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Cablegate: The Awesome Potential of Remittances

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RR RUEHAO RUEHRS
DE RUEHME #0634/01 0531611
ZNR UUUUU ZZH
R 221609Z FEB 10
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC 0548
INFO ALL US CONSULATES IN MEXICO COLLECTIVE
WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RUEHML/AMEMBASSY MANILA 0010
RUEHNE/AMEMBASSY NEW DELHI 0001
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC

UNCLAS SECTION 01 OF 03 MEXICO 000634

SENSITIVE
SIPDIS
SIPDIS

E.O. 12958: N/A
TAGS: AID ECON MX
SUBJECT: The Awesome Potential of Remittances

THE AWESOME POTENTIAL OF REMITTANCES

1. (U) Summary: Remittances to Mexico fell approximately 16%
from 2008 to 2009. This was due primarily to the economic and
financial crisis the U.S. experienced in 2009 that compromised
Mexican migrants' ability to get work. Remittances from the U.S. to
Mexico totaled US$21.28 billion in 2009 and accounted for
approximately 27% of rural income and 19% of urban income. The IDB
expects remittances to stabilize around US$21 billion per year. The
use of remittances fascinates international organizations,
governments, and development agencies, but so far there is little
accord on the proper channeling of remittances. End summary.

Remittances by the Numbers

--------------------------

2. (U) At US$21.28 billion in 2009, remittances represent
Mexico's second most important source of foreign exchange after oil
exports. They provide around 27% of income on average for rural
families and 19% of income for urban families. Largely because of
the slump in U.S. activity in the construction and manufacturing
industries, migrants have struggled to find work. More stringent
laws in several states and an overall bias against hiring foreign
labor when unemployment is so high in the U.S. have also
contributed to a drop in income for migrants, documented and
undocumented. Remittances received in November 2009 were the lowest
they have been since March 2005, though the amount of money sent
increased by around 1.3% month-on-month in December 2009. The IDB
expects remittances to stabilize around US$21 billion per year for
the foreseeable future, provided the U.S. job market recovers.

3. (U) The U.S. and Mexico began to officially track receipt
of remittances in the mid-1990s, and since then the study of use of
remittances has become an academic field in its own right. There is
strong disagreement between actors on how remittances should be
used and channeled. Some say that an extra US$20 billion should be
used productively to support economic opportunities and
infrastructure improvements in the migrants' own communities.
Others say that migrants should use the money for the basics of
consumption and household survival.

Mexico's 3X1 Program

--------------------

4. (U) The state of Zacatecas, a major source of migrants to
the U.S., launched a "one-for-one" (1X1) program in 1986, matching
each peso of migrant money remitted with a peso from state funds.
In 1991, Guerrero launched a two-for-one (2X1) program, adding
municipal funds to the 1X1 program; Zacatecas followed with its own
2X1 in 1992. The positive results in Guerrero and Zacatecas
inspired the federal government to begin matching funds in those
states in 1998, and in 2001 it launched the Citizen Initiative
Three-For-One Program (3X1) with a nation-wide footprint through
the Secretariat of Social Development (Sedesol). 3X1 is generally
most active in the poorest parts of the country because those are
the areas that send the most migrants. Most of the money coming
into 3X1 comes from migrant clubs rather than individuals, and
migrant clubs have a strong voice in the nature of the programs
they sponsor. This can lead to friction between the "home town
associations," migrant communities, and local government officials.


5. (U) Currently the 3X1 program is active in 26 states
including Zacatecas and Guerrero, and despite the overall drop in
remittances, 3X1 monies remained stable at around US$77 million
between January and September 2009. In the first three quarters of
2009, 3X1 had approved more than 2,139 projects, exceeding its
annual goal by 42%, including:

MEXICO 00000634 002 OF 003


- 898 projects improved "urbanizaci????n" and paving;

- 421 projects improved water and sanitation;

- 276 projects improved educational, sport, and health
infrastructure;

- 116 projects improved electrification;

- 101 projects improved productive projects; and

- 60 projects improved rural roads.

Criticism of 3X1

----------------

6. (U) Many actors in the study and management of remittances
criticize programs like 3X1. They say migrant money is private
money and should not be considered another source of public
resources. In effect, 3X1 can give the GOM a 25% discount on
services it should be providing anyway when it contributes to
projects like building roads, improving drainage and sanitation
systems, and restoring health and educational facilities. Critics
claim that massive out-migration is the result of a deeply flawed
job market and that the GOM should not punish migrants twice: once
by forcing them from their families and homeland, and again by
usurping the money they earned elsewhere. Salaries that become
remittances are usually taxed in the U.S. whether the workers are
documented or not, so more government intrusion in Mexico is
unjust. On the other hand, others say that 3X1's non-infrastructure
programs can be quite beneficial to migrant-sending communities. In
Zacatecas in 2009, for example, several people received student
scholarships through contributions from 3X1; other projects created
multi-use rooms for communities.

Harnessing Wealth and Supporting Entrepreneurs

--------------------------------------------- -

7. (U) Approximately 86% of money received from migrants is
spent on immediate consumption within the family. The remaining 14%
is often put into informal savings (mattresses and socks) or, in a
good scenario, into a microfinance organization, credit union, or
other non-bank financial institution. Unfortunately, according to
contacts at the Inter-American Development Bank, very often the
depositor (usually the wife or mother of a migrant) does not feel
authorized to risk the money in an investment project. Thus credit
unions and lending organizations, which need to lend around 70% of
their capital, cannot survive in the areas where they were
introduced. Additionally, consumer protection organizations like
PROFECO and CONDUSEF must provide better and more active services.
In response to the regulation gap, USAID provides technical
assistance to establish guidelines for regulatory oversight of
microfinance institutions to the Mexican Banking and Securities
Commission. Currently around 20% of Mexicans have access to the
internet, and functional literacy is lower than average among the
poor and isolated. Watchdog groups must consider means besides
cutting edge technology to communicate their warnings.

8. (U) Econoff contacts recommended improved banking services,
business incubation, increased access to a variety of traditional
and non-traditional export markets, and a market-oriented - as
opposed to economic development - approach to lending. In terms of
agriculture, where most holdings produce only for family
consumption and where many farms lie fallow due to the absence of
the men who worked them prior to migrating, investment by the GOM
and recipients of remittances in export farming infrastructure,
such as greenhouses and agriculture extension support of export
crops, is one manner of harnessing remittances and involving the
GOM in a fully positive way. Another way the GOM could help
recipients of remittances channel the money into productive
purposes is to provide market research into tourist spending on

MEXICO 00000634 003 OF 003


indigenous-chic products that could be made in communities that
send migrants with small, targeted investments of remittances.
(Note: Most social programs in Mexico lack a market component. For
these suggested programs to be successful, the government would
have to address that component. End Note)

9. (U) Although including all actors in economic development
schemes is important for success, econoff contacts warned against
too heavy involvement of municipal officials. As at all levels of
government, elected officials only serve a single term: in all
states except Coahuila (where they serve four years), municipal
officials serve three years. While term limits prevents
dynasty-like control over local governments, it also reduces the
accountability of municipal officials and increases their
incentives to maximize personal gains while in office.
Municipalities are often the first level of barriers to
entrepreneurs. Officials generally have between eight and ten years
of formal education, and programs that rely too heavily on them
risk elite capture.

10. (U) Comment: The drop in remittances in 2009 is newsworthy
and important because it strongly impacts the ability of Mexico's
poor to consume at their usual level and will thus impact the
recovery of domestic demand. As the U.S. job market recovers,
however, remittances are expected to stabilize around US$21 billion
per year. Remittances can provide the poor with capital and a
credit history, and they can be part of the impetus to improve
socioeconomic conditions. There is a strong and important role for
the market, specifically banks, to play in the improvement of
services available to the poor and marginalized; the GOM will also
need to participate to regulate the market and prevent crises of
confidence like those that have occurred in the past. Mexico needs
to pair its programs for channeling remittances with both improved
financial education and market institution outreach to reduce risk
aversion and reduced barriers to entry to improve poor people's
ability to participate in the formal sector. The country's strong
focus on community-driven development might also turn problematic
as the market, the only real driver in the current political
economy, notoriously favors positive deviant individuals.
FEELEY

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