Best Free Reference
Web Site 2007
Remittances, the Rural Sector, and Policy Options in Latin America
By Manuel Orozco
The Inter-American Dialogue
Development has long regarded foreign savings as key to increasing a country's
capital-output ratio. In the past 30 years, significant changes in the
global economy spurring migration have influenced economic and development
The relationship between development and migration or the movement of people,
and the resulting effects of economic ties between diasporas and home country
economies (household and business sectors) are becoming more relevant for
The networks resulting from the prevailing ties of labor migration have
contributed significantly to the integration of countries into the global
economy. This latter point is important on various levels, including
donations, investment (small and large-scale), trade, tourism, and unilateral
The mobilization of migrant (and their relatives') savings and investments at
home (in the acquisition of land, property, or small businesses) are important
to areas traditionally neglected by the private and public sectors. Worker
remittances, and donations made by migrant associations, constitute key
building blocks of economic growth and subsistence in many countries.
In short, there exist at least five "Ts" that integrate many countries in the
global economy through migration (namely, transfers of remittances and grants,
transportation, tourism, telecommunication and nostalgic trade). The share of
these factors in national income in some cases exceeds half a country's GDP.
The current effects of migration through family remittances and other forms of
migrant capital pose an important policy option linking financial opportunities
in rural Latin America. Specifically, the demand for financial services by
remittance receiving households intersects with micro-finance institutions and
rural sector development.
Remittances and the Rural Sector
Emigration from rural Latin America represents an obstacle in so far as those
migrating are people with more skills and abilities. Although emigration
affects agricultural production in a decline in the available labor force, the
influx of remittances helps to compensate for the adverse effect on
agricultural productivity by generating a demand for goods, which in turn has
a multiplier effect on the local economy.
A significant flow of remittances go to rural areas in countries like Mexico,
El Salvador, the Dominican Republic, Haiti, and Nicaragua. The top 10 remittance-receiving states in Mexico come from a combination of urban and rural settings—Guanajuato, Jalisco, Michoacán, San Luis Potosí, Guerrero, Zacatecas, el
Distrito Federal, el Estado de México, Chihauhua, and Durango—and receive
over two-thirds of all remittances sent to Mexico.
Moreover, remittances play a larger role in rural Mexican economies than in
urban ones. In 1996, 10 percent of all rural households reported receiving
remittances while less than four percent of urban households reported receiving
In El Salvador, the departments which lose the highest percentages of their
populations to migration—San Vicente, Cabañas, Chalatenango, Morazán, La
Unión, and Sonsonante—are the most ecologically deteriorated states, they
have the lowest standards of living, and lack significant infrastructure. About
40 percent of remittances receiving households are in the rural sector.
In Nicaragua, people predominantly migrate to the United States and Costa Rica.
Four in 10 people living in Managua report having a relative abroad, against 35
percent in the Pacific region and 29 percent from North-Central Nicaragua, with
predominantly rural areas. The majority of those reporting outside Managua
had relatives working in Costa Rica, whereas those living in Managua had
relatives predominantly migrating to the United States.
In the rural sector, a portion of remittances are utilized to purchase land.
Mexican remittance recipients in mostly rural areas typically spent more money
on machinery and other equipment than their counterparts in higher-density
Savings Mobilization and Remittances
As foreign savings, remittances are influencing not only spending but also
investment behavior. A portion of remittances is saved or invested on
education, health, or wealth generation. Therefore, remittances are already
connected to savings mobilization in many Latin American countries.
Remittance-receiving households not only save a portion of their money, but
also play an investment and insurance function. In the case of investment,
immigrants send money back home with the specific purpose of procuring an
investment opportunity. Immigrants buy land, materials to work the land, or
seed to plant.
A recent study in Mexico showed that remittances were
responsible for 27 percent of the capital invested in micro-enterprises in
Mexico, and 40 percent of the capital in the major remittance-receiving areas
of the country (Woodruf and Zenteno 2001).
Other studies have shown that immigrant remittances also operate as a form
of insurance to protect before future uncertainties. Susan Pozo argues that
when remittances continue an incremental trend, although immigrants face income
risks, the money is sent home "to purchase assets" as a form of precautionary
savings (Pozo and Amuedo 2002).
Pozo stresses that "older migrants, female migrants, migrants with a greater
fraction of family members working for pay, migrants who came accompanied by
friends/family to the United States, and migrants with greater educational
attainment are more likely to remit for asset accumulation."
Remittances also have a positive effect in the rural sector when they alleviate
the restrictions that limit local production due to the creation of employment.
Most of these connections are spontaneous and often occur under conditions of
incomplete information for the entrepreneur about affordable lending
opportunities. Within this context, micro-finance institutions and credit
unions are poised to play a key role in bringing financial services to an
already existing demand for economic transactions.
Of significant importance for savings mobilization are credit union operations
in the rural sector. One of the major constraints in development has been the
lack of adequate credit to individuals in rural areas. The end result has been
that the average citizen, and especially lower-income cohorts, have not had
access to financial services, nor have banks relied on them to draw assets.
A recent study on Latin America's income inequality points to the deficiencies
of banking institutions as a major source of inequality. "Financial markets are
underdeveloped in Latin America and the blame goes beyond the region's history
of inflation and financial instability. Weak institutions to support credit
markets are also at fault" (IPES 1999).
Less than five percent of established small business entrepreneurs receive loans
from commercial banks. Moreover, credit unions and micro-finance institutions
that supply a demand for financial services to those outside the preference of
commercial banks do not have a large loan portfolio. Such portfolios are one
percent or less of what commercial banks hold in Latin America (IPES 1999,
Financial institutions have traditionally placed a high risk on lending and
investing in agriculture and the rural sector. With a recurrent flow of
remittances, households have posed a demand for financial services that is not
supplied by commercial banks. However, local savings mobilization intersects
between remittances and local development.
In the rural sector, remittances not only take longer to arrive, but recipient
households spend time picking up the money in other cities, which sometimes, if
not often, are one hour from the hometown. Costs thus increase for households.
One solution to this situation is the use of financial institutions already
operating in the areas, such as micro-finance institutions and credit unions.
The participation of alternative financial institutions throughout remittance
receiving areas, such as community banks, savings and credit cooperatives and
micro-finance businesses, is critical and becomes a form of financial
These institutions provide access and outreach to lower-income communities and
isolated rural areas that large commercial banks have traditionally ignored.
In the Dominican Republic, many credit union branches operate in rural areas
and sectors less served by banks. Moreover, cooperatives also offer a more
welcoming environment and approach for remittance recipients, as they seem to
be less "formal" than banks. One example is San Jose de las Matas cooperative,
which transferred half a million dollars in remittances during a 12-month
period in 2001. Since using the cooperative service, many remittance
recipients have themselves become members.
Because of the success in this and other cooperatives, and the existence of
remittances going to the rural sector, the Association of Cooperatives in the
Dominican Republic is expanding its services by providing ATMs to the cooperative network
while setting up a more effective and inexpensive money transfer system than
the one currently offered by remittance agencies.
In Mexico, the micro-bank in the Mixteca region in Oaxaca, Xuu Ñuu Ndavi (Money
of the Poor People) was created with help from immigrants. Of the $170,000
received in remittances after the first year of operation, the micro-bank's 168
members (83 of whom are women) accumulated $160,000 in savings.
El Salvador's federation of credit unions, FEDECACES, has an estimated 80
percent of affiliated credit unions located outside of San Salvador. Once the
cooperatives became involved in money transfers from the US, the flow of money
rose to $22 million in 2002 from less than $2 million in 2001, with a
corresponding significant increase in membership that incorporated recipients
into formerly inaccessible financial services.
The link between remittances and development is growing stronger as multiple
players connect in a broader web of relationships that move from social to
financial interactions. As these interactions consolidate, the opportunities
to improve the quality of life for many in rural areas expand. Governments,
donors, foundations, and migrant groups must join in partnerships to further
advance social change by identifying projects that add value to remittances.
IPES 1998/1999: Facing Up to Inequality in Latin America Washington: IADB,
Pozo, Susan and Catalina Amuedo-Dorantes, "Remittances as Insurance: Evidence
from Mexican Migrants", July 24th, 2002. Paper presented at the Norteast
Universities Development Consortium Conference, Williams College.
Woodruf, Christopher, and Rene Zenteno, Remittances and Micro-enterprises in
Mexico, unpublished manuscript, 2001.
Back to the top
If you have questions or comments about this article, contact us at
2002-2013 Migration Policy Institute.
All rights reserved.
Migration Information Source, ISSN 1946-4037
MPI · 1400 16th St. NW, Suite 300 · Washington, DC 20036
ph: (001) 202-266-1940 · fax: (001) 202-266-1900