Remittance Patterns in Flux

Like housing values and stock markets, it once seemed as if the global value of remittances could only go up. Remittances to developing countries increased 18 percent in 2006 ($229 billion in all) and 16 percent in 2007 ($265 billion), according to World Bank estimates.

Remittances are widely considered an exceptionally stable source of development finance that actually increases when the economic climate sours in developing countries. The big question now is how they will fare when countries around the world are being pinched by outright recession or economic turmoil.

"We are in unknown territory now because both the source countries and the destination countries are not doing very well," World Bank Senior Economist Dilip Ratha said recently.

The data available for 2008 present a mixed picture. The World Bank reported in November that remittances for 2008 are expected to be about $283 billion, a 7 percent increase. Flows from the gulf countries to South Asia have grown quickly in 2008; in contrast, flows from the United States to Latin America and the Caribbean and those from Western Europe to Europe and Central Asia have been slowing.

Kenya, the Philippines, Pakistan, and Bangladesh experienced double-digit growth in remittances in the first two or three quarters of 2008. El Salvador, Guatemala, Honduras, and the Dominican Republic also saw remittance growth between 5 and 9 percent while Mexico had a 3.7 percent decrease.

But the average amount Mexican migrants in the United States send per transaction in 2008 ($349) remains in the $340-to-$350 range that has been the norm since 2005.

Also, despite a drop in remittances in August, Mexico's central bank reported an increase in September compared to the same month in 2007. And with the dollar stronger against the peso, even if the average transaction is holding steady, it nonetheless is providing greater buying power in Mexico.

Manuel Orozco, director of remittances and development at the Inter-American Dialogue, gives a number of reasons why Mexico's experience differs from those of other Latin American countries. These include job losses in the United States (particularly in the construction sector), a large drop in cash savings, a higher number of deportations resulting partly from worksite raids, and increased use of informal and alternative money-transfer methods that the Central Bank of Mexico does not properly record.

During the U.S. recession of 2001-2002, remittances increased. The current recession, however, is expected to affect a larger number of developed countries and to be deeper and longer.

Ratha and his colleagues forecast that remittances as a share of GDP of the recipient countries will fall to 1.8 percent in 2008 from 2.0 percent in 2007. If realized, this would represent a remarkable turnaround in the growth trends of the past decade. The decline in remittances is expected to be short-lived, however, recovering to a growth rate of more than 6 percent by 2010.

And the outlook for 2009, once all factors are considered? A slowdown in remittances in general, with some countries feeling the pain more than others.

Yet other kinds of external financial flows, such as foreign investment in emerging stock markets and official development assistance from governments, are likely to slow even more. That means remittances could become more important to developing countries even as their absolute value declines.