Remittances and the Latin American Dream

Ever since the 1920s, the United States had limited the number of immigrants admitted. Visas were awarded on the basis of a national-origins quota system. According to this scheme, Germany and the United Kingdom were among the “most favored countries.”

One of the goals—though certainly not the only one—of the 1965 new policy was family reunification; applicants who had relatives already residing in the United states were thus granted entry visas.

A distinguished Harvard scholar, George J. Borjas, wrote back in 1996, “the social, demographic, and economic changes initiated by the 1965 legislation have been truly historic. The number of immigrants began to rise rapidly. As recently as the 1950s only about 250,000 immigrants entered the country annually; by the 1990s the United States was admitting more than 800,000 immigrants a year, and some aliens entered and stayed in the country illegally. [This] led to a momentous shift in the ethnic composition of the population.”1

The 1910 census yielded some 13.5 million foreign-born people in the American population. According to the Census Bureau, by the mid-nineties, foreign-born people living in America amounted to 22.5 million. Over the past 25 years the foreign-born population had almost doubled in the U.S., going from 6.2% in 1980 to 12% today. By the 1990s more than 800,000 legal immigrants admitted to the United States yearly while 300,000 aliens entered the country illegally.

Prior to 1965, the heaviest immigration influx that preceded WWI lasted almost a quarter of a century. It was then when most of the tired, poor and huddled masses that Emma Lazarus so movingly ennobled in her famous poem came in from Europe.

The current heated debate about immigration laws in the United States underscores the novel fact that during the past quarter of a century half of the immigration has arrived from just eight countries: Mexico, the Philippines, Korea, Vietnam, China, Taiwan and the Dominican Republic.

These are Asian and Latin American countries with disparate economic performances, but their nationals’ motives to emigrate are in many ways identical to those that triggered the great European migration more than one hundred years ago.

A recent New York Times editorial (April 12, 2006), commenting on the immigration rallies organized in recent weeks for the “national day of action” in several big cities all across the country, says, “This nation is deeply divided and undecided about illegal immigration. The ambivalence runs deep. Americans can hardly even agree on whom they are talking about. Listen to debates from talk radios to the Senate, and you will hear utterly incompatible descriptions of the same group of people. The nation’s 11 million to 12 million illegal immigrants are either an occupying army of thieves, snatching jobs and subverting our laws, or the are a wholesome community of strivers, eager to build families and chase the American dream.”

According to various estimations, there are now 34 million immigrants in the United States, one third of them illegal. The Center for Immigration Studies estimates that 35 percent of immigrants lack health insurance and 26 percent receive some sort of federal benefit. Mexicans have become the single largest group of U.S. immigrants: 30 percent of the total in 2000.

A recent study by Harvard economists George J. Borjas and Lawrence Katz affirms that Mexican immigration “is historically unprecedented, being both numerically and proportionately larger than any other immigrant influx in the past century.” Apparently, non-Hispanic whites will form a minority in America sometime after 2050.

As debates rage on, several economists, newspaper columnists and public policy pundits have contended that illegal immigrants compete for jobs with the nation’s most disadvantaged citizens.

The received wisdom on the economics of immigration tells us that unskilled illegal workers bid down wages thus harming low-skilled job opportunities for the native born labor force. But there are studies that cast doubt on this supposed damage to the wages of the least educated domestic workers.

According to study by David H. Autor of the Massachusetts Institute of Technology, Mr. Katz of Harvard and Melissa S. Kearney of the Brookings Institution,2 income inequalities in the bottom of the ladder have not grown significantly since the mid-1980s.

Be that as it may, an unsettling notion comes to mind when you realize what millions of unskilled immigrant Mexican workers’ effort, illegal or not, represent in Mexico’s economy. Indeed, Mexico has become the largest remittance-receiving country in the region.

Remittances have become a fashionable academic subject nowadays; there is considerable global awareness about them. But only a few years ago we all had only a shallow knowledge of how “trans-national families” have shaped a kind of money flow that had been hidden to the eyes of both multilateral research teams and finance market’s analysts.

Only in 2005, remittances to Latin America and the Caribbean (LAC) reached over US $53.6 billion. A recent report by the Inter-American Development Bank says that these figures make the region “the largest remittance market in the world. This amount exceeded, for the third consecutive year, the combined flows of all net Foreign Direct Investment (FDI) and official Development Assistance (ODA) to the region.”

The same report shows how remittances from Mexican immigrant workers living in the United States equal to 2.8% of Mexico’s GDP, and 10% of its annual exports. Only in 2005, remittances reached US $20,034 million, representing 13772% of ODA and 178% of FDI.3

Mexico is by far the largest recipient of remittances, at over US $20 billion. Dominican Republic and Central America combined reached over US $11 billion. Brazil and Colombia reached over US $6 and US $4 billion respectively. How such enormous amount of money could go unchecked in front of so many specialists’ eyes for so long?

The IADB’s report estimates that more than 25 million LAC-born adults are living outside their country of origin. Some 65% send money home on a regular basis. But they do so in small amounts; $100/$200/$300 a month. More than 200 million separate bank transactions are made in any given year.

Illegal immigrants cannot have bank accounts in the United States so they rely on an encomendero, a Spanish word derived from encomendar, meaning “to entrust”. Encomendero’s networks carry and deliver the money from the USA to remote Central American or Andean villages.

The system works much in the same way that halawa, the informal Middle East financial channels, do. Tracking the encomendero underground transactions can be a complicated process. Money traveling through the hand-to-hand encomendero informal networks can make actual flows at least 10% higher.

That illegal immigrants low-wage workforce subsidizes the host economy is a widely accepted notion among economists. But consider that 75% of LAC remittances (US $40 billion) are sent from the United States. Since most remittances going into Mexico pass through a modern banking system, the Government is able to tax them. Money thus raised goes into road maintenance all over Mexico.

Intraregional flows are scarce in Latin America. Remittances from Spain and other Western Europe countries, including the United Kingdom, account for US $7.5 billion, which represents almost 15% of the market.

“Unskilled” is the word most frequently used by specialists to qualify most of the immigrant labor force that every year sends US $40 billion back to their country. Such an impressive achievement can only be explained by something in the “physiology” of the host economies.

Reading the IADB’s report and other authorized sources on the subject reminded me of the obsessive ideas that Latin American policy-makers and multilateral officials have had about education of the workforce as a sine qua non tool for economic growth.

How come, then, illiterate Mexican immigrants can end up financing Mexico’s road maintenance federal agency, not to mention the 2.8% remittances’ share of Mexico’s GDP?

Productivity seems to be the answer.

Discussing the findings on productivity made by the McKinsey Global Institute during a 12-year research project, William W. Lewis says, “the importance of the education of the workforce has been taken away too far. In other words, a high education level is no guarantee of high productivity.”[…] “Whatever weakness exists in the U.S. education system, it is being made-up for by on-the-job training.[…] If illiterate Mexican immigrants can reach world-class productivity, building apartment houses in Houston, there is no reason why illiterate Brazilian agricultural workers cannot achieve the same in Sao Paolo”.4

As his very illuminating book shows, and contrary to what used to be conventional wisdom pertaining German and Japanese economies, U.S. workers achieve the highest productivity in the world in most economic sectors. Obviously, this also applies to immigrant workers, illegal or not, whose countries of origin are plagued by all kinds hindrances to individual initiative and legitimate ambitions of affluence. Viewed this way, immigrant remittances are a trustworthy index of hard work, thrift and family devotion.

Are not these the proverbial moral qualities that made market economy and capitalism in America not only possible but endurable?