Friday, November 15, 2013

"Remittances" to Latin America are 8 times more than foreign aid to that region. That has to be good, right? But what the heck is a Remittance?

An important topic we cover in AP Macroeconomics is "Balance of Payments". This is an accounting of the flow in the trade of goods and services, factor payments on interest or dividends paid or received, certain transactions involving the buying and selling of physical and/or financial assets, and subsets of other transactions that occur across borders.

According to Pew Research:
""Remittances are a larger source of money to Latin America than official foreign aid. In 2011, when foreign aid to Spanish-speaking Latin America nations totaled $6.2 billion, formal remittances were more than eight times that—$53.1 billion
Wow! That is amazing? Oh, wait, you don't know what a "Remittance" is? That's ok. I will help you out.

Remittances are cash transfers (or it could be non-cash assets) that migrants to a country send back to their home country.  For example, a Mexican migrant in the US works, earns money, then sends a portion of it back to Mexico to his or her family.  It also works in reverse. An American migrant in Mexico sends money back home to the US.  Hence, a "Net value" is obtained---The amount leaving the country versus how much is coming back.

In the US Balance of Payments in 2012 net remittances from all countries were -$79,913,000,000 (negative $79.913 billion).  This means there was a net OUTFLOW of dollars from the US to foreign countries.

By comparison, TOTAL foreign aid by the US to the rest of the world was approx $54 billion in 2012. Remittances earned in the private sector play a larger role than foreign aid financed by tax dollars.

Pew Research has a new study out showing the effect of remittances to Latin America.  The study can be found HERE but I am posting a couple of interesting graphs for your viewing pleasure.

As you might expected due to geographic proximity, most of the remittances are earned in the US.
Share of Latin America Remittances from Top Sending Countries, 2012

Mexico is by far the country that receives the most remittances.  A little over $20 billion whereas the rest of Latin America/South America takes in a little over $30 billion.

Total Remittances Received in Latin America and Mexico, 2000-2013

However, the total effect on the recipients economy, as measured by the impact the remittance has on the nations GDP, is not equal. El Salvador, Honduras, and Guatemala (as percent of their GDP) are highly dependent on this source of income.

Remittances as a Share of GDP, 2012

Remittances and Foreign Aid are just two sources of US dollars to Latin America. For example, this does not count charitable donations, religious or non-religious.

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