By Svetlana Cerovic and Kimberly Beaton

June 29, 2017

Versions in Español (Spanish) and Português (Portuguese)

People waiting to withdraw money in La Cruz, Costa Rica: emigrants from Latin America send home sizable remittances (photo: Juan Carlos Ulate/Reuters/Newscom)

Many people from Latin America and the Caribbean live and work abroad. Migrants have been motivated to leave their home country in search of better job opportunities and, in some cases, a more secure environment. Their families at home often benefit from the remittances migrants send home, which help improve their standard of living, health care, and education. Remittances also provide financial resources for trade and investment, which helps boost the country’s growth.

However, in some cases, the impact on the others in home countries may be negative, because migrants are often young and may be high-skilled (such as doctors, nurses, or engineers), and their departure reduces the country’s economic potential.    

Our most recent Regional Economic Outlook finds that outward migration and remittances together have had a small and negative effect on real per capita growth for large parts of the region, although the effect varies across subregions. On the positive side, remittances have beneficial effects for stability.

Patterns of migration and remittances

Outward migration (or emigration) has been an important phenomenon for countries in the region, particularly for the Caribbean; Central America, Panama, and the Dominican Republic; and Mexico. In these countries, emigrants account for close to 10 percent of the population—compared with about 2 percent, on average, worldwide for emerging market and developing economies. They send substantial sums of money, averaging about 6 percent of GDP, to support family members back home.

In contrast, while some South American countries such as Paraguay and Uruguay have sizable emigrant populations, even in these countries, the receipt of remittances is dwarfed by those to their Central American and Caribbean neighbors.

The United States is by far the most important destination for Latin American and Caribbean migrants, with about two thirds of them living and working in the United States. This high dependence on a single destination country makes the economic fortunes of the region’s migrants—and the remittances they send back home—susceptible to the economic ups and downs and immigration policy changes in the United States.

Who are these emigrants?

Emigrants from Mexico and Central America tend to be younger (on average, about 20 years old) and have lower levels of education compared with those from South America and the Caribbean. Of the latter groups, about 40 percent have attended college (or beyond). With a high share of skilled workers leaving their home countries, the Caribbean in particular has been suffering from “brain drain.” With lower levels of education, emigrants from Mexico and Central America tend to work in lower-skilled occupations and have lower wages, but they also send a higher share of their income back to their families.

Effects on growth

The departure of people of working age reduces the labor force and weakens the growth of the home country, and this effect is likely to be strongest for countries facing a brain drain. But the money migrants send home brings a number of benefits to their families and provides financial resources for trade and investment.

Our analysis suggests that the overall impact of these forces depends on the profile of migrants and the amount of money they send home—with different net effects on growth across the region.

For countries with highly skilled emigrants like Caribbean countries and, to a lesser extent, South American countries, the negative impact on growth from emigration is not fully compensated by the money migrants send home. In contrast, for Central American countries, the negative effects of emigration seem to be broadly (or more than) offset by gains from their higher remittance receipts.

Remittances are a valuable source of stability

While the effects of migration and remittances on growth may not be clear-cut, remittances can be a valuable source of economic stability.

Our analysis suggests that remittances are an important source of income and can support consumption at home when the economy is not doing well. For example, we find that emigrants tend to send more money home following natural disasters, particularly to the Caribbean—the region most exposed to large natural disasters.

We also find that remittances can support financial stability by strengthening borrowers’ capacity to repay their loans, and help generate revenues for the government, which taxes the spending from remittances. Finally, digging deeper into the Mexican case, we find that migration and remittances can help reduce both poverty and inequality, as remittances go mostly to lower-income households.

Tilting the balance in a favorable direction

What can countries do to reap the benefits while minimizing the costs of emigration and remittances? In general, we recommend policies that aim to reduce outward migration, while supporting remittances and encouraging the productive usage by the families that receive them.

Countries should focus on structural policies to make it more attractive for people to stay and for emigrants to return, including by recognizing professional qualifications earned abroad, and reforms to limit brain drain, for example, by developing a medical tourism industry. In addition, policies that aim at boosting the labor supply, in particular by raising women’s participation in the labor force, can also help to offset the adverse impact of emigration on productivity.

As remittances bring many benefits, policies should help the development of formal financial channels for migrants to send money home and on reducing the costs of sending money, including through new solutions like mobile money.

Effective policies to improve the security situation in many Central American and Caribbean countries may also relieve key bottlenecks to the productive use of remittances, including their greater use for investment in small businesses.

For countries that are highly dependent on remittance inflows, it is important to ensure adequate financial buffers—such as central bank reserves—to compensate for a potential loss in remittances associated with negative economic shocks or shifts in immigration policy in host countries.