Workers Remittances in Mexico

1
Workers Remittances in Mexico
February 20th, 2006
2
Index

1. IMPORTANCE
2. SOME FEATURES OF REMITTENTS AND BENEFICIARIES
3. CURRENT REGULATION AND INTERNATIONAL TRANSFER OF
   FUNDS Agreement Banco de México Federal
   Reserve Bank
4. IMPACT OF REMITTANCES IN THE ECONOMY
5. DESTINATION OF REMITTANCES
6. REMITTANCES AND ECONOMIC DEVELOPMENT
7. FINAL COMMENTS

3
I. Importance (Total income)

• During 2004 remittances totaled US16.6 billion
  and US20 billion in 2005. These figures
  represent respective annual increases of 24 y
  20.6.

Workers Remittances (Million US dollars 2005 -
2005)
Workers Remittances (Million US dollars 1995 -
2005)
4
I. Importance (Evolution in the Last Decade)

• Workers remittances have been very dynamic in
  recent years. In 1995-2000 remittances grew at an
  annual rate of 12.3, whereas in 2000-2005 they
  did so at a rate of 23.
• The rapid increase of recent years stems from a
  better statistical coverage, as well as from the
  growth of such flows. However, an increase in the
  number of migrants and decreasing transfer costs,
  also explain this behavior.

Inflows from workers remittances
N.S Not significant.
Transfers of goods and cash.
5
I. Importance (Number of Transactions and Average
Amount

• The number of remittances transactions has also
  shown a significant increase. Such number went
  from 11.3 million transactions in 1995, to 18
  million in 2000 and 58.7 million in 2005. For the
  last four years, the average remittance has
  remained in a rank between 320 and 341 dollars.

Inflows from Remittances
(Amount, number of transactions and average
remittance)
1/ Millions of US dollars.
2/ Thousands of transactions.
3/ Dollars.
6
I. Importance (Remittances Instruments)
Inflows from Remittances
(Percentage structure)
2005
1995
2000
2001
2002
2004
Total Remittances
100.0
100.0
100.0
100.0
100.0
100.0
Money Orders
39.7
21.8
9.0
7.0
11.3
9.3
Checks
0.7
0.1
0.1
0.1
0.0
0.0
Electronic Transfers
51.5
70.6
87.5
89.6
87.3
89.3
Direct Transfers
8.1
7.4
3.4
3.3
1.4
1.4
Inflows from Remittances (Percentage Structure by
Instrument)

• The share of electronic transfers has raised in
  recent years. This, due to technological change
  and an increased competition among the various
  intermediaries, who have been looking for more
  efficient electronic instruments that allow them
  to offer lower prices, as well as more safety and
  speed.
• The quality of remittances statistics is
  supported in information originated 99 in
  accounting records from banks and fund transfers
  firms. The remaining 1 consist of direct
  transfers captured by means of the International
  Travelers Survey, also applied by Banco de
  México.

7
I. Importance (Remittances and Other Inflows of
the External Accounts)

• The amount of remittances received by Mexico is
  very high when compared with other inflows of the
  external accounts.

Workers Remittances (Percentages in 2005)
8
I. Importance (Workers Remittances as a
Percentage of GDP)

• Remittances went from 0.9 percent of GDP in
  1990-1994, to 1.2 percent in 1995-2000, only to
  increase significantly to 2.6 en 2005.

Workers Remittances ( del GDP)
9
I. Importance (Workers Remittances by Mexican
State)
Workers Remittances by Mexican States in 2005
Figures in brackets refer to the share of
each state in the total remittances.
10
I. Importance (Workers Remittances an
International Comparison)

• During 2004 Mexico ranked third among the main
  remittances recipient countries.

Workers Remittances in Various Countries in 2004
Source Banco de México (for Mexico) and
International Monetary Fund.
1/ Data obtained from the respective country.
e/ Estimated figures of the World Bank.
11
I. Importance (Transfers Cost from Mexico to
the US)

• In recent years the costs of money transfers to
  Mexico has been reduced. The main factors that
  explain such reduction are
• The rapid growth of the US population of Mexican
  origin.
• More information available about the costs of the
  various intermediaries, as well as an increased
  competition among them.
• The greater use of international electronic
  transfers has allowed money remittances to become
  quicker and safer.

Total Cost of Money Transfers from the U.S. to
Mexico of an
Average Amount of US300 Dollars from a Sample of
Firms by City of Origin
(US Dollars per Transfer)
12
Index

1. IMPORTANCE
2. SOME FEATURES OF REMITTENTS AND BENEFICIARIES
3. CURRENT REGULATION AND INTERNATIONAL TRANSFER OF
   FUNDS Agreement Banco de México Federal
   Reserve Bank
4. IMPACT OF REMITTANCES IN THE ECONOMY
5. DESTINATION OF REMITTANCES
6. REMITTANCES AND ECONOMIC DEVELOPMENT
7. FINAL COMMENTS

13
II. Some Features of the Sender and the Recipient
of Remittances

• Surveys compiled by Banco de México in northern
  border cities from Mexican migrants living in the
  US who were planning to spend some days in
  Mexico, provide information on the following
• Remittances to relatives and sending frequency.
  Around 80 of those interviewed said that they
  used to send money to their relatives in Mexico
  on a regular basis, and that they used to do it
  10 times a year.
• Relatives in the U.S. and arrival to that
  country. Four out of five respondents who send
  remittances stated that they already had
  relatives in the U.S. when they first arrived,
  most of them said they used to live with them at
  arrival.
• Beneficiaries of remittances. Two thirds of
  remitters (65) said that the main recipients are
  their parents (well above wife and children),
  followed in frequency by wife (14) and siblings
  (9). However, the highest average amount
  corresponds to the wife.
• Recipients other sources of income. Almost half
  of the remitters surveyed said that their
  beneficiaries have additional sources of income.

14
II. Some Features of the Sender and the Recipient
of Remittances

• Gender of the Remittent. More than 90 percent of
  the remitters who were surveyed were men.
• Visit and Amount of the Transfer. When migrants
  visit their relatives in Mexico, they normally
  deliver a bigger amount of money than the one
  they use to send on a monthly basis.
• Average Remittance and Income of the Worker. As
  expected, the survey shows that the average
  amount of the remittance is directly related to
  the workers income.
• Income and Academic Level of the Remittent.
  Ranked by their income, the academic level of the
  worker increases (also the average monthly
  remittance).
• Years of Residence and Average Remittance. With
  age and years of residence abroad, the average
  remittance tends to decrease, meaning that, with
  time, workers generate increasing economic
  commitments in the United States.
• Use of Remittances. According to the responses,
  the main use of the remittances is consumption.
  However, almost half (44) of those who were
  surveyed stated that their beneficiaries have
  used part of the resources they receive to
  improve or to buy a house.

15
Index

1. IMPORTANCE
2. SOME FEATURES OF REMITTENTS AND BENEFICIARIES
3. CURRENT REGULATION AND INTERNATIONAL TRANSFER OF
   FUNDS Agreement Banco de México Federal
   Reserve Bank
4. IMPACT OF REMITTANCES IN THE ECONOMY
5. DESTINATION OF REMITTANCES
6. REMITTANCES AND ECONOMIC DEVELOPMENT
7. FINAL COMMENTS

16
III. Current Regulation

• Banco de México has legal power to regulate fund
  transfer services carried out by financial
  institutions and any other agent professionally
  involved in such activity.
• On October the 28th 2002, a set of rules were
  issued instructing all firms dedicated to the
  service of funds transfers to provide monthly
  information on the amounts and volume of
  remittances sent to Mexico, classified by Mexican
  recipient state.
• The rules were issued with the following goals
  a) to create a register of firms dedicated to
  money transfers, b) to standardize the
  information received, and c) to produce
  information at a national level and state level.

17
III. Current Regulation (Banco de México
Federal Reserve Bank Agreement)

• There is an agreement between the Federal Reserve
  Bank of the United States and Banco de México to
  connect their respective system of payments
  (Automatic Clearance). By this agreement, banks
  can transmit and receive payments in a way
  similar to the one they use in their countries.
• The system is useful for payments that can be
  programmed, such as workers remittances,
  pensions, payroll, etc.
• This project is called Direct to Mexico.

18
III. Current Regulation (Banco de México
Federal Reserve Bank Agreement)

• The US Government has been sending payments since
  October 2003.
• Starting February 2004, commercial payments from
  the United States to Mexico have been processed
  from particulars (remittances and payments made
  by firms).
• Goal To develop a system that allows
  trans-border bidirectional transfers between
  deposit institutions of the United States and
  Mexico.

19
III. Current Regulation (Banco de México
Federal Reserve Bank Agreement)

• The infrastructure allows for multilateral
  transfers transfers originating in any deposit
  institution in the United States (Mexico) to any
  deposit institution in Mexico (United States).
• The system is open for banking clients in the
  United States (for payments to Mexico).
• There is a widespread joint promotional campaign
  by Banco de México, the Mexican embassy and
  consulates in the United States and the Federal
  Reserve Banks.

20
Index

1. IMPORTANCE
2. SOME FEATURES OF REMITTENTS AND BENEFICIARIES
3. CURRENT REGULATION AND INTERNATIONAL TRANSFER OF
   FUNDS Agreement Banco de México Federal
   Reserve Bank
4. IMPACT OF REMITTANCES IN THE ECONOMY
5. DESTINATION OF REMITTANCES
6. REMITTANCES AND ECONOMIC DEVELOPMENT
7. FINAL COMMENTS

21
IV. The Impact of Remittances in the Economy

• Remittances improve significantly the welfare of
  the recipient families. In Particular
• Remittances have a positive effect on their level
  of income and, therefore, also on consumption and
  investment
• they soften their consumption pattern over time
  and.
• They allow the families an increased consumption
  of basic products.

22
IV. The Impact of Remittances in the Economy

• Remittances are an important source for the
  formation of physical and human capital
• by increasing the consumption of basics of the
  recipient families, their health conditions
  improve
• children in recipient households have higher
  academic levels than those in similar non
  recipient households
• It is estimated that remittances are responsible
  for almost 20 of capital invested in urban
  micro-business firms and,
• Recipient households gain access to capital by
  formalizing their relations with financial
  institutions and therefore, reduce their
  effective financial costs.

23
IV. The Impact of Remittances in the Economy

• Workers remittances enhance macroeconomic
  stability
• A higher level of remittances allows for an
  increase of the domestic expenditure without
  facing major external imbalances.
• By increasing the current account revenues,
  remittances help improve the financial position
  of the economy and, as a consequence, also
  improve the credit conditions the country faces
  in international markets.

24
IV. The Impact of Remittances in the Economy

• Remittances represent a growing share of private
  consumption, 3.6 in 2004.

Workers Remittances (Share of Private
Consumption and Millions of US Dollars)
/ Figures for 2005 were calculated based on
information of the third quarter.
25
IV. The Impact of Remittances in the Economy

• Based on a hypothetical exercise, it is estimated
  that
• Without remittances, per capita private
  consumption in 2004 would have been almost 3
  smaller than the one observed and,
• GDP growth could have been smaller than observed
  by 0.3.
• Of course, these impacts are more significant in
  those states in which the remittances recipient
  families are concentrated.

26
Index

1. IMPORTANCE
2. SOME FEATURES OF REMITTENTS AND BENEFICIARIES
3. CURRENT REGULATION AND INTERNATIONAL TRANSFER OF
   FUNDS Agreement Banco de México Federal
   Reserve Bank
4. IMPACT OF REMITTANCES IN THE ECONOMY
5. DESTINATION OF REMITTANCES
6. REMITTANCES AND ECONOMIC DEVELOPMENT
7. FINAL COMMENTS

27

• V. Destination of Remittances

• Most of remittances are used by households for
  consumption expenditure, including education
  expenditure. Part of such resources are used for
  acquisition and improvement of housing.
• The results of the questionnaire applied by INEGI
  to 10 of Mexican households show that
• The share of Mexican households with electrical
  appliances (radio, TV, video recorders,
  refrigerators, washing machine, etc.) is higher
  in households that receive remittances than in
  those that do not receive such transfers.
• In 2000, 83 of households receiving remittances
  owned the house where they lived, whereas the
  proportion was 78 for households that did not
  receive such transfers

28
Index

1. IMPORTANCE
2. SOME FEATURES OF REMITTENTS AND BENEFICIARIES
3. CURRENT REGULATION AND INTERNATIONAL TRANSFER OF
   FUNDS Agreement Banco de México Federal
   Reserve Bank
4. IMPACT OF REMITTANCES IN THE ECONOMY
5. DESTINATION OF REMITTANCES
6. REMITTANCES AND ECONOMIC DEVELOPMENT
7. FINAL COMMENTS

29

• VI. Remittances and Economic Development

• Studies regarding worker remittances impact have
  found that those resources are mainly used to
  finance consumption, as well as to increase human
  capital (education and health expenditure). Only
  a small portion of remittances are oriented
  towards investments such as the improvement or
  acquisition of a house or to establish a small
  business.
• Investment in human and physical capital has a
  direct impact on economic growth, while
  consumption expenditure affects GDP indirectly
  through aggregate demand.

30
VI. Remittances and Economic Development

• Two factors have limited remittances to be
  channeled to investment expenditure 1) the low
  portion of such remittances that is left
  available to finance investment expenditure and
  2) the lack of managerial culture on the side of
  remittances recipients.
• Some studies have found that remittances dampen
  revenue falls during economic crisis, reducing
  family income volatility.
• Evidence also suggests that members of recipient
  households have less incentives to search for
  alternative sources of income.

31
Index

1. IMPORTANCE
2. SOME FEATURES OF REMITTENTS AND BENEFICIARIES
3. CURRENT REGULATION AND INTERNATIONAL TRANSFER OF
   FUNDS Agreement Banco de México Federal
   Reserve Bank
4. IMPACT OF REMITTANCES IN THE ECONOMY
5. DESTINATION OF REMITTANCES
6. REMITTANCES AND ECONOMIC DEVELOPMENT
7. FINAL COMMENTS

32
VII. Final Comments

• A number of factors have stimulated Mexican
  migration to the United States
• Rigidities in the labor market.
• A poor dynamic creation of well paid jobs in the
  formal sector.
• A high and increasing number of Mexicans with
  family ties in the United States, which cheapens
  migration.
• It is reasonable to expect that a significant
  contraction of wage differentials between Mexico
  and the United States will take a long time to
  make migration less attractive to Mexican
  workers.
• Migration to the USA shows the need for pending
  structural changes that would widen opportunities
  for productive and well paid jobs in Mexico.

33
VII. Final Comments

• On the other hand, the positive effects of
  Mexican migrants remittances on the welfare of
  recipient families, must be stressed
• Remittances have helped to reduce poverty in
  significant segments of the population
• They have enhanced improvements in health and
  education for recipient families
• Have provided families with better financial
  conditions and, that way their consumption
  patterns have been softened and they have also
  been able to invest in micro-business firms.