Time for Governments to Embrace Migrant Dollars

If there is a group in the United States accustomed to economic privation, it is the immigrant community. After all, it is immigrants who leave regions of devastating poverty for richer lands, taking jobs few others would perform, relocating as necessary, working more than one job and sacrificing personal comforts to cut costs.

What is all the more remarkable is that immigrants are able to save enough money, even in a recession, to continue transferring billions of dollars to their families and friends back home. These remittances surpassed official foreign aid years ago. In some countries, such as Haiti, Honduras, El Salvador, Nicaragua, Jamaica and Guatemala, they amount to more than 10 percent of the entire gross domestic product.

Until now, remittances have proven to be countercyclical, growing in times of crisis and thus helping to mitigate a downturn's effects on the poor. That was the case during the peso crisis in Mexico in the mid-1990s and during the collapse of the banking system in the Dominican Republic in 2003.

This time around, however, remittances are dwindling because the recession originated in the United States and hurt sectors with high concentrations of immigrant labor. Experts agree that in 2009, only $64 billion in remittances will flow into Latin America and the Caribbean, a 7 percent drop from last year.

While that decrease will have adverse effects on thousands of poor families in poor nations, it is a testament to migrant workers' resilience that remittances are not falling more sharply. In contrast, foreign direct investment to the region will plunge 51 percent this year, from $89 billion last year to $43 billion now, according to the World Bank. Meanwhile exports from countries such as Mexico, Honduras and Colombia are expected to slide 20 percent or more.

The drastic drop in investment and trade makes remittances all the more crucial. In a March brief, the World Bank forecasted that "it is almost certain that in many developing countries remittances will become even more important as a source of external financing as private flows dry up."

Sadly, developing countries continue to neglect remittances' potential as a source of revenue. As governments in Latin America and the Caribbean put together stimulus packages in response to the economic crisis, none has considered leveraging those remittance dollars, according to Manuel Orozco, a remittance expert at Inter-American Dialogue, a Washington-based think tank. These times call for innovative ideas, he said, and for developing countries that should mean incorporating migration into economic development.

Orozco likes to cite the example of Guatemala in 2001, when coffee prices plunged around the world and the government bailed out coffee producers with a $200 million package. That same year, Guatemala received $1.5 billion in remittances, but did nothing to leverage those funds.

According to Dilip Ratha, a lead World Bank economist and one of the authors of the remittance brief, a few governments are considering tapping into emigrants' interest in investing in their countries of origin by issuing diaspora bonds. These innovative financial instruments can be used to target development that private investors deem too risky or unprofitable.

While now would seem to be the perfect time to create diaspora bonds -- with favorable exchange rates and the financial system stabilizing -- no Latin American country has issued them so far. Orozco notes that immigrant investment occurs largely through informal channels, without government incentives or guarantees. Investing in housing, for instance, "is a critical opportunity to increase flows into the homeland, while solving prevailing housing deficits," he wrote in a new report about migration and remittances during periods of recession.

So far, government programs tapping the potential of emigrant dollars have lacked ambition. In Mexico, for instance, the three-for-one program -- which adds a dollar each from the federal, state and local governments to every dollar invested by emigrants -- is limited to collective donations sent by emigrant associations that want to improve a school or a park in their hometowns.

According to Orozco's data, such contributions to Latin America and the Caribbean amounted to $615 million in 2007, just 12 percent of what emigrants invested in the region that year and a little over 1 percent of what they sent in remittances.

Both Orozco and Ratha concur that had governments been leveraging remittances more seriously, the effects of the current recession would not be as severe. Let's be thankful remittances haven't radically dropped off and are expected to recover before any other financial flows.