The Power of Remittances

January 21, 2011
Money Exchange Signs in Santiago

About the Author: Jose W. Fernandez serves as Assistant Secretary of State for the Bureau of Economic, Energy, and Business Affairs.

Here is a quick quiz for DipNote readers: how much money do you think flows from workers in the United States back to their families in countries throughout Latin America each year? A few million? Possibly $100 million? How about $60 billion? That's right -- every year, $60 billion in funds flow from the United States to Latin American countries.

These funds are known as remittances, and they are one of the most significant sources of foreign exchange in emerging economies. In Honduras and El Salvador, for example, remittances account for nearly one fifth of GDP and dwarfs foreign assistance. This is true all over the globe -- remittances are often the largest source of foreign exchange, and far exceed what the United States and other nations provide in development assistance. More importantly, remittances are a critical source of income for millions of people in emerging economies throughout the world. However, since remittances are used primarily to meet daily needs like food, housing and clothing, the potential of remittances as an asset to meet long-term economic growth and development goals has been largely unrealized.

A new initiative launched by the State Department aims to make use of this asset by using these flows for infrastructure projects like building bridges and roads; public works, like clean water and renewable energy; and entrepreneurship development. This initiative is known as BRIDGE: Building Remittance Investment for Development, Growth and Entrepreneurship.

The BRIDGE initiative will initially partner with sound and well established financial institutions in two pilot countries, Honduras and El Salvador. By providing credit enhancements and partial guarantees, BRIDGE will enable these financial institutions to safely and effectively harness the value created in the basic remittance transfer in order to secure a sustainable source of development finance. In turn, remittances will be able to help meet economic growth and development goals, not just short-term consumption needs. BRIDGE will not impact the basic transfer of remittances and the millions of households that depend on them for income and basic daily living expenses -- these households will not see their regular payments disrupted by this effort. There is no change in sending or receiving the remittances.

The scarcity of long-term investment capital is one of the largest hurdles to long-term growth and job creation in emerging economies, especially in Central America. We are hopeful that BRIDGE can help close the financing gap between developing countries' significant investment needs and the longer-term capital required to meet those needs. BRIDGE's partner agencies, including the Development Credit Authority at the U.S. Agency for International Development (USAID), the Overseas Private Investment Corporation (OPIC), and the Inter-American Development Bank (IDB), will help private financial institutions in developing countries maximize remittance flows to facilitate access to longer-term and lower-cost funds in the capital markets. This, in turn, will enable greater investment in projects that can create economic growth.

I've seen firsthand in my travels to El Salvador and other developing nations that the need for infrastructure is great. So many countries have kids sitting in classrooms that lack electricity, or parents tending to homes that lack access to clean water. BRIDGE offers a way for remittances have a larger impact in development: they can help put food on the table while at the same time putting lights in the classroom. Ultimately, I hope that through innovative programs like BRIDGE, developing nations will no longer need traditional assistance at all but will look to new ways to find lasting solutions to their needs.

You can follow Assistant Secretary Fernandez on Facebook and @EconEngage on Twitter.

Comments

Comments

ERICA A.
|
Brazil
January 24, 2011

Erica A. in Brazil writes:

Olhaaaaaaaaaaaa

Kirsten C.
|
Wisconsin, USA
May 13, 2011

Kirsten C. in Wisconsin writes:

These statistics on remittances are very surprising. I never realized that remittances have that great of an effect on the GDP of Latin American countries. BRIDGE sounds like a positive way to harness the economic potential of remittances. I think it's equally important, though to make loans available for small businesses to encourage economic growth internally. I hope that there is also an initiative to open up pathways for the high demand for small business loans in Latin America in addition to programs like BRIDGE to continue to stabilize and strengthen Latin American economies.

Becca
|
Virginia, USA
August 16, 2011

Becca in Virginia writes:

Its good to know that something will actually be done will all the money that is leaving the States.... Its not like we need it here or anything....

.

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