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Cablegate: Growth in Remittances to Mexico Stagnates

VZCZCXRO4501
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #0749/01 0732219
ZNR UUUUU ZZH
P 132219Z MAR 08
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 0900
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RHEHNSC/NSC WASHINGTON DC
RHMFIUU/CDR USSOUTHCOM MIAMI FL
RHMFIUU/CDR USNORTHCOM
RUEHC/DEPT OF LABOR WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 04 MEXICO 000749

SIPDIS

SENSITIVE
SIPDIS

STATE FOR A/S SHANNON
STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA, AND DRL/AWH
STATE FOR EB/ESC MCMANUS AND IZZO
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GERI WORD
USDOC FOR ITS/TD/ENERGY DIVISION
TREASURY FOR IA (ANNA JEWEL, LUYEN TRAN)
NSC FOR RICHARD MILES, DAN FISK
EXIM FOR MICHELE WILKINS
STATE PASS TO USTR (EISSENSTAT/MELLE)
STATE PASS TO FEDERAL RESERVE (ANDREA RAFFO)

E.O. 12958: N/A
TAGS: ECON ELAB EFIN EINT ETRD MX
SUBJECT: GROWTH IN REMITTANCES TO MEXICO STAGNATES


-------
Summary
-------

1. (SBU) Remittances from the U.S. to Mexico grew by only 1%
last year to total USD 23.98 billion. The Bank of Mexico
(Banxico) attributed the fall to a combination of factors,
including a slowdown in the U.S. economy, particularly in the
construction sector, stricter U.S. immigration controls, and
the gradual disappearance of a statistical bias associated
with the measurement of remittances. Michoacan topped the
list of highest grossing recipients nationwide followed by
Guanajuato, Mexico, and Jalisco. Eleven areas received less
remittance income than in 2006. While the slowdown in
remittances will have only a limited impact on the overall
economy, poorer households that rely on the receipt of these
funds will take a hit. The GOM needs to promote the
productive investment of remittances, work to improve
financial intermediation and literacy, and support investment
in small businesses. End Summary.

---------------------------
Remittance Growth Sluggish
---------------------------

2. (U) The amount of money Mexican workers living in the U.S.
sent back to relatives last year stagnated after years of
spectacular growth. Remittances grew by only 1% in 2007,
down from 17% in 2006 and 21% in 2005. In January 2008,
remittances fell by 5.9% compared to the same month a year
earlier, the worst fall since the Bank of Mexico (Banxico)
began recording these transfers. At USD 23.98 billion,
remittances were MexicoQ,s second largest source of foreign
exchange after crude oil revenues last year -- representing
approximately 2.7% of GDP. The states receiving the most
transfers included Michoacan, Guanajuato, Mexico, Jalisco,
and Puebla -- which jointly captured 41% of total inflows.
On a per capita basis, Guerrero, Hidalgo, and Michoacan
topped the list. Eleven states received fewer funds from
remittances than in 2006. The largest drops were seen in the
Federal District, Michoacan, Aguascalientes, and Chiapas.

3. (U) The Banxico publicly cites a number of reasons for the
sluggish growth in money transfers, including slower economic
growth in the U.S. -- particularly in the construction
industry because many Mexicans are employed in this sector.
Banxico also says that heightened border surveillance is
making it harder for Mexicans to enter the U.S. in search of
work without authorization. Banxico adds that, once in the
U.S., it is harder for migrants to find jobs because of
tighter controls against employers who hire undocumented
workers. Another reason Banxico cites for the slowdown is
the gradual disappearance of a statistical bias associated
with the measurement of remittances. Lower costs for
transferring money, and improvements in how Banxico collects
and records remittance data partially explain the high growth
in remittances seen from 2000 to 2006. Because fees for
transferring money became much lower, money that was already
being sent to Mexico switched to official channels. Now that
most people sending remittances to Mexico use formal channels
that are recorded by Banxico, it makes sense that the growth
rate measured for remittances would flatten out.

4. (SBU) Dr. Sergio Kurczyn Ba$uelos, the Deputy Director for
Economic and Political Research at Banamex, told Econoff that
while he agreed with the reasons Banxico cited for the
slowdown, it is "strange" that growth dropped off so quickly
in just one year. He said that while the contraction in the
U.S. construction industry will have an impact on employment
rates among Mexican migrants, the effect may not be as
dramatic as some believe because many workers will simply
switch to other occupations. While Kurczyn agreed that the
perception of increased security at the U.S.-Mexico border is
probably deterring Mexicans from migrating north, he remarked

MEXICO 00000749 002 OF 004


that it is hard to quantify whether or not stepped-up
enforcement is contributing to the slowdown in remittances.
He said that while the number of apprehensions has fallen
along the border, there are limitations to using this number
as a proxy for the flow of Mexican workers into the United
States. (Comment: Moreover, some argue that stricter border
controls deter Mexicans already in the U.S. from returning to
Mexico to visit family members. Comment.)

5. (SBU) Dr. Gerardo Esquivel from Colegio de Mexico
disagreed with some of KurczynQ,s comments, noting that
trends in the U.S. labor market were the main reason the
growth in remittances has slowed. He told Econoff that
migration to the U.S. picked up during 2000-04, adding that
these immigrants found jobs in construction and other sectors
that allowed them to noticeably increase their income -- and
hence the amount of money they were able to send back to
relatives. Esquivel said that many Mexicans in the U.S. work
in sectors that are sensitive to the performance of the
economy, so it is not surprising that unemployment among
workers of Hispanic origin in the U.S. has increased more
than it has for other ethnic groups over the past year. This
has translated into less money being sent to Mexico.
Esquivel added that slower growth in the U.S. also deters
some Mexicans from heading north to find a job. He noted,
however, that he did not buy the argument that stricter
immigration controls were a factor in the slowdown in the
growth of remittances.

--------------------------------
How Is the Money Sent to Mexico?
--------------------------------

6. (SBU) According to Banxico, workers send money to Mexico
via four vehicles: money orders, personal checks, electronic
transfers, and cash and in-kind transfers. Electronic
transfers are by far the most popular method. As a share of
all remittances, electronic transfers rose from 71% in 2000
to 95% in 2007. This increase is due in part to U.S. and
Mexican government initiatives to allow Mexican citizens
living in the United States to open bank accounts regardless
of their immigration status. U.S. banks are allowed to
accept the Mexican matricula consular card, issued by Mexican
consulates in the United States, as an official form of
identification to open accounts. (Comment: Although these
systems are designed to make the transfer of money faster and
less expensive for the customers, the rapid movement of such
vast sums of money by persons of questionable identity leaves
the money transfer systems open to potential money laundering
and exploitation by organized crime groups. End Comment.)
As noted above, another reason electronic transfers have
become more popular is the large reduction in transaction
fees for sending money to Mexico. According to a report from
Profeco (MexicoQ,s federal consumer protection agency), these
fees fell 63% from 1999 to 2006.

--------------------------------------------- ----
Remittances Play Crucial Role in Some Communities
--------------------------------------------- ----

7. (U) Finance Secretariat officials have told Econoff that
the slowdown in remittances will have only a limited impact
on the overall economy since these transfers represent such a
small percentage of GDP. Nonetheless, poorer households that
rely on the receipt of these funds will take a hit. For
these families, remittance income is critical for maintenance
of their modest standard of living. Often these households,
which are usually headed by women, use remittances for
household necessities such as food, clothing, and health care
for themselves and their children. According a 2007 Banxico
report, more than 85% of remittance funds are used to
purchase consumption goods, while 6% is used for educational
expenses and only 0.4% for small business investment.


MEXICO 00000749 003 OF 004


8. (SBU) Esquivel told Econoff that remittances are only
channeled to investment when you use a general definition of
investment (e.g. including education). He cited a UNDP
report that found remittances promote greater investment in
primary and secondary education, but not high school
education. Esquivel remarked that some students in
communities with a migrant tradition are more interested in
emigrating than in attending high school.

9. (SBU) Microfinance institutions and savings and credit
cooperatives report that the slowdown could negatively affect
efforts to integrate more Mexicans into the financial system.
These "popular finance" institutions -- which have gradually
entered into the remittance transfer business over the past
five years -- have been successful in channeling remittances
into the financial system by educating remittance receivers
of the benefits of keeping their savings in a regulated
financial institution.

10. (SBU) Esquivel said his research shows that receiving
remittances reduces a householdQ,s probability of being in
food-based and capacities poverty by 7.7 and 6.3 percentage
points, respectively (Note: The food-based poverty line is an
estimate of the income required to purchase a food basket
satisfying minimum nutritional requirements. The capacities
poverty line includes non-food income for spending on
education and health services. The assets poverty line also
considers expenditures on housing, clothing, and transport.
End Note.) These effects represent a reduction of around 36%
and 23% in the corresponding poverty rates of a
remittance-receiving household vis-a-vis a comparable non
remittance-receiving household. In general, however,
receiving remittances does not affect the probability of
being in assets-based poverty. The effects of receiving
remittances are similar in rural households. The main
difference is that for rural households, receiving
remittances reduces the probability of being in assets-based
poverty by 10 percentage points (that is, a reduction of
about 15% in the corresponding poverty rate).

11. (SBU) Since the 1990s, the Mexican government has tried
to channel remittance flows into infrastructure and business
development in Mexico. For example, under the
"Three-for-One" program, each peso contributed by migrants
from their remittances is matched by federal, state, and
municipal governments for specific improvements in their
hometowns (e.g. roads, schools, and water systems). Another
government-sponsored program called "Invest in Mexico"
provides free business planning support and directs
remittances into small business start-ups. Esquivel was
critical of government programs such as "Three-for-One,"
noting that most of the money does not go toward productive
investment projects, but rather projects such as restoring
the local church or plaza. While he believes these programs
are not well designed, he admits that the communities that
participate in these initiatives are better off.

12. (SBU) Esquivel remarked that local governments are not
concerned about emigration because it serves as an escape
valve for social and political pressures, allowing the
government to avoid confronting problems like poverty and
unemployment. Emigration, and the remittances associated
with it, also provides a means to improve the local economy
that would not have been available otherwise. He noted that
in Michoacan, remittances account for 15% of GDP. Esquivel
believes that leaders at all levels of government need to
assume responsibility for the factors that encourage people
to leave Mexico, and work to create jobs and reduce poverty.

-------
Comment
-------

13. (SBU) There are many benefits associated with

MEXICO 00000749 004 OF 004


remittances. They not only provide a buffer against
difficult times for many Mexicans, they also promote access
to financial services and, in some instances, encourage small
business development. However, communities can become
dependent on this income as the more productive members of
the community move away. Moreover, such cash infusions can
mask structural problems and lessen the demand for social and
economic reforms -- similar to the effect Petrodollars have
in many countries. The GOM needs to increase the positive
impact of remittances not only by promoting their investment
in productive ventures, but also by improving Mexico's
overall investment climate, encouraging access to financial
services, promoting financial literacy, supporting investment
in small businesses, and improving Mexico's educational
system. End Comment.


Visit Mexico City's Classified Web Site at
http://www.state.sgov.gov/p/wha/mexicocity and the North American
Partnership Blog at http://www.intelink.gov/communities/state/nap /
GARZA

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