Remittances, or the money sent from international migrants to family members in their home country, make up one of the largest sources of financial flows to developing nations. Remittances worldwide have been accelerating since the early 2000s. In particular, remittances to Mexico have increased exponentially since 2013, and even more now due to the COVID-19 pandemic. 

In 2022, remittances to Mexico hit a record high of $58.5 billion, making Mexico the second-highest remittance-receiving country, following India. Remittances are Mexico’s main net foreign exchange generator, topping both manufacturing exports and tourism.

How Remittances Affect the Economy

In the short term, remittances impact the economy by stimulating consumption and increasing household income. In the long term, remittances can have strong poverty-reducing effects through investment in physical or human capital. The funds can provide resources to invest in education, health and small businesses. 

Additionally, remittances help reduce inequality and play a role in local development. Money that people send from abroad typically goes to families in the poorest states of Mexico, which are the north-central and southwest regions—the areas where most migrants have left. Thus, remittances contribute to mitigating regional economic disparities. For example, a 2010 research paper showed that remittances shifted the wage distribution, which caused fewer low-wage workers in remittance-high areas.

Mexico’s 3×1 Program

Mexico launched an innovative government initiative aimed at fostering collaboration between Mexican migrants living abroad and their communities of origin. The program’s name of 3×1 represents the policy of matching funds; for every peso contributed by Mexican migrants, the federal, state and municipal governments contribute one peso each.

The program’s objectives are:

• To gather collective remittances toward social development community projects.
• To benefit migrant communities with high levels of poverty or marginality.
• To promote the development of Mexican hometown associations.

These efforts put the focus toward development, which contributes toward long-term economic growth, rather than household consumption. Remittances also contribute to long-term growth by enlarging the tax base as Mexican citizens receive more money.

Looking Ahead

While remittances play a major part in the Mexican economy, their effect will decrease as Mexico develops. In 2022, Mexico’s “super peso” was among the top-performing currencies in the world and appreciated more than 13% against the U.S. dollar. With a stronger local currency, Mexicans receive fewer pesos when they sell the dollars they were sent.

However, a decreasing value of remittances isn’t fully bad in the long run. Economies can get stuck in a cycle of stagnation and dependence on them, creating a “remittance trap.” Thus, while remittances are an effective way of reducing immediate poverty and increasing the well-being of many families, they should not be the main focus of development; countries must supplement growth with stronger institutions and better governance.

Conclusion

Remittances to Mexico play a large part in the economy and contribute to the well-being of millions of Mexican families. They are so crucial that the Mexican government has a new initiative to support and encourage them. And in order to not become dependent on them, Mexico is focusing on funding strong institutions and governance.

– Cameron Alcocer
Photo: Unsplash