Latin America: Enduring Less Drastic Declines in Remittances than Predicted

By Gabriel Cabañas*

Ria Money Transfer/ Adam Fagen/ Flickr/ Creative Commons License

The decline in remittances during the COVID-19 pandemic has been less severe than predicted for Latin American and Caribbean countries because many migrants are in essential jobs and industries benefitting from generous U.S. income-protection measures, and a good U.S. recovery suggests positive trends will continue.

  • In April 2020, a month after the World Health Organization declared the pandemic, the World Bank estimated the resulting economic shock would cause remittances globally to drop by around 20 percent over the year – the greatest single year drop ever recorded. The Bank said the decline hinged on the fall of wages and employment of migrant workers. Other factors loomed large, such as China’s announcement that its economy had contracted 6.8 percent in the first quarter of 2020, and Europe, especially Italy, faced growing cases of the coronavirus.

More recent data tell a different story. The pandemic reduced global economic growth to -4.5 percent to -6 percent, which, while devastating, was cushioned by good performance in numerous sectors and industries. Contrary to the prediction of a 20 percent decline in 2020, remittances experienced only a 7 percent drop. Some remittance-receiving countries, including Mexico, actually reported growth in remittances from 2019 to 2020.

  • Generous stimulus programs, which the World Bank could not have predicted, preserved an income flow for companies in “essential” industries employing migrant workers, and those losing jobs received generous unemployment benefits.
  • A shift to digital remittances also made it easier and less costly for migrant workers to send money to their families. Western Union, which is the largest single remittance handler (with 10 to 20 percent of the market), reported that revenues increased 16 to 20 percent in 2020. Other channels appear to be growing even faster. The impact of remittances from migrant workers in the United States was further increased by currency devaluations in emerging economies hit hard by COVID.

Policymakers and academics have traditionally viewed remittances as having marginal positive impact on the economies of recipient countries – judging that foreign direct investment (FDI) has a much deeper impact – but that assessment is changing. A report published last year examined 538 estimates of the impact and found that 40 percent showed a positive correlation, 20 percent showed a negative correlation, and the remaining 40 percent were neutral. Observers increasingly think that remittances used by recipient families for consumption are often their optimal use. During periods of income shock, such as environmental catastrophe, increases in remittances replace roughly 60 percent of lost income, according to some estimates. During the Great Recession (2008-09) FDI dropped 39.7 percent, but remittances only dropped 5.2 percent. For a select group of remittance-receiving countries, including El Salvador, remittances have grown to provide more than 20 percent of GDP.

  • In 1970 remittances worldwide totaled less than $50 billion (in 2018 dollars), and in 2018 they exceeded $600 billion – surpassing all overseas development assistance and, in 2019, all FDI (except Chinese investment). Some experts claim much of this growth is a function of measurement error – caused by how banks track remittances – but the fact that remittances have been steadily growing since the 1970s is no illusion.
  • The hemisphere’s continuing challenges emerging from the pandemic raises questions about the future, but – as long as generous stimulus plans, essential work protection, and a strong dollar continue – remittances to Latin America and the Caribbean appear likely to allow recipient countries some continued reprieve from the economic devastation caused by COVID-19 and help them achieve an earlier economic recovery.

September 3, 2021

* Gabriel Cabañas is studying international relations and economics in the School of International Service.

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