Remittances in the era of the subprime crisis

An article in the Financial Times today points out that there has been a dramatic reversal in the growth of the volume of remittances being sent from the United States to Mexico. According to data from the Bank of Mexico, remittances in the first four months of 2008 are down 2.4 percent from the same period last year. This decline follows a decade of double-digit increases. The author identifies two culprits: increased scrutiny of illegal immigrants and rising unemployment, particularly in the construction sector. According to the author:

Unemployment among US-based Mexicans has risen from 5.4 per cent in the first quarter of 2007 to 8.2 per cent in the same period this year.

This may be a worrisome development for poor communities in Mexico. According to a 2006 Bank report on The Development Impact of Remittances in Latin America, Mexico is the largest recipient of remittances in Latin America by volume.

Even worse in the case of Mexico, the distribution of remittances tends to skew toward the least well off:

…61 percent of the households that report receiving remittances fall in the first quintile of non-remittances income.

The 2006 Bank report points out that remittances tend to have a positive impact on education and health. In some cases, remittances even contribute to greater entrepreneurship. Two years ago, the main concern was that the volume of remittances might be contributing to the so-called “Dutch Disease” as a result of pressure on the exchange rate. Clearly, given the reversal in the growth of remittances, that problem is no longer so pressing. Now, the pressing question is whether the Mexican labor market will be able to absorb a new surplus as fewer migrants head north and some return from their time in the United States.

Update: I'm not sure if the writers at the Economist are regular readers of the PSD blog, but this article makes me suspicious.