Remittances from Immigrants to Developing World Down

The Economist reports this week (August 1, 2009, p 64), “Remittances to developing countries: what goes up,” that remittance payments by immigrants, legal and illegal, from developed countries to developing countries has shrunk by a lot.  Remittances held up during 2008 but they are a lagging indicator of economic distress, and in 2009 were shrinking radically:

[T]he chances that remittances will continue to hold up this [2009] 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.

As the World Bank’s Dilip Ratha wryly notes, as private investment inflows from other sources from the rich world to the poor world dry up, migrants are “thrust into the role of a sort of lender of last resort.”  The 2009 situation is a long ways from where it was a couple of years ago, when even in 2008 the Bank estimates worldwide remittances were some $328 billion.  Not very long ago, there was important discussion of new financial instruments to securitize remittance flows, among other financial techniques.  I think those discussions will come back – remittance flows will themselves come back – and $300 billion is too much money, even in the tiny streams by which much of it flows, to leave to the simplest mechanisms such as Western Union.  But any newfangled financial instruments seeking to package remittance flows will have to assume that the flows can go down as well as up, and there is unlikely to be a Fed standing ready to pour in billions.  That necessarily tempers the thinking – and in ways that, come to that, the world of conventional finance might consider a little bit.