A Change of Fortune: Remittances to Mexico Fall, Weakening Washington’s Diplomatic Clout

On July 30, the Mexican central bank reported that remittances coming from overseas nations—mainly the U.S.—have dropped 2.9 percent this year. This was the first decline since the practice began being accurately measured. In 2007, remittances flowing into Mexico reached an all time high of $23.98 billion, but Mexican officials recently predicted a decline this year of 1.5 to 2 percent as a result of the United States’ housing crisis and soaring food prices. Also contributing to the drop is the current crackdown on illegal immigration which has made it difficult for many Mexican nationals to gain entry across the border or find jobs in the United States.

The recent drop in remittances poses a major threat to the Mexican economy, as they are second only to oil as a source of foreign income. Remittances are important because they promote economic growth by allowing more citizens at home to engage in the formal economic sector, while simultaneously encouraging the use of formal financial services and participation in small-scale investment in the national economy. The decrease in remittances may also threaten United States diplomacy to a significant extent. In the past, Washington has used taxation of remittances as leverage for furthering U.S. interests when engaging with remittance-dependent nations in negotiations. If remittances fall steadily in the coming years, the United States may very well lose this bargaining tool.

According to the Inter-American Development Bank (IADB), Mexico is the largest remittance-receiving country in Latin America, due in part to the more than 11 million Mexican nationals living in the states. The study also reported that 18 percent of Mexican adults consistently receive remittances (averaging about seven times per year, each with a value of $190). The majority of remittances (78 percent) are being utilized to pay for basic necessities such as food, medicine and housing. Women are twice as likely to receive remittances as men, with most recipients living on only moderate incomes and having limited education. The highest concentrations of Mexican remittance recipients in 2007 were in Guanajuato, Jalisco, Michoacán, San Luis Potosí and Zacatecas.

The drop in remittances is not surprising considering the recent economic downturn in the U.S. and how closely Mexico’s economy is tied to that of the United States. Families and businesses that depend on remittances for their livelihoods have also suffered due to the eight percent devaluation of the U.S. dollar against the Mexican peso. The future may be equally gloomy, as the central bank has predicted no significant growth of remittances in the coming year. The fact that Mexico is feeling the effects of the U.S. economic downturn is of concern to Mexican officials and only serves to underline the importance of the November U.S. presidential election to Mexico and the rest of Latin America.