Remittances are a very important part of the global economy. They often account for a larger portion of poor countries’ income than foreign aid does. (“Remittances” refers to money that immigrants send home to family members in the home community.) In 2004, immigrants from Latin America sent over $30 billion to their home countries—in 2005, over $50 billion.1
In 2004, 10 million Latin American immigrants—some 60 percent of the Latin Americans living in the United States—sent home remittances, usually ranging from $1,000 to $2,500 a year, or 10 percent of their annual income. (The total income of Latin American immigrants in the United States is $450 billion.) Although only 10 percent of what an average immigrant earns here, the money sent home represents from 50 percent to 80 percent of the household income for those at home in Latin America.2 Ninety percent of immigrants’ wages are spent in this country. Citizens, too, of course, spend some of their earnings abroad—directly, if they travel, or indirectly, if they purchase imported goods.
Because of the complex nature of the global economy, it’s very hard to untangle exactly who benefits from every dollar spent. For example, if you buy a cup of coffee at Star-bucks, you’re paying for rent on the building, workers’ wages, baristas’ wages, maintenance workers’ wages, managers’ salaries, and utilities (and everything that goes into producing the utilities, including perhaps the importation of coal, oil, or gas), plus various forms of insurance, advertising, the furniture, the music, the mugs, and the many people involved in the production, processing, trading, and shipping of coffee, not to mention the shareholders in all of these different enterprises, and the executive officers and their retirement packages …
How remittances are spent is also very complex. A significant—though shrinking—portion goes to the institutions that process the financial transactions. In the 1990s the cost of sending money to Latin America was almost 20 percent of the amount sent, though this declined to slightly under 10 percent after 2000.3 Still, local banks and transfer companies, all of which employ people, are one beneficiary.
Some portion of the remittances goes directly to family members and is spent on food, health care, clothing, home improvement, and education. This kind of spending can have both local and global effects, since many of the products and materials used in these areas are imported. When the money is spent locally, it can also help to improve the local economy.
In some ways, remittance money is more efficient than foreign aid at improving people’s lives in ways that reduce migration. Foreign aid often comes with strings attached. Sometimes it has to be spent on products, or machinery, made in the country that gives the aid. Sometimes it has to be spent on “development” projects that actually make the lives of the poor worse—like a dam, or a mine, that displaces people from their homes, or like subsidized corn that floods markets and bankrupts poor farmers.
Some remittance money goes to hometown associations that are involved in different types of development projects like building schools, water systems, or sports facilities. (In Spanish these are sometimes called organizaciones de pueblo, clubes de oriundos, or clubes sociales comunitarios.) The Mexican government has been particularly active in using incentives to channel money into economic development. In perhaps the consummate irony, the state government of Guanajuato has implemented a program of joint ventures with hometown associations to develop garment maquiladora factories in migrants’ home communities. These factories produce clothing for foreign companies that in turn export to the United States. As of 2000, six of these factories had been established, with plans in the works for sixty more.4 Other studies have shown that U.S. companies choose Guanajuato as a site for building factories because, with such a large proportion of families relying on remittances, they are able to pay lower wages there than in other parts of Mexico.5
Remittances can have other contradictory effects too. In El Salvador, one study found that a significant portion of remittances is spent on imported consumer goods. Imports rose from 27.7 percent of El Salvador’s GDP in 1990 to 42 percent in 2004. So rather than creating jobs, the system creates new incentives to migrate, since only families who count migrants among their members can afford this kind of consumption.6
Remittances, then, are one element in an extremely integrated global economy. If we look only at the flow of remittances, it looks like a lot of money is leaving wealthy countries and going into poor countries. But if we look at the global economy as a system, remittances are just one small piece of a very complex, multidirectional flow.