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Remittance Trends in Central America
By Dovelyn Agunias
Migration Policy Institute
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April 2006
Recent years have seen an impressive surge in official remittance flows to
Central America. The Inter-American Development Bank (IADB) estimates the region
received US$7.8 billion through official channels in 2004, a 17 percent increase
from the 2003 figure of US$6.7 billion.
Although a huge portion of remittance flows to Latin America and the Caribbean
(LAC) still goes to countries outside of Central America — almost 60
percent reportedly just to Mexico, Brazil, and Colombia — Central
America's slice of the remittance pie has nonetheless been growing. It
now accounts for 17 percent of the official flow to LAC, up from just 15 percent
in 2001 according to IADB.
Reporting almost US$2.7 billion in official flows in 2004, Guatemala topped
the list, followed closely by El Salvador, with US$2.5 billion (see Table 1).
These two countries, which account for nearly two-thirds of the two million
Central Americans counted in the 2000 US census, receive almost 64 percent
of total remittance flows to Central America, and they are the fourth- and
fifth-largest remittance-receiving countries in LAC. Remittance growth in Guatemala
tripled from 2001 to 2004.
Honduras and Nicaragua followed at some distance, at around the US$1 billion
mark, while Panama, Costa Rica, and Belize trailed with less than US$325 million
in remittances in 2004. The low levels of the latter three reflect the fact
that they have relatively few emigrants in the United States.
Not surprisingly, the dominant source of these remittance flows is the United
States. A good proportion, however, is also believed to be sent from other
LAC countries. Despite the attention given to remittances from developed countries,
particularly the United States in the case of Latin America, these so-called
South-South remittance flows are far from negligible.
A 2003 study of Costa Rica and Nicaragua suggests that about one-third of remittances
received in Nicaragua are actually sent from Costa Rica. Given that Mexico is
the second-largest destination of Guatemalan workers after the United States,
it can also be assumed that at least some of the remittances going to Guatemala
are coming from Mexico. Indeed, research conducted for IADB estimated that, in
2002, about US$1.5 billion of the US$32 billion remitted to LAC were actually
interregional.
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Table 1. Remittances to Central American Countries in Millions of US Dollars, 2001 to 2004
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| Country |
2001 |
2002 |
2003 |
2004 |
| Guatemala |
584 |
1,690 |
2,106 |
2,681 |
| El Salvador |
1,911 |
2,206 |
2,316 |
2,548 |
| Honduras |
460 |
770 |
862 |
1134 |
| Nicaragua |
660 |
759 |
788 |
810 |
| Costa Rica |
80 |
135 |
306 |
320 |
| Panama |
-- |
-- |
220 |
231 |
| Belize |
-- |
-- |
73 |
77 |
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Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of data
from the Inter-American Development Bank/Multilateral Investment Fund (IADB/MIF)
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In interpreting these numbers, it is critical to realize they are official
estimates and, thus, do not take into account remittances flowing through informal
channels, such as those hand carried by migrants on visits home. Given the
predominance of informal transfer mechanisms in Central America, it is safe
to assume these figures are, more probably than not, underestimates.
Indeed, evidence from household surveys suggests widespread use of informal
remittance channels to Central America, as in many other regions. The
World Bank estimates, for example, that informal remittances account for about
five percent of the actual remittance flow to Guatemala and almost 15 percent
to El Salvador.
Remittances and the Macroeconomy
The importance of these huge remittance flows to the economies of Central
America becomes very visible once they are compared to key economic aggregates
such as gross domestic product (GDP), foreign direct investment (FDI), official
development assistance (ODA), and exports.
In all but three Central American countries, remittances are equivalent
to at least 10 percent of GDP, suggesting a heavy dependence on remittances
as an engine of economic activity. Figures from Nicaragua, El Salvador, and
Honduras are particularly high (see Table 2).
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Table 2. Remittances to Central America as a Percentage of GDP, FDI, ODA, and Tourism Receipts (2004)
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| Countries |
GDP |
FDI |
ODA |
Tourism |
| Guatemala |
10% |
2145% |
3052% |
348% |
| El Salvador |
16.10% |
655% |
6620% |
756% |
Nicaragua |
17.80% |
310% |
127% |
432% |
| Honduras |
15.10% |
582% |
385% |
286% |
| Costa Rica |
1.70% |
55% |
7960% |
24% |
| Panama |
1.80% |
49% |
6435% |
35% |
| Belize |
6.80% |
253% |
1556% |
58% |
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Source: Inter-American Development Bank, 2005
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Except in Costa Rica and Panama, remittances also far outweigh both private
capital flows and official development assistance. Particularly remarkable
in this regard is Guatemala, where remittances are 21 times greater than FDI
and 30 times greater than ODA.
Figures from the rest of Central America are no less striking. As share of
FDI and ODA, remittances also scored very high in El Salvador, Honduras, and
Nicaragua. Interestingly, Belize's remittance flows, although low in
absolute value, are two and a half times greater than FDI and 15 times greater
than ODA. Indeed, in Guatemala, El Salvador, Honduras, and Belize, remittances
are far larger than ODA and FDI combined.
Remittances also made up for the shortfall in exports of some traditional
products, dwarfing coffee exports in Guatemala, El Salvador, and Nicaragua,
and banana exports in Honduras and Panama. Remittances, again with the exception
of Costa Rica, Panama, and Belize, are also at least three times greater than
tourism receipts.
For political scientist Manuel Orozco, a long-time analyst of remittances,
this dominance of remittance flows over traditional export receipts signals
that Central American countries are in the midst of a transition away from "agro-exporting
economies" and toward "transnationally integrated households" that
are mainly exporting labor to the United States.
Remittances and Development
Despite remittances increasing in magnitude and importance for the majority
of Central American countries today, it is interesting to note that their impact
on development is far from clear. For decades now, the perception has lingered
that remittances are used mostly for consumption by individual households and
rarely, if at all, invested in productive enterprises. Thus the developmental
potential of remittances is generally thought to be low. In fact, it has been
argued that remittances lead not to long-term economic growth but to a passive
and dangerous dependency.
Recent household surveys do show that Central Americans who receive remittances
mainly use them to cover basic necessities. According to the World Bank, about
77 percent of remittances, on average, are believed to be spent on immediate
needs, such as food. At 84 percent of total expenditures, consumption
spending is particularly high in El Salvador while Honduras (77 percent) and
Guatemala (68 percent) are not far behind.
More recently, however, an increasing number of studies suggest a more positive
developmental role for remittances. Although a big chunk of the literature
on this topic is concentrated on other countries and regions, a relatively
small number of studies focus on some Central American countries.
For example, economist Richard Adams found that, contrary to common perception,
Guatemalan households receiving remittances actually spend slightly less, at
the margin, on consumption — food and consumer goods and durables — than
do households receiving no remittances. For Adams, this rather surprising result
may be explained by Guatemalan households' tendency to view their remittances
as a temporary stream of income thus precluding more spending on consumption.
Adams further found that although remittances only had a limited role in reducing
the number of poor people in Guatemala, they do reduce the depth of poverty
and are therefore particularly beneficial for the poorest of the poor. According
to his calculations, remittances reduced extreme poverty by almost 22 percent.
A study on child schooling in El Salvador also found that remittances have
a large and significant effect on school retention. From a development standpoint,
this finding is clearly promising. Since the increased investments in education
contribute to human capital formation, it is likely that remittances may benefit
developing countries' long-term growth prospects.
Remittances have also been found to rise when the recipient economy suffers
a downturn in activity or macroeconomic shocks due to financial crisis, natural
disaster, or political conflict. By compensating for foreign-exchange losses
due to these events, World Bank economist Dilip Ratha has found that remittances
may smooth consumption and thus contribute to the stability of recipient economies.
Indeed, emigration from Central America and the remittances that soon followed
were mainly a response to the political turmoil of the 1980s and early 1990s
as well as to natural disasters such as Hurricane Mitch in Honduras in 1998.
Very recently, the Economic Commission for Latin America and the Caribbean
(ECLAC) released the findings of a comprehensive, region-wide study of the
impact of remittances on poverty and inequality. This study included the top
four remittance-receivers in Central America — Guatemala, El Salvador,
Honduras, and Nicaragua. In this study, however, the results were mixed and
prone to different interpretations.
On one hand, the ECLAC study reported that remittances' impact on poverty,
indigence rates, and income distribution is very limited. The study revealed
that remittances reduced poverty rates in Central America by only 2.2 percentage
points. It is important to note that this average is skewed because of
El Salvador, which registered a particularly high decline of 4.5 percentage
points (see Table 3).
Remittances' impact on indigence is much higher but still limited
to a 2.7 percentage-point reduction. This average is skewed, once again, by
El Salvador, which registered a higher reduction of 5.4 percentage points.
Remittances' effect on income distribution, though perceptible, is also
very limited. El Salvador registered the most significant improvement with
an almost five percent reduction in the value of the Gini index, the most commonly
used measure of inequality, while Guatemala and Nicaragua were at the far lower
end of the scale. Remittances were associated with a small increase in inequality
in El Salvador.
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Table 3. Impact of Remittances on Poverty and Indigence Rates on Select Central American Countries, 2002
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| Country |
Year |
Indigence without Remittances (percent) |
Indigence with Remittances (percent) |
Absolute Variation |
Poverty without Remittances (percent) |
Poverty With Remittances (percent) |
Absolute Variation |
| El Salvador |
2001 |
27.5 |
22.1 |
-5.4 |
53.4 |
48.9 |
-4.5 |
| Guatemala |
2002 |
33 |
30.9 |
-2.1 |
61.8 |
60.2 |
-1.6 |
| Honduras |
2002 |
55.9 |
54.5 |
-1.4 |
78.5 |
77.3 |
-1.2 |
| Nicaragua |
2001 |
44.5 |
42.5 |
-2 |
70.9 |
69.4 |
-1.5 |
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Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of special tabulations of data from
household surveys conducted in the respective countries.
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On the other hand, however, the study also found that if the analysis focused
only on remittance-receiving households, remittances enabled many recipients
to escape poverty. The Central American countries in the study recorded,
on average, a 20 percent decline in poverty rates among these households. El
Salvador registered the highest drop in Central America with a 39 percent poverty-rate
reduction and was followed by Honduras, Guatemala, and Nicaragua.
The impact of remittances on indigence in receiving households is even more
dramatic. ECLAC found that 64 percent of Salvadoran households receiving
remittances were lifted out of extreme poverty. Corresponding figures
for Guatemala (43 percent), Honduras (28 percent) and Nicaragua (27 percent),
although smaller, are still very significant.
These numbers can mean different things to different people. They can affirm
what skeptics have been pointing out for decades — that the benefits
of remittances do not accrue beyond the households receiving them. They can
even contribute to inequality, as the case of Honduras revealed.
Others, however, might look at the same numbers and emphasize the significant
number of remittance-receiving households that managed to improve their living
conditions and escape poverty. Further, it can be argued that the dismal
impact of remittances on aggregate poverty and indigence figures stems from
the fact that the number of households receiving these transfers is still small.
In other words, if more households received remittances, then the impact on
poverty would be much more pronounced.
The authors of the ECLAC study clearly take the latter view. They emphasize
that remittances would lift 2.5 million Latin Americans above the poverty line.
They further suggest that if, as they suspect, the data utilized in their
study came from a source that underreported remittances received, then several
million more persons in Latin America have been lifted out of poverty.
Ultimately, however, the developmental impact of remittances on Central American
economies can only be ascertained from empirical studies based on more accurate
data.
Migrant, Government, and Private Sector Initiatives
As the discussion on the costs and benefits of remittances occupy the academic
literature and professional circles, key stakeholders have already launched
initiatives aimed at maximizing the benefits of remittances. This is hardly
surprising given that the ongoing debate on the impacts of remittances is occurring
at a time when the perceived developmental potential of remittances has never
been greater.
One of the most well known of such initiatives started with the migrants themselves.
Like their counterparts from the rest of LAC, Central Americans have organized
hometown associations, or HTAs.
Members of these associations pool their financial resources and send money
or goods back to their hometowns. These so-called collective remittances are
used to finance infrastructure and social projects, such as remodeling churches
and schools. Guatemalan HTAs, for example, have been involved in purchasing
small fire trucks for their hometowns, mobilizing support for their country
after the 1996 peace agreements, and even in raising money for crises such
as Hurricane Mitch.
Although, at present, only one percent of all remittances in Central America
come from HTAs, the International Fund for Agricultural Development recently
estimated that their contribution could rise to between three and five percent in
10 years if their management and institutional capacity improves.
Central American governments have also taken initiatives to maximize the benefits
from remittances. El Salvador is particularly noteworthy in this regard. Almost
six years ago, it created an office that coordinates governmental outreach
efforts to Salvadorans living abroad. El Salvador's decision in
2000 to adopt the US dollar as its legal tender was also widely acknowledged
to be related to the nation's heavy reliance on foreign exchange coming
from remittances.
Taking its cue from Mexico, El Salvador also launched a $300,000 matching
fund in 2003 to implement joint partnership activities with HTAs. This grant
will act as an incentive for HTAs to start and/or broaden development initiatives
for their hometowns. Unlike in Mexico, however, the Salvadoran government
is offering a one-to-one match with HTA money. Interestingly, related initiatives
in Guatemala reportedly fell short in gaining government support and never
took off.
Members of civil society, including international organizations, have also
taken an interest in remittances. Through its Multilateral Investment Fund (MIF), IADB
has been particularly active in the region. One of its rallying cries — bank the unbanked — is
especially important in Central America given that only two out of 10 Central
American migrants have bank accounts. This figure is significantly lower than
LAC's ratio of six out of 10.
Credit unions in El Salvador, Guatemala, Honduras, and Nicaragua were instrumental
in the creation of the International Remittance Network (IRnet) in July 1999.
The network, which facilitates remittance flows from the United States to Latin
America, reportedly lowered remittance costs not only by generating competition
but also through raising customer awareness of remittance fees.
The private sector has also become more involved. Notably, several banks in
Central America have been able to raise relatively cheap and long-term financing
from international capital markets via securitization of future remittance
flows.
The volume of remittance securitization has grown rapidly since Mexico made
the first transaction in 1994.
These initiatives are just a sample of an increasing array of activities, programs,
and policies different actors have taken to maximize the benefits of remittances.
Unfortunately, the effectiveness of these initiatives is unknown because evaluations
are either incomplete or unavailable for public consumption.
What is clear, however, is that remittances do play an increasingly significant
role in Central America, a role that, given current remittance flow projections,
will only increase in the years ahead. Whether remittances will be able to lift this region of almost 40 million people out of poverty is a
question only time can truly answer. If empirical findings from other regions
are indicative of what is happening in Central America, then the skeptics are
bound to be disappointed.
Sources:
Adams, Richard. 2006. "Remittances, Poverty and Investment in Guatemala." International
Migration, Remittances, and the Brain Drain. Edited by Çaglar Özden
and Maurice Schiff. Washington, DC: World Bank.
Cox-Edwards, Alejandro and Manuelita Ureta. 2003. "International Migration,
Remittances, and Schooling: Evidence from El Salvador." Journal of
Development Economics 72(2): 429–61.
Economic Commission for Latin America and the Caribbean (ECLAC). 2006. "Social
Panorama of Latin America 2005: Preliminary Version." United Nations.
Available online.
Inter-American Development Bank. 2005. "Transforming Labor Markets and
Promoting Financial Democracy, Statistical Comparison.", November.
Available online.
Fagen, Patricia and Micah N. Bump. 2006. " Remittances between Neighboring
Countries in Latin America." Beyond Small Change, Making Migrant
Remittances Work for Development. Edited by Donald Terry and Steven Wilson.Washington,
DC: Inter-American Development Bank.
Orozco, Manuel. 2006. "Migration, Money and Markets: The New Realities
for Central America" in Beyond Small Change, Making Migrant Remittances
Work for Development, Edited by Donald Terry and Steven Wilson.Inter-American
Development Bank Washington DC
Ratha, Dilip. 2006. "Trends, Determinants and Macroeconomic Effects
of Remittance." Global Economic Prospects 2006: Economic Implications
of Remittances and Migration Washington, DC: The International Bank for
Reconstruction and Development / The World Bank.
Sander, Cerstin. 2003. "Migrant Remittances to Developing Countries:
A Scoping Study: Overview and Introduction to Issues fro Pro-Poor Financial
Services." Paper prepared for the UK Department of International
Development (DFID). June.
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