Workers Remittances in Mexico

Workers Remittances in Mexico February 20th, 2006

Index • IMPORTANCE • SOME FEATURES OF REMITTENTS AND BENEFICIARIES • CURRENT REGULATION AND INTERNATIONAL TRANSFER OF FUNDS: Agreement Banco de México – Federal Reserve Bank • IMPACT OF REMITTANCES IN THE ECONOMY • DESTINATION OF REMITTANCES • REMITTANCES AND ECONOMIC DEVELOPMENT • FINAL COMMENTS

I. Importance (Total income) During 2004 remittances totaled US$16.6 billion and US$20 billion in 2005. These figures represent respective annual increases of 24 y 20.6%. 20,035 20,000 20,000 18,000 18,000 16,613 16,000 16,000 14,000 13,396 14,000 12,000 10,000 12,000 8,000 9,814 10,000 6,000 8,000 4,000 6,000 2,000 0 4,000 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2002 2003 2004 2005 Workers Remittances (Million US dollars; 2005 - 2005) Workers Remittances (Million US dollars; 1995 - 2005)

Workers remittances have been very dynamic in recent years. In 1995-2000 remittances grew at an annual rate of 12.3%, whereas in 2000-2005 they did so at a rate of 23%. The rapid increase of recent years stems from a better statistical coverage, as well as from the growth of such flows. However, an increase in the number of migrants and decreasing transfer costs, also explain this behavior. I. Importance (Evolution in the Last Decade) 1995 1998 2000 2002 2003 2004 2005 Millions of US dollars Total Remittances 3,673 5,627 6,573 9,814 13,396 16,613 20,035 Money Orders 1,456 1,871 1,434 687 1,623 1,883 1,867 Personal Checks 26 62 9 10 6 0 0 Electronic Transfers 1,891 3,250 4,642 8,798 11,512 14,496 17,895 Direct Transfers * 299 444 488 320 255 234 273 Percentage Change Total Remittances 5.6 15.7 11.2 10.3 36.5 24.0 20.6 Money Orders -10.2 8.2 -1.0 -14.5 136.4 16.0 -0.9 Checks -47.5 -21.5 -83.2 -1.1 -36.2 N.S. N.S. Electronic Transfers 24.3 23.2 18.0 13.0 30.8 22.5 23.4 Direct Transfers * 4.9 5.8 2.7 7.2 -20.4 20.4 16.9 Inflows from workers remittances N.S: Not significant. * Transfers of goods and cash.

I. Importance (Number of Transactions and Average Amount The number of remittances transactions has also shown a significant increase. Such number went from 11.3 million transactions in 1995, to 18 million in 2000 and 58.7 million in 2005. For the last four years, the average remittance has remained in a rank between 320 and 341 dollars. 1995 1998 2000 2002 2003 2004 2005 Inflow1/ 3,673 4,744 6,573 9,814 13,396 16,613 20,035 Number 2/ 11,263 15,901 17,999 29,954 41,808 50,874 58,739 Average Amount3/ 326 298 365 328 320 327 341 Inflows from Remittances (Amount, number of transactions and average remittance) 1/ Millions of US dollars. 2/ Thousands of transactions. 3/ Dollars.

I. Importance (Remittances Instruments) 89.3 90 80 Electronic 70 60 50 40 Money Orders 30 20 9.3 Other 10 1.4 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Inflows from Remittances (Percentage structure*) 2005 1995 2000 2001 2002 2004 Total Remittances 100.0 100.0 100.0 100.0 100.0 100.0 Money Orders 39.7 21.8 9.0 7.0 11.3 9.3 Checks 0.7 0.1 0.1 0.1 0.0 0.0 Electronic Transfers 51.5 70.6 87.5 89.6 87.3 89.3 Direct Transfers 8.1 7.4 3.4 3.3 1.4 1.4 Inflows from Remittances (Percentage Structure by Instrument) • The share of electronic transfers has raised in recent years. This, due to technological change and an increased competition among the various intermediaries, who have been looking for more efficient electronic instruments that allow them to offer lower prices, as well as more safety and speed. • The quality of remittances statistics is supported in information originated 99% in accounting records from banks and fund transfers firms. The remaining 1% consist of direct transfers captured by means of the International Travelers Survey, also applied by Banco de México.

The amount of remittances received by Mexico is very high when compared with other inflows of the external accounts. I. Importance (Remittances and Other Inflows of the External Accounts) 170% 128% 113% 93% 71% Crude oil Exports Oil Balance Surplus International Travel Inflows* Foreign Direct Investment* Maquiladora Surplus Workers Remittances (Percentages in 2005)

I. Importance (Workers´ Remittances as a Percentage of GDP) Remittances went from 0.9 percent of GDP in 1990-1994, to 1.2 percent in 1995-2000, only to increase significantly to 2.6% en 2005. 2.64 2.46 2.10 1.51 1.43 1.28 1.27 1.23 1.21 1.13 1.13 0.95 0.85 0.85 0.83 0.82 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Workers Remittances (% del GDP)

I. Importance (Workers´ Remittances by Mexican State) 2,595 (13.0) 2,595 (13.0) Mich. Mich Mich Mich. 634.8 634.8 Mich Mich. 15.8 15.8 Gto. Gto 1,715 (8.6) 1,715 (8.6) Zac Zac. 366.2 366.2 Zac Zac. 8.7 8.7 1,693 (8.5) 1,693 (8.5) 346.6 346.6 8.5 8.5 Jal Jal. Gto. Gto Oax. Oax M M é é x. x. 1,675 (8.4) 1,675 (8.4) Ags. Ags 303.2 303.2 7.3 7.3 Hgo Hgo. D.F D.F . . 1,452 (7.2) 1,452 (7.2) Hgo Hgo. 302.9 302.9 Gro. Gro 7.3 7.3 1,174 (5.9) 1,174 (5.9) 298.8 298.8 Pue Pue. Nay. Nay Nay Nay. 6.8 6.8 Ver. Ver. 1,155 (5.8) 1,155 (5.8) Gro. Gro 293.6 293.6 6.4 6.4 Gto. Gto Oax. Oax 1,002 (5.0) 1,002 (5.0) Mor Mor. 278.1 278.1 Chis Chis. 5.1 5.1 957 (4.8) 957 (4.8) 272.8 272.8 Gro Gro. Oax. Oax Tlax Tlax. 5.1 5.1 718 (3.6) 718 (3.6) 253.1 253.1 4.5 4.5 Hgo Hgo. Jal Jal. Mor Mor. Chis. Chis 655 (3.3) 655 (3.3) Qro Qro. 243.4 243.4 4.2 4.2 Pue. Pue Zac. Zac 496 (2.5) 496 (2.5) Dgo Dgo. 235.2 235.2 Ver. Ver. 3.7 3.7 476 (2.4) 476 (2.4) 231.9 231.9 Mor Mor. Col. Col. S.L.P. S.L.P 3.7 3.7 S.L.P S.L.P . . 476 (2.4) 476 (2.4) Pue Pue. 205.7 205.7 3.6 3.6 Col. Col. Qro Qro. 392 (2.0) 392 (2.0) Tlax Tlax. 198.4 198.4 Jal Jal. 3.6 3.6 371 (1.8) 371 (1.8) 198.4 198.4 Sin. Sin. S.L.P. S.L.P Dgo. Dgo 3.5 3.5 Dgo Dgo. 342 (1.7) 342 (1.7) D.F. D.F 167.5 167.5 3.4 3.4 Ags. Ags Ags. Ags 317 (1.6) 317 (1.6) Ver. Ver. 164.1 164.1 3.0 3.0 Qro Qro. 302 (1.5) 302 (1.5) 150.5 150.5 Tamps Tamps. Chis. Chis . Sin. Sin. 2.6 2.6 Millions of Dollars and Percentage Structure* As a Percentage of State GDP Chih. Chih 293 (1.5) 293 (1.5) Sin. Sin. 140.0 140.0 M M é é x. x. 2.3 2.3 Dollars Per capita Nay Nay. 280 (1.4) 280 (1.4) M M é é x. x. 110.2 110.2 1.3 1.3 Tab. Tab. 231 (1.2) 231 (1.2) 99.5 99.5 N.L N.L. Tamps. Tamps . Tamps. 1.2 1.2 Tlax Tlax. 210 (1.0) 210 (1.0) Chih. Chih . 85.9 85.9 Son. Son. 1.0 1.0 Coah Coah. 189 (0.9) 189 (0.9) Son. Son. 78.8 78.8 Chih. Chih 0.9 0.9 187 (0.9) 187 (0.9) 77.7 77.7 B.C B.C. Coah. Coah 0.8 0.8 D.F D.F. 186 (0.9) 186 (0.9) 65.9 65.9 Son. Son. Camp. Camp Coah. Coah 0.8 0.8 Col. Col. 145 (0.7) 145 (0.7) Q.R Q.R. 64.0 64.0 Yuc Yuc. 0.7 0.7 Tab. Tab. 126 (0.6) 126 (0.6) Tab. Tab. 61.1 61.1 0.7 0.7 B.C. B.C 80 (0.4) 80 (0.4) 59.7 59.7 Yuc Yuc. B.C. B.C Q.R Q.R. 0.6 0.6 Q.R. Q.R 73 (0.4) 73 (0.4) N.L. N.L 55.3 55.3 Camp. Camp 0.5 0.5 Camp Camp. . . 49 (0.2) 49 (0.2) Yuc Yuc. 45.3 45.3 B.C.S. 0.5 0.5 21 (0.1) 21 (0.1) 42.8 42.8 0.4 0.4 B.C.S. B.C.S. N.L. N.L Workers´ Remittances by Mexican States in 2005 * Figures in brackets refer to the share of each state in the total remittances.

I. Importance (Workers Remittances: an International Comparison) During 2004 Mexico ranked third among the main remittances recipient countries. Millions of Percentage Millions of Percentage Dollars of GDP Dollars del GDP 1. India e/ 23,000 3.5 12. Guatemala 2,551 9.8 2. China e/ 21,300 1.4 13. El Salvador 2,548 16.1 3. Mexico 14. Brazil 2,459 0.4 2002 9,814 1.5 15. Dominican Republic e/ 2,300 11.8 2003 13,396 2.1 16. Greece 1/ 2,122 1.0 2004 16,613 2.5 17. Ecuador 1/ 1,604 5.4 4. Philippines 8,961 10.5 18. Indonesia e/ 1,300 0.5 5. Spain 5,179 0.5 19. Honduras 1,135 15.3 6. Moroco 4,218 8.5 20. Peru 1,123 1.7 7. Pakistan 3,943 4.8 21. Tunisia 1/ 1,100 3.9 8. Bangladesh 3,400 6.1 22. Croatia 851 2.6 9. Egypt 3,341 3.3 23. Turkey 804 0.3 10. Colombia 3,170 3.3 24. Nicaragua 519 11.7 11. Portugal 3,032 1.8 25. Costa Rica 302 1.6 Workers Remittances in Various Countries in 2004 Source: Banco de México (for Mexico) and International Monetary Fund. 1/ Data obtained from the respective country. e/ Estimated figures of the World Bank.

I. Importance (Transfers Cost from Mexico to the US) Annual Average San Jose Los Ángeles Nueva York Chicago Dallas Houston Indianapolis Miami Sacramento Total 1999 21.8 27.1 21.8 42.1 28.3 27.4 27.0 32.4 -- 28.5 2000 18.8 24.3 21.4 29.7 23.7 22.6 21.6 17.1 29.2 23.2 2001 12.7 16.2 15.7 21.1 13.1 17.0 15.7 14.7 15.0 15.7 2002 13.3 14.6 14.9 17.1 13.9 16.4 14.2 15.3 14.4 14.9 2003 11.2 13.1 13.1 11.9 12.0 13.1 12.8 14.5 13.1 12.8 2004 11.2 12.3 12.6 11.3 11.4 12.0 12.2 12.2 11.7 11.9 2005 9.4 10.5 10.9 9.0 9.9 9.5 10.0 10.1 10.1 9.9 Source: Profeco • In recent years the costs of money transfers to Mexico has been reduced. The main factors that explain such reduction are: • The rapid growth of the US population of Mexican origin. • More information available about the costs of the various intermediaries, as well as an increased competition among them. • The greater use of international electronic transfers has allowed money remittances to become quicker and safer. Total Cost of Money Transfers from the U.S. to Mexico of an Average Amount of US$300 Dollars from a Sample of Firms by City of Origin (US Dollars per Transfer)

Surveys compiled by Banco de México in northern border cities from Mexican migrants living in the US who were planning to spend some days in Mexico, provide information on the following : • Remittances to relatives and sending frequency. Around 80% of those interviewed said that they used to send money to their relatives in Mexico on a regular basis, and that they used to do it 10 times a year. • Relatives in the U.S. and arrival to that country. Four out of five respondents who send remittances stated that they already had relatives in the U.S. when they first arrived, most of them said they used to live with them at arrival. • Beneficiaries of remittances. Two thirds of remitters (65%) said that the main recipients are their parents (well above wife and children), followed in frequency by wife (14%) and siblings (9%). However, the highest average amount corresponds to the wife. • Recipients´ other sources of income. Almost half of the remitters surveyed said that their beneficiaries have additional sources of income. II. Some Features of the Sender and the Recipient of Remittances

Gender of the Remittent. More than 90% percent of the remitters who were surveyed were men. • Visit and Amount of the Transfer. When migrants visit their relatives in Mexico, they normally deliver a bigger amount of money than the one they use to send on a monthly basis. • Average Remittance and Income of the Worker. As expected, the survey shows that the average amount of the remittance is directly related to the worker’s income. • Income and Academic Level of the Remittent. Ranked by their income, the academic level of the worker increases (also the average monthly remittance). • Years of Residence and Average Remittance. With age and years of residence abroad, the average remittance tends to decrease, meaning that, with time, workers generate increasing economic commitments in the United States. • Use of Remittances. According to the responses, the main use of the remittances is consumption. However, almost half (44%) of those who were surveyed stated that their beneficiaries have used part of the resources they receive to improve or to buy a house. II. Some Features of the Sender and the Recipient of Remittances

III. Current Regulation • Banco de México has legal power to regulate fund transfer services carried out by financial institutions and any other agent professionally involved in such activity. • On October the 28th 2002, a set of rules were issued instructing all firms dedicated to the service of funds transfers to provide monthly information on the amounts and volume of remittances sent to Mexico, classified by Mexican recipient state. • The rules were issued with the following goals : a) to create a register of firms dedicated to money transfers, b) to standardize the information received, and c) to produce information at a national level and state level.

III. Current Regulation (Banco de México – Federal Reserve Bank Agreement) • There is an agreement between the Federal Reserve Bank of the United States and Banco de México to connect their respective system of payments (“Automatic Clearance”). By this agreement, banks can transmit and receive payments in a way similar to the one they use in their countries. • The system is useful for payments that can be programmed, such as workers remittances, pensions, payroll, etc. • This project is called “Direct to Mexico”.

III. Current Regulation (Banco de México – Federal Reserve Bank Agreement) • The US Government has been sending payments since October 2003. • Starting February 2004, commercial payments from the United States to Mexico have been processed from particulars (remittances and payments made by firms). • Goal: To develop a system that allows trans-border bidirectional transfers between deposit institutions of the United States and Mexico.

III. Current Regulation (Banco de México – Federal Reserve Bank Agreement) • The infrastructure allows for multilateral transfers: transfers originating in any deposit institution in the United States (Mexico) to any deposit institution in Mexico (United States). • The system is open for banking clients in the United States (for payments to Mexico). • There is a widespread joint promotional campaign by Banco de México, the Mexican embassy and consulates in the United States and the Federal Reserve Banks.

IV. The Impact of Remittances in the Economy • Remittances improve significantly the welfare of the recipient families. In Particular: • Remittances have a positive effect on their level of income and, therefore, also on consumption and investment; • they soften their consumption pattern over time; and. • They allow the families an increased consumption of basic products.

IV. The Impact of Remittances in the Economy • Remittances are an important source for the formation of physical and human capital: • by increasing the consumption of basics of the recipient families, their health conditions improve; • children in recipient households have higher academic levels than those in similar non recipient households; • It is estimated that remittances are responsible for almost 20% of capital invested in urban micro-business firms; and, • Recipient households gain access to capital by formalizing their relations with financial institutions and therefore, reduce their effective financial costs.

IV. The Impact of Remittances in the Economy • Workers’ remittances enhance macroeconomic stability: • A higher level of remittances allows for an increase of the domestic expenditure without facing major external imbalances. • By increasing the current account revenues, remittances help improve the financial position of the economy and, as a consequence, also improve the credit conditions the country faces in international markets.

IV. The Impact of Remittances in the Economy 4.0 24,000 3.8 3.6 3.5 21,000 Share of Private Consumption 3.1 Millions of US Dollars 3.0 18,000 2.5 15,000 2.2 2.1 2.0 2.0 1.9 1.9 2.0 12,000 1.8 1.7 1.5 1.5 1.4 1.4 1.4 1.5 9,000 1.2 1.2 1.2 1.1 1.1 1.0 0.9 1.0 6,000 0.7 0.5 0.5 0.5 3,000 0.0 0 2005 * 2004 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 • Remittances represent a growing share of private consumption, 3.6 % in 2004. Workers’ Remittances (Share of Private Consumption and Millions of US Dollars) */ Figures for 2005 were calculated based on information of the third quarter.

IV. The Impact of Remittances in the Economy • Based on a hypothetical exercise, it is estimated that: • Without remittances, per capita private consumption in 2004 would have been almost 3% smaller than the one observed; and, • GDP growth could have been smaller than observed by 0.3%. • Of course, these impacts are more significant in those states in which the remittances recipient families are concentrated.

V. Destination of Remittances • Most of remittances are used by households for consumption expenditure, including education expenditure. Part of such resources are used for acquisition and improvement of housing. • The results of the questionnaire applied by INEGI to 10% of Mexican households show that : • The share of Mexican households with electrical appliances (radio, TV, video recorders, refrigerators, washing machine, etc.) is higher in households that receive remittances than in those that do not receive such transfers. • In 2000, 83% of households receiving remittances owned the house where they lived, whereas the proportion was 78% for households that did not receive such transfers

VI. Remittances and Economic Development • Studies regarding worker remittances’ impact have found that those resources are mainly used to finance consumption, as well as to increase human capital (education and health expenditure). Only a small portion of remittances are oriented towards investments such as the improvement or acquisition of a house or to establish a small business. • Investment in human and physical capital has a direct impact on economic growth, while consumption expenditure affects GDP indirectly through aggregate demand.

VI. Remittances and Economic Development • Two factors have limited remittances to be channeled to investment expenditure: 1) the low portion of such remittances that is left available to finance investment expenditure; and 2) the lack of managerial culture on the side of remittances’ recipients. • Some studies have found that remittances dampen revenue falls during economic crisis, reducing family income volatility. • Evidence also suggests that members of recipient households have less incentives to search for alternative sources of income.

A number of factors have stimulated Mexican migration to the United States: Rigidities in the labor market. A poor dynamic creation of well paid jobs in the formal sector. A high and increasing number of Mexicans with family ties in the United States, which cheapens migration. It is reasonable to expect that a significant contraction of wage differentials between Mexico and the United States will take a long time to make migration less attractive to Mexican workers. Migration to the USA shows the need for pending structural changes that would widen opportunities for productive and well paid jobs in Mexico. VII. Final Comments

VII. Final Comments On the other hand, the positive effects of Mexican migrants´ remittances on the welfare of recipient families, must be stressed: Remittances have helped to reduce poverty in significant segments of the population; They have enhanced improvements in health and education for recipient families; Have provided families with better financial conditions and, that way their consumption patterns have been softened and they have also been able to invest in micro-business firms.

Workers Remittances in Mexico