U.S. problems leak to develped world through less obvious routes

Thursday, October 9, 2008

The Mexican economy is set for a slowdown as the U.S. economy loses steam, and with it, remittence income. Remittances – contributions of Mexican people living abroad and sent home – are an important part of household income in Mexico. In 2004, remittances were the largest source of foreign income, 2.5% of GDP, after oil export revenues, and equivalent to foreign direct investment and tourism. When remittances slow, domestic demand in Mexico slows, putting the economy at risk of a recession.

The chart illustrates domestic demand annual growth (growth minus trade balance contributions) on a quarterly basis in Mexico from 2000 to 2008. Domestic demand growth has been quite strong since 2005, averaging 4.1%, which is above its 3.4% 8-yr average. Much of growth has been fueled by remittence, oil exports, and tourism income. However, one of those key income components has showed signs of weakness: remittence income.

According to the Financial Times:

Remittance flows to Mexico plummeted 12.2 per cent in August, recording their biggest yearly fall since records began and signalling an end to years of hitherto vigorous growth, Mexico’s central bank reported on Wednesday.

The latest figure brings the total amount of money sent back home by Mexican migrant workers between January and August to $15.6bn – a fall of 4.2 per cent compared with last year. The bank said it expected the flows to continue to contract, making this year’s total lower than the previous year for the first time. ”Remittance income is likely to continue to lose strength in the coming months,” the bank said.

Behind the precipitous fall is a sharp decline of activity in US sectors that have traditionally employed large amounts of informal migrant labour, such as construction. According to the bank, as much as 25 per cent of the estimated 8m Mexicans living illegally in the US work in the construction sector.

But the bank also claims that part of the fall has to do with the tighter security on the US’s southwest border. In the last two years, US authorities have more than doubled the number of Border Patrol agents along the 2,000-mile border with Mexico. They have also built about 350 miles of fence, and have promised to construct another 350 miles in the coming months. ”Mexican workers now face much greater difficulty getting to the US,” said the bank.

The latest figures are terrible news for millions of poor families throughout Mexico that have come to rely on remittances to overcome lack of employment opportunities and help put food on the table.

In Michoacán, a state to the west of Mexico City and recipient of the greatest share of annual remittances, entire communities depend on the flows, which migrants typically send form the US in amounts that average $350 a month.

But the fall is also bad news for the centre-right administration of President Felipe Calderón as it weighs strategies to offset the inevitable economic impact of the US financial crisis.

In recent years, remittances have proved a vital source of foreign currency and in 2006, when they reached about $25bn, they represented Mexico’s biggest single source of foreign currency after oil.

It is also bad news for Mr Calderon’s administration because it implies that fewer Mexicans are trying to cross the border in search of work in the US, a fact that will almost certainly create far greater pressure for jobs back home.

‘Emigration to the US has served as a pressure valve for years,” says Alfonso Zárate, a political analyst in Mexico City. ”Now that the valve appears to have clogged up, it will make life harder for the government.’”
The Mexican economy – the government and its households – are looking at tough economic times with the destruction of remittence income. Remittence income is am important transfer from the developed to the the developing world, where its destruction will certainly supress domestic demand and growth.

Rebecca Wilder


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