2. Remittances would not exist without the globalization that we see today. Globalization allows countries to work together to increase productivity around the world through behaviors like increased trade, foreign direct investment, capital flows, the spread of technology, and most important to my subject, migration. Globalization allows people 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 crisis. It can be convincingly proven that immigrant remittance behavior has directly affected the propagation of the 2008/2009 financial crisis. That is what I am here to show you today. Mexico and it’s immigrants’ remittance behavior will be examined to a great extent in this presentation.
Remittances, the money sent back to families in Mexico by Mexican workers residing within the United States, are the second major source of income for the nation of Mexico, following oil and surpassing even the income from Mexico’s tourism industry. It is estimated that, in 2005, remittances totaled around $20 billion. After the signing of the North American Free trade Agreement (NAFTA), Mexico’s agricultural sector began to decline and Mexico’s small farmers found themselves unable to compete as subsidized U.S. food imports began to flood Mexican markets and U.S. agribusiness interests began to buy up Mexico’s agricultural land. The North American Free Trade Agreement (NAFTA) also contributed to a decline in other sectors of the Mexican economy as domestic businesses found that they could not compete with the steady flow of U.S. imports. Although many commentators promised that NAFTA would both modernize Mexico’s economy and increase employment levels as U.S. business interests moved their operations to Mexico, U.S. business interests found yet a cheaper source of labor in Asian countries such as China.
Prior to 1980, Mexico experienced a much higher growth rate than it has in recent years If Mexico’s economy had continued on the pre-1980’s trend, they would most likely have a per capita income close to that of Spain today. This would mean less incentive to illegally emigrate into the U.S. (Weisbro 4) Mexican GDP has seen a major decline over the past 25+ years. This is further proof that NAFTA may have caused more harm (growth wise) than good as it was signed in 1994. In the period from 1994 to 2005, Mexico’s growth averaged 1.2% compared to its pre 1980’s growth rate of 3.5% (Weisbrot 3)
As the saying goes, &quot;When Uncle Sam sneezes, Mexico catches a cold.&quot; It can be seen here that during times of economic hardship in the United States, Mexico also encounters great problems. The major dip in the graph is due to the Mexican peso crisis of 1994-1995. This was the result of a devaluation of the Mexican peso and the signing of the NAFTA. I will explain more about this later. The dip in economic output around 2001 was a direct result of the U.S. recession. The 2001 recession was caused by a collapse of the stock market bubble in the U.S. The stock markets went through a rough period, and, as a result, the U.S. entered a recession. During this time, Mexico also went through a recession; however, remittances continued to grow, and Mexico quickly recovered along with the U.S. From 2000 to 2007, the United States saw unprecedented and uncontrollable growth as a result of the housing bubble. Basically, after increasing at a steady rate (after controlling for inflation) from the 1950s to about 1997, house prices increased dramatically thereafter. This created all kinds of wealth that did not actually exist, which, along with other factors, led the U.S. into the worst recession since the great depression.
As a share of Mexico’s national population, the number of Mexican immigrants living in the U.S. remained at 1.5% from 1960 to 1970, before rising to 3.3% in 1980, 5.2% in 1990, and 10.2% in 2005. Mexico is by far and away the largest source country for U.S. immigration, accounting for one third of the current U.S. foreign-born population. (Hanson 1). Because of its proximity, the U.S. has a major issue with controlling immigration. Because of this dramatic increase in population in the U.S., the labor force residing in Mexico has dramatically decreased and has forced much of the country to depend on remittances being sent home (Hanson).
Remittances are Mexico’s second-largest source of foreign income next to oil (Watson). Mexican remittances fell 3.6 percent to $25 billion in 2008 compared to $26 billion the previous year. According to Julie Watson, “the percentage drop is nearly twice what the government had expected for the year” (1) Experts blame a combination of illegal immigration crackdown and the U.S. recession for this extreme drop in remittances (Watson, 1). Business News Americas collected information from a Mexico City-based investment advisory firm called FGI Global Investment. Analysis Head 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.” Hernandez also said 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.” (BNA) Remittance transactions are already down 20% in 2009 (State News Service).
The unemployment rate in the U.S. for foreign born Hispanics increased from 5.1% in the fourth quarter of 2007 to 8.0% in the fourth quarter of 2008. (BNAmericas) The Construction sector is the worst in terms of unemployment for both Hispanics and non-Hispanics. (BNAmericas) Migration is being slowed by poor economic conditions in the United States. Mexico City’s National Statistics, Geography and Information Institute reported that both legal and illegal migration has declined by over 50 percent from August 2007 to August 2008 (State News Service). This is the first time that a decrease in remittances has ever been reported since Mexico began tracking the data in 1995 (State News Service). Experts are forecasting a negative growth rate for Mexico of anywhere from -0.8% to -4%. To give an idea of how much this is, Mexico’s growth rate dropped 7% in 1995.
The Mexican peso crisis of 1994-1995 was the result of a devaluation of the Mexican peso and the signing of the NAFTA. Since, at the time, the peso was devaluated, Mexicans could earn more by emigrating to the United States since the “relative value of dollars earned by Mexicans” increased (State News Service). Consequently, during this period of economic crisis in Mexico, there was a “30% increase in border apprehensions” (State News Service). Although at this time the Bank of Mexico did not keep remittance information, it is abundantly clear that remittances would become more important to the country’s economic welfare. Remittances have been steadily growing every year since 1995 until 2008 when the first decline was observed. As a result of the peso crisis, Mexico’s growth rate dropped by nearly 7%. This shows that Mexico might not be in as bad as a position as it was in during the early-mid 90’s recession.
This is a good recession to compare the current one to because many of Mexico’s statistics are similar in both. A decline in growth rate can be seen in both A devaluation of the Mexican peso can be observed in both cases However, in this case, remittances play a very different role as they increased in the first recession and decreased in the recent recession. In the first recession, the U.S. had to step in and offer its help economically which we are not in a position to do right now. Because Mexico relies so heavily on remittances, one of the only things they can do right now is wait for the U.S. to recover.
The 2001 – 2002 recession is a weaker comparison because it was caused in a much different way and there was no apparent affect on remittance behavior. Although people lost money, the U.S. was still in the middle of the housing boom and was able to keep Mexican immigrants employed in construction jobs Therefore, remittances continued to grow. The 2008 crisis exists on a much larger scale and directly affects the Mexican economy through a slowing of remittances. There is virtually no new construction due to the subprime mess There are major job cuts everywhere so there is more competition for jobs that Mexican immigrants would usually fill. Because jobs are not available, remittances are directly influenced.
If there is a large number of mexicans who decide to move back to mexico as a result of fewer job opportunities and poorer wages in the U.S., Mexico could be in for trouble. London’s Latin News Daily says “Mexico would be unable to cope with a mass return of migrant workers. For one, unemployment figures would rise at a much faster pace and any further social unrest on the back of this could destabilize the government” (State News Service) The decrease in migration and remittances is what is driving the talks of Mexico as a “failed state” (SNS) Basically, if the country isn’t being supported by remittances as it has been for so long, government operations like counter-narcotics, anti-corruption practices, and the like would not function as they should. (SNS) Mexico is having a crisis with drug cartels that are making the country extremely unsafe. Drug related crimes are now being viewed as a national security threat in the U.S. since the violence is able to spread into border states. (SNS) “ Mexico’s crisis of drug trafficking, migration, and economic integration with the U.S. are interrelated and require an accordingly nuanced approach from the Obama administration” (SNS). The State News Service argues that while security issues will surely be addressed by the Obama administration, there should be an emphasis on installing other policies which aim to increase remittances and possibly revamp NAFTA. According to State News Service, “U.S. policy and aid should not be limited to counter-narcotics activity but should also focus on facilitating domestic development and foreign remittances as progressive steps towards fostering security and economic recovery” (4) It is important to regulate the employer in these matters rather than the immigrant to ensure that immigrants are going through legal channels so that they are able to send remittances and continue helping Mexico’s economy. (SNS)
The difference between this recession and the previous one is that now there are less construction jobs as a result of the crash of the house market. No new building is going on. Also, other jobs commonly held by Mexican immigrants are being cut back and as a result, Mexicans have less money to send home. Because of their dependence on remittances, and their close economic history with the U.S., Mexico could have a very hard time recovering from this crisis before the U.S. does. Clearly, as immigrant jobs are lost, and as the U.S. economy continues to dwindle, remittances decline. As a result, the economic crisis will spread to countries who depend on remittances as a source of income. As we saw in Mexico, the decline in remittances is not the only way that this crisis can propagate to other countries; however, it is bound to have a major impact on any country that expects a constant flow of money from the U.S. Since the U.S. economy is so important globally, there are many ways in which the world will feel the effects of our economic recession for years to come. However, the remittance behavior impact goes both ways. If the U.S. economy rebounds and jobs become more available, remittances will be sent to other countries in greater numbers and we could see a decline in the global crisis.
Mexican Immigrants’ Remittance Behavior and its Affect on Crisis Propagation By Cody D’Angelo
Overview <ul><li>Introduction </li></ul><ul><li>Mexican Economic History </li></ul><ul><li>Mexico – U.S. Relationship </li></ul><ul><li>Mexican Immigrant Remittance Behavior & 2008 crisis </li></ul><ul><li>Comparison to Past Recessions </li></ul><ul><li>Conclusions </li></ul>
Mexico – Quick Facts <ul><li>3 rd largest trading partner with U.S. </li></ul><ul><li>9 th largest economy in the world </li></ul><ul><li>40+% of Mexicans live below poverty line </li></ul><ul><li>5 million undocumented Mexicans live and work in U.S. </li></ul><ul><li>Remittances are 2 nd largest source of foreign income next to oil </li></ul><ul><li>NAFTA caused problems </li></ul>Source: http://www.cusmia.org/
Mexican GDP Growth Source: http://www.cepr.net/documents/mexico_background_2006_06.pdf
"When Uncle Sam sneezes, Mexico catches a cold." Source: http://www.cepr.net/documents/mexico_background_2006_06.pdf
Major Emigration <ul><li>Mexican immigrants living in U.S. </li></ul><ul><ul><li>1.5% in 1960-1970 </li></ul></ul><ul><ul><li>3.3% in 1980 </li></ul></ul><ul><ul><li>5.2% in 1990 </li></ul></ul><ul><ul><li>10.2% in 2005 </li></ul></ul><ul><li>Mexican Labor force increased </li></ul><ul><li>Dependence on remittances increased </li></ul>Source: Hanson
Mexican Remittances <ul><li>Mexico’s second-largest source of foreign income next to oil </li></ul><ul><li>Fell 3.6 percent from 2007 to 2008 </li></ul><ul><ul><li>$26 billion in 2007 </li></ul></ul><ul><ul><li>$25 billion in 2008 </li></ul></ul><ul><li>Forecasted to drop 10% in 2009 </li></ul><ul><ul><li>$25 billion in 2008 </li></ul></ul><ul><ul><li>$22.6 billion in 2009 </li></ul></ul>Sources: BNAmericas, State News Service, Watson
Mexican Downfall <ul><li>Hispanic unemployment rate at 8.0% in 2008 </li></ul><ul><ul><li>Vs. 5.1% in 2007 </li></ul></ul><ul><li>Construction sector hit hard </li></ul><ul><li>Migration down </li></ul><ul><li>Mexican economy expected to decline </li></ul>Sources: BNAmericas, State News Service
Early-Mid 90s Recession <ul><li>Mexican peso crisis of 1994-1995 </li></ul><ul><ul><li>Devaluation of peso </li></ul></ul><ul><ul><li>Signing of NAFTA </li></ul></ul><ul><ul><ul><li>Increased border apprehensions </li></ul></ul></ul><ul><ul><ul><li>No information about remittances </li></ul></ul></ul><ul><li>Mexico’s growth rate dropped 7% </li></ul>Source: State News Service
1994 - 1995 2008 - 2009 <ul><li>7% decline in growth rate </li></ul><ul><li>Devaluation of Mexican peso </li></ul><ul><li>Increased emigration to U.S. </li></ul><ul><ul><li>Increased remittances </li></ul></ul><ul><li>~.08% – 4% decline in growth rate </li></ul><ul><li>Devaluation of Mexican peso </li></ul><ul><li>Decreased emigration to U.S. </li></ul><ul><ul><li>Decreased remittances </li></ul></ul>
2001 – 2002 2008 - 2009 <ul><li>Based on stock crash only </li></ul><ul><ul><li>Housing still increasing </li></ul></ul><ul><ul><ul><li>Construction still in high demand </li></ul></ul></ul><ul><li>Remittance behavior continued growing </li></ul><ul><li>Stock market crash </li></ul><ul><li>Based on collapse of housing bubble </li></ul><ul><ul><li>Major job cuts </li></ul></ul><ul><ul><li>No construction </li></ul></ul><ul><li>Remittance behavior declining </li></ul>
Failed State? <ul><li>Mexicans returning home will not help </li></ul><ul><li>Decreased migration and remittances bad sign for Mexico </li></ul><ul><li>Increased cartel activity a direct result of recession </li></ul><ul><li>U.S. Intervention? </li></ul><ul><li>Increase migration and remittances </li></ul>Source: State News Service
Conclusions <ul><li>Dependence on remittances </li></ul><ul><li>Clear link between remittances and crisis propagation </li></ul><ul><li>Propagation happens in many ways </li></ul><ul><li>U.S. economy important globally </li></ul>