Remittances rose in 2008. This year will be different

Remittances to developing countries

What goes up

From The Economist

THINGS that grew rapidly in 2008 included home foreclosures, government deficits and the ranks of the jobless. More encouragingly, remittances to developing countries also expanded. The World Bank reckons that migrant workers sent $328 billion home to their families last year, 15% more than in 2007.

This continued growth is particularly striking because it came in a year when other private financial flows into the developing world declined dramatically. The net inflows of private capital to these economies dropped by nearly two-fifths, from $1.16 trillion in 2007 to $707 billion, as panicky rich-world investors turned inward and foreign banks became increasingly reluctant to lend across borders. Dilip Ratha of the World Bank wryly remarks that migrants are being “thrust into the role of a sort of lender of last resort.”

However, the chances that remittances will continue to hold up this year are slim. Some argue that these payments are less affected by downturns than other kinds of financial flows because they are sent primarily to support people’s families. But whatever their motives, migrant workers must earn before they can remit. And this crisis has hit countries where migrants work harder than the countries they come from.

The continued growth in remittances in 2008 may not reflect their resilience to recession so much as the fact that it takes a few months for changes in host economies to have an effect. Remittances to Mexico, which are dominated by money from Mexicans working on American building sites, follow the upticks and downturns in American housing starts with a lag of a few months (see chart). As with Mexico, remittances to Guatemala and El Salvador, most of whose migrants are also in America, were at least 10% lower in the first half of this year than in the same period in 2008. America was the first big economy to enter recession so it may only be a matter of time before flows from other countries also fall.

And the shallower the recovery in the rich world, the more unemployment will rise. Spain and the Czech Republic are already offering to pay migrant workers to go home. Other governments, from Italy to South Korea, have reduced the number of temporary workers they let in. The World Bank is forecasting a decline in remittances of 7-10% in 2009.

Source:The Economist