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The Untold Story: Remmitances, Migration and BP in México Jesús Muñoz*

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Presentation on theme: "The Untold Story: Remmitances, Migration and BP in México Jesús Muñoz*"— Presentation transcript:

1 The Untold Story: Remmitances, Migration and BP in México Jesús Muñoz*

2 * Jesús Muñoz holds a PhD in Economics from the University of Lancaster, United Kingdom. He has been a full time researcher in Universidad Michoacana de San Nicolás de Hidalgo in Morelia, Mexico, the world capital of remiittances.

3 Abstract This paper describes the growing relevance of Mexican migration of Mexican citizens into the US and especially that of remittances in Mexico, particularly during the most recent years. Remittances have had a positive effect in the Mexican economy. But this is only half of the story as it is immediatley described. As description is not a formal part of science, an explanation is hereby conducted of the causes, interactions and consequences of remittances on the Mexican economy – based on field studies (surveys). In addition some further suggestions are provided about the perception of remittances in the long term.

4 The role of remittances Remittances, the main by-product of migration according to the Mexican view, are shock absorbers, as theye are reghsietres in the Current Account (CA) of the Balance of Payments (BP), according to the current classification scheme of Banco de México. Remittances, hence play a key role in foreign exchange stabilisation o even in the prevention of currency crises in Mexico, as they are considered as net exports. This is of course due to BP must be balanced in order to achieve foreign exchange stability in developing countries.

5 Remittances and BP in Mexico BP = CA + KA + R CA: Revenues Non factorial services Travellers Factorial services Interests, Other Transfers Family remittances Other.

6 The stabiliser role of remittances The Mexican CA has registered deficits since 1995, but remittances (about 92% out of transferencias) have hampered this effect. Remittances actually reduce pressures on reserves and supplement the stabiliser short-term effects of deflationary policies on inflation, interest rates and the exchange rate. This has been happening during the last two years.

7 The CA deficit in Mexico The Mexican CA registers deficits as imports are greater than exports, since the latter lack progress in terms of both diversification and competitiveness. Portfolio capital flows used to be the shock absorber in Mexico, being as they are a part of KA. This is very common in free exchange regimes as that of Mexico since 1995, which has experienced however some interventions and where reserves play a negligible role.

8 Remittances in Mexico Mexico is the main receiver of remittances in the world and they are the second source of revenues form abroad for this country (after oil revenues, which represent about 81% of GDP). Although remittances only represent 1.9% of GDP. Their impact is hence qualitative. Michoacán is the main Mexican entity in terms of migration, and its BP is in permanant surplus.

9 We export people who send $ home The relevance of remittances has been growing at a growing rate during the most recent years, especially since 1995, more than other items in CC or those of KA. This is due, of course, to that in a free exchange regime reserves are irrelevant (Graph 6).

10 Remittances during the most recent years Source: Banco de México, 2004

11 Exports

12 Comparisons: Exports vs.

13 Remittances in figures

14 Stability in BP

15 Remittances after the currency crisis of 1994

16 Causes MIGRATION IS DUE TO: Human networks since 1890, and the treaties In the 20s and 30s in wages: 8/1 the US and Mexico Unemployment Empleos no deseados por los estadounidenses Crisis in the farming sector Financial crisis Globalisation Low regional levels of industrialisation Remittances are obviously the most straightforward consequence of migration Providing information and protection, eliminating entry barriers and transaction costs

17 Macroeconomic consequences VISION 1: Remittances possess separate causes and consequences, having a negative impact on national income. They generate moral hazard, due to the existence of asimmetry and imperfect information in their markets (Ketkar, 2003).

18 Remittances and the financial system VISION 2: An inefficient banking system blocks the allocation of remittances, so that they do not become into investment. The banking system must be modified in order to solve this problem, where migration and and remittances are a twin problem, reflecting development levels and the extent of economic liberalización (Dimsky, 2003). This circle can become a virtous once the financial system achieves someadvances.

19 The allocation of remittances The liberalisation of KA is at the heart of financial liberalisation, but may entail some risks. The securitisation of future flows may increase investment and available funds in international capital markets for Mexico. The consolidation of financial supermarkets would contribute to this goal. This would contribute to the allocation of remittances. So far remittances in Mexico have only enhanced consumption rather than investment (either productive or financial).

20 Positive impact of remittances Initially, only bancarisation may increase the productive investment arising from remittances. Remittances prevent eventual reductions of currencies and hence they delay the impact of currency crisis. If they are used efficiently they may enhance the development of regional communities, especially those of migrants, for example in Michoacán, Zacatecas or Guanajuato

21 Workers remittances in the world Table 1 Years Millions of dollars , , , , , ,402 Source: World Bank, 2005

22 Remittances by country of destination Table 2 Country % GDP Líbano34.8 El Salvador5.9 Dominican R.3.8 Honduras2.1 México1.9 Guatemala1.8 Costa Rica1.2 India1.1 Perú0.6 Source: World Bank, 2005

23 Remittances by country of destination Table 3 Mill. Dollars % GDP México13, India8, Spain3, Paquistan3, Morocco3, Portugal3, Egypt2, Bangladesh2,8486 Source: World Bank, 2005

24 Negative impact of remittances Remittances must bring about negative growth. Their apparent positive short term impact differ from their long term effects. An economy sending labour abroad may lose dynamism in certain regions, for instance Huandacareo is a ghost town a well as its neighbouring regions. The analysis of remittances must not be either temporary or superficial.

25 Negative consequences of remittances Remittances must only be a temporary macroeconomic solution. Reliance on remittances as a capital item may reduce incentives for reducing the deficit between imports and exports or even for enhancing both direct and portfolio investment. In microeconomic terms, a damage may be caused on competitiveness, as it must grow in Mexican exports of goods, rather than in people expelling. There is a danger of a vicious circle.

26 Remittances as investment The communities of origin must benefit from remittances in the long term, rather than creating ghost towns. This can only be achieved through productive investment. In addition, the attitude of he US towards migrants may become harsher in the medium term, especially in future governments. Remittances are a countercyclical flow (as portfolio inverstment) which temporary nature differs from that of FDI.

27 Socioeconomic consequences of migration Remittances obvioulsy impact employment levels, but may also enhance leisure or over reliance on them in the communities of origin. This kind of problems is teh result of surveys and field studies about the role of remittances in certain rural and urban communities in Michoacán. A sloution may be the liebralisation of the labour market in Mexico and the US. Actualy NAFTA has proven to have a negative impact on the Mexican farming sector, as it is demonstrated by the growing migration levels. Remittances levels are larger in both cities or communities with low (dual) development levels, in Zacatecas and Guanajuato, for example.

28 Conclusions Under low income levels, migration overshoots, but must be reduced in the long term through the enhancement of investment (in the Keynesian sense). Rather than enhancing remittances, employment must grow in a systematic fashion. Thus, remittances have an impact upon GDP, consumption, employment, inflation, exchange rate and competitiveness.

29 Conclusions Only if remittances have a larger impact upon financial investment may instead be considered as a part of the capital account. As a consequence their role in the Mexican economy would be superior: as a shock amplifier in the long term. An unexplored topic is the identification of the paths of existing workers networks. Examples are that from Michoacanos to Los Angeles, Texas and Chicago, or that from Oaxaquenos and Poblanos to New York, as well as the current growing migration levels to North Carolina.

30 NOTE: Bibliography about field studies and surveys as well as that on specific problem of remittances in México are included in the main paper.

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