Latin American Remittances
Developing countries looking to stimulate their economies often seek foreign sources of funds to increase business activity. Regularly, this comes in the form of foreign direct investments (FDI), investments from companies from other countries looking to generate returns from their business activities in the developing nation. But increasingly, developing economies are buoyed by inflows of money from their own citizens living and working in other, wealthier nations who are sending remittances to their families in their home country. Unlike FDI funds, which ultimately make their way out of the developing country and back to the headquarters of the multinational companies, these remitted funds remain in the local economy — improving quality of life and supporting local business activity. Dr. Diego Vacaflores of the McCoy College of Business studies the migration patterns and remittances flow between nations, and the conditions that affect them both.
In 2017 alone, Latin American citizens living and working abroad remitted $72 billion to their home countries, mainly from the U.S. The largest portion of that total has gone to Mexico, roughly $29 billion. This accounts for 2.5 percent of the annual GDP of Mexico, but in smaller nations like Honduras or El Salvador, remittances can account for almost 19 percent of their GDP. This means that for policymakers, it is extremely important to be able to predict the flow of these remittances. Vacaflores’ most recent line of research examines the conditions within both the home nation of migrants and their host nation, to determine what factors most heavily influence the flow of migrants out of, and remittances into, the home countries. For example, economic difficulties in the receiving country and robust economic activity in host countries both drive migration from developing nations into developed countries. An improvement in the economic conditions in the home country, or an economic downturn in a host country, will result in fewer migrants and lower remittances. This results in a counter-cyclical pattern of migration and remittance, where improvements in the economic well-being of the receiving nation can reduce these flows, and potentially hinder economic growth. But how much influence do remittances have on poverty and inequality in receiving nations? This is the subject of a second recent line of Vacaflores’ research.
While the results of Vacaflores’ analysis show that remittance payments do reduce poverty, enhance education and improve economic well-being in the receiving countries, they also imply that policymakers should be cautious in regard to policies that encourage migration. This is because the citizens willing to move for work in other countries are usually the most educated, more industrious or entrepreneurial, and less impoverished, giving them more freedom to move. This often results in a type of brain drain when these citizens assimilate into the host country and settle down, starting families or long-term careers. Vacaflores is currently developing detailed economic models that take into account why people leave their home countries and what happens when they move, to better equip policymakers with tools to forecast migration flows and to best take advantage of the opportunity provided by foreign remittance payments.