D Angelo Final Paper


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D Angelo Final Paper

  1. 1. Mexican Immigrants’ Remittance Behavior and its Affect on Financial Crisis Propagation by Cody D’Angelo ECON 4999 Dr. Wolfgang Keller 2 May 2009
  2. 2. D'Angelo 2 1 Introduction Remittances would not exist without the level of globalization that we see today. Globalization allows countries to work together to increase productivity around the world through behaviors that include: increased trade, foreign direct investment, capital flows, the spread of technology, and most important to this paper, migration. Migration enables one to emigrate from their home country and join the work force in another country. It is common knowledge that this can be done through either legal or illegal channels. Either way, migration plays a huge role in today’s global economy and must be examined in the process of studying the 2008/09 financial crisis. There are many factors that may influence a person’s decision to migrate; however, in many cases, one of the main goals is to send money to relatives back home; a practice known as remittance. Due to its proximity to the United States, Mexico and its immigrants’ remittance behavior will be examined to a great extent in this paper. Migration’s large impact on international economics is related to remittance behavior which has directly affected the propagation of the 2008/2009 financial crisis. 2 Background Information Remittances have become a crucial part of Mexico’s GDP. According to the Center for United States and Mexico Immigration Analysis, remittances are Mexico’s second largest source of foreign income next to oil, surpassing even Mexico’s massive tourism industry. In 2005 it was estimated that income from remittances alone totaled around $20 billion (CUSMIA). Nearly complete dependence on foreign income has put the country in a particularly poor social and economic position as global economic conditions have
  3. 3. D'Angelo 3 worsened. In Mexico, the third largest trading partner with the United States and the ninth largest economy in the world, over 40% of the population lives below the poverty line (CUSMIA). This is the direct result of failed economic and migration policies and is sure to worsen with this recession. 3 Mexican Economic History Mexico and the rest of the Latin American region have experienced multiple declines in economic productivity throughout their troubled and storied histories. The first major decline came after the 1980s. According to Mark Weisbrot and Luis Sandoval, Latin America and Mexico have encountered horrendous economic growth over the past 25 years, and “to find a 25-year period even close to this kind of a failure, one has to go back to 1905 and select a 25-year period that includes both World War I and the Great Depression.” This great claim accurately depicts the economic woes of a troubled region. Mexico, in particular, has suffered dearly since experiencing economic growth from the 1960s to the 1980s. Weisbrot and Sandoval claim that if Mexico had “continued to grow at its pre 1980s rate, the country would have a per capita income at the level of Spain today.” This maintains that if Mexico hadn’t seen such economic turmoil post 1980, we would not see such a high dependence on foreign income, and political border issues might not be the disaster they have become as of late. Adding to their economic struggle, in 1994 Mexico signed the North American Free Trade Agreement (NAFTA). The signing of the agreement led to a decline in Mexico’s agricultural sector as well as a decline in domestic business as both industries could not compete with those of the United States (CUSMIA). It was thought that NAFTA would
  4. 4. D'Angelo 4 “both modernize Mexico’s economy and increase employment levels as U.S. business interest interests moved their operations to Mexico;” however, most United States businesses utilized cheap labor found in Asian countries like China and India (CUSMIA). 4 Mexican – American Relationship As the popular saying goes, “when Uncle Sam sneezes, Mexico catches a cold.” Figure 3 shows a distinct relationship between Mexico’s Global Index of Economic Activity and the United States’ Industrial Production Index. The dip in economic output around 2001 was a direct result of the U.S. recession between 2001 and 2002. True to the saying, as the United States went into a recession, Mexico followed suit. This recession was short lived, and as the United States bounced back so did Mexico. The figure shows that Mexico continued to grow at rates proportional to those of the United States until the most recent economic downturn. The recession of 2008/2009 brought about an unprecedented global economic crisis that includes the United States and Mexico. FIGURE 1: Economic activity in Mexico and the U.S. Source: Weisbrot
  5. 5. D'Angelo 5 5 Mexican Remittances The number of Mexican immigrants living in the United States has increased steadily since the 1960s. Gordon Hanson reports that the number of Mexican immigrants “as a share of Mexico’s population” has grown from 1.5% in the 1960s and 1970s to 10.2% in 2005. This large increase in immigrant population is due in part to the difficulty of maintaining control of migration along the large Mexican/American border. The dramatic increase in Mexican population in the U.S. has proved to be detrimental to Mexico’s labor force. A great increase in migration and decrease in labor force over the years is a testament to Mexico’s increased reliance on remittances. As stated earlier, Mexico relies heavily on remittances which are the country’s second-largest source of foreign Income next to oil (Watson). Remittances had been steadily increasing since the Mexican Central Bank began collecting data in 1995, only 14 years ago. Given that record collecting lacks longevity, there is not a wealth of data on remittances; however, there is enough data to draw correlations between this recession and the 2001/2002 recession. 6 Mexican Economic Downfall In 2008, remittances dropped for the first time since Mexico started collecting data. The Mexican Central Bank declared that remittances dropped 3.6 percent from $26 billion in 2007 to $25 billion in 2008 (Watson). Julie Watson discovered that the amount by which remittances dropped is “nearly twice what the government had expected for the
  6. 6. D'Angelo 6 year.” The fact that remittances dropped more than the Mexican government had expected is troubling as many families were most likely caught off guard by the abrupt change in cash flow. Remittances are forecasted to continue to drop in 2009. Mexican economic analyst Gustavo Hernandez told Business News Americas that “remittances would drop to $22.6 billion in 2009 from $25 billion [in 2008] as a result of the economic downturn in the U.S.” Further decline is sure to gravely impact Mexico’s economy which relies so heavily on remittances. Hernandez went on to state that “the estimated drop in remittances this year will reflect the effect of a tight job market for Mexicans living in the U.S., particularly in the construction and manufacturing sectors.” Construction jobs are being lost at a high rate in the U.S. as expansion practically stands still. This was not the case in previous recessions. 7 2001 Recession The 2001 recession was caused by a few factors, but at the forefront was the bursting of the stock market bubble. According to Dean Baker, “an unprecedented run-up in the stock marked propelled the U.S. economy in the late nineties.” This bubble burst in 2001 when the NASDAQ crashed in early 2000 and the Dow Jones Industrial Average crashed on September 17, 2001 following the September 11th terrorist attacks (Wee). While these events were certainly strong enough to send our economy into a recession, they were not strong enough to burst the increasing housing bubble. This left construction jobs intact throughout the 2001 recession as new housing and other construction was still in high demand.
  7. 7. D'Angelo 7 The 2001 recession officially lasted 8 months and showed the United States that its economy wasn’t impervious to fluctuation. According to the International Monetary Fund, Mexico’s real GDP growth in 2001 was -0.2% and the United States’ real GDP growth was 0.8%. This was a large drop in growth from the previous year in the U.S. and even larger in Mexico. In 2000, the U.S. real GDP growth rate was 3.7% and Mexico’s was 6.6%. Figure 2 shows that Mexico was so severely impacted by the 2001 recession that it went from seeing its second largest growth year since the Mexican Peso Crisis of 1994 to its first negative growth year since that crisis. Despite such a drastic economic downturn, in this recession remittances to Mexico continued to increase. FIGURE 2: U.S. and Mexican real GDP growth 1994-2002 Source: IMF 8 Construction Sector The United States construction sector employs a large number of Mexican immigrants. According to the Bureau of Labor Statistics, of the 14,806,000 people who worked in “natural resources, construction, and maintenance operations” in 2008, 25% were of Hispanic or Latino ethnicity. As a subcategory, there were 1,651,000
  8. 8. D'Angelo 8 “construction laborers,” of which 44.1% were of Hispanic or Latino decent in 2008. This data does not show the percentage of people who have immigrated or had been born in the United States; however, it is clear that with such large shares of this industry, many of the Hispanic and Latino laborers are likely legal or illegal migrant workers from Mexico. With such a large share of this industry, fluctuations are sure to impact Mexican workers and their remittance behavior. FIGURE 3: U.S. Construction Data U.S. Total Construction 2001-02 vs. 2007-08-09 (seasonally adjusted) 1,200,000 (in millions of USD) Total Construction 2001 2002 1,000,000 2007 2008 2009 800,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Month Source: Census.gov Figure 3 shows the relationship of total United States expenditure on construction between 2001-2002 and 2007-2009. From 2002-2007 the United States experienced economic expansion; as a result, construction projects increased. The figure shows that in the recession of 2001, total construction was not affected. Total construction actually increased throughout the year and continued strong into 2002. The recession of 2008-2009 has had a much different affect on the construction sector. It is clear that
  9. 9. D'Angelo 9 overall expenditure on construction in the United States has dropped at an alarming rate since about July of 2007. Even more troubling is how fast it has dropped over the past few months. In the 2001-2002 construction data, the months of October – February showed a reasonable increase in construction expenditure, whereas the months of October – February of 2008-2009 showed a drastic drop. The construction industry has been hit hard by the 2008-2009 economic crisis and is taking its toll on migrant workers. 9 2008-2009 Recession The United States is experiencing one of its worst recessions on record. Overall production has decreased, people are losing jobs at an alarming rate, the government is reacting with drastic measures, and nothing seems to be improving. The recession is a direct result of the housing bubble that burst and left the United States with a sub-prime mortgage mess. This recession has become global and one of the main ways that it has spread to other countries is through remittance practice. Mexico has been impacted more by this recession than the recession of 2001-2002 because of its devastating impact on the United States construction sector. The bursting of the housing bubble has translated to immense job loss in the construction industry. As construction jobs are lost, Mexican migrants are less able to send money home. The 2008-09 recession has been negatively impacting our economy for months and is not expected to rebound any time soon. The real GDP growth rate in the United States has dropped from 1.1% in 2007 to -2.8% in 2008. This is the first time that the United States has experienced a negative growth rate since the early 1990s. Mexico’s real GDP growth has once again followed United States trends and dropped to -3.7% in 2008 down
  10. 10. D'Angelo 10 from 1.3% in 2007. Figure 4 shows the drastic drop in GDP from both countries as a result of our current crisis. Compared to the 2001-2002 recession, GDP growth rate loss is much more drastic with negative percentages in both Mexico and the United States. FIGURE 4: Real GDP growth rate 2000-2009 Source: IMF 10 Remittance Impact FIGURE 5: Total Mexican Remittances Total Remittances 2001-02 vs. 2007-09 3000.00 (in millions of USD) Total Remittances 2500.00 2000.00 2001-02 1500.00 2008-09 1000.00 500.00 0.00 v l n n n c g p r ar ar b b ct ay Ju Ap No Ja Ju Ja Au Se De Fe Fe O M M M Month Source: Mexican Central Bank Overall, the 2008-09 global economic crisis has impacted the world in a great way. While total remittances continued on their regular pattern of growth through the 2001
  11. 11. D'Angelo 11 recession, they have fluctuated and actually fallen for the first time in history with the 2008-09 crisis. Figure 5 shows remittance data from the Mexican Central Bank from January 2001 – March 2002 compared to data from January 2008 – March 2009. The graph shows that remittances dropped drastically since November 2008 and have only recently began to grow towards the amount that they were at before. Immense job loss, especially in the construction sector has led to this large drop in remittance behavior. Lower remittance activity has allowed the 2008-09 crisis to propagate to Mexico as that country has witnessed a decline in GDP growth much larger than the loss observed in the 2001 recession. All evidence points to the possibility that Mexico will not see an improvement in GDP until the U.S. economy stabilizes and remittances increase. 11 Conclusion Mexico and the United States, despite being close in geography, might as well exist on two different planets in terms of economy. Mexico is able to use its geographic location to take advantage of the United States’ constant status of the economic headquarters of the world. The large border is hard to patrol which gives Mexicans an opportunity to migrate by whatever means necessary to a wealthy country with a lot to offer so they can earn money for their families back home. For the first time in the history of this relationship, Mexican migrants are unable to take full advantage of this system as the United States is in dire economic turmoil and jobs are unavailable for everyone.
  12. 12. D'Angelo 12 Globalization allows crisis propagation to happen in many ways. Remittance behavior is one in a slew of methods for the financial virus to metastasize to the global economy. This crisis has shown us that any country that relies heavily on remittances coming from a wealthier country is sure to feel the impact of that country’s economy, whether it is positive or negative. Since the U.S. economy is so important globally, there are many ways in which the world will feel the impact of the collapse of our housing bubble and the ensuing recession for years to come. Remittance behavior is not a bad thing; if the U.S. economy happens to rebound and begin to expand, remittances will enable that prosperity to propagate in a similar manner as the 2008-09 crisis. The 2008-09 crisis has taught us that it is important to keep other countries in mind when dealing with matters of our own wealth. Our economic situation directly impacts other countries as well as the rest of the world as it propagates through globalization.
  13. 13. D'Angelo 13 Works Cited Baker, Dean. "The Menace of an Unchecked Housing Bubble." Economists' Voice MAR 2006 Web.2 May 2009. <http://www.bepress.com/cgi/viewcontent.cgi? article=1161&context=ev>. "CUSMIA." 2007. Center for United States and Mexico Immigration Analysis. 1 May 2009 <http://www.cusmia.org/QuickFacts.php>. "Employed persons by detailed occupation, sex, race, and Hispanic or Latino ethnicity." bls.gov. 2008. Bureau of Labor Statistics. 2 May 2009 <ftp://ftp.bls.gov/pub/special.requests/lf/aat11.txt>. "FGI Expects Remittances to Decline 10% in 2009." Business News Americas 27 MAR 2009 Web.2 May 2009. Hanson, Gordon and Craig McIntosh. "The Great Mexican Emigration." AUG 2008 1-41. Web.09 APR 2009. <http://irps.ucsd.edu/assets/015/8800.pdf>. "IMF Data Mapper." 2009. International Monetary Fund. 1 May 2009 <http://www.imf.org/external/datamapper/index.php>. "Revenues by Workers' Remittances." banxico.org. MAR 2009. Mexican Centaral Bank. 2 May 2009 <http://www.banxico.org.mx/SieInternet/consultarDirectorioInternet Action.do?accion=consultarCuadro&idCuadro=CE81&locale=en>. "Total Construction Spending." census.gov. 02 FEB 2009. U.S. Census Bureau. 2 May 2009 <http://www.census.gov/const/www/totpage.html>. Watson, Julie. "Yearly Mexican Remittances Drop for First Time." Associated Press Financial Wire 27 JAN 2009 Web.09 APR 2009.
  14. 14. D'Angelo 14 Wee , Heesun . "U.S. Stocks Dive, with Dow Posting Record Point Loss." BW Online. 17 SEP 2001. Business Week. 2 May 2009 <http://www.businessweek.com /investor/content/sep2001/pi20010917_6288.htm>. Weisbrot, Mark and Luis Sandoval. "Mexico's Presidential Election: Background on Economic Issues." cepr.net. JUN 2006. Center for Economic and Policy Research. 1 May 2009 <http://www.cepr.net/documents/ mexico_background_2006_06.pdf>.