of Economía Mexicana para Desenchantado (FCE 2006)