Remittances fuel consumption, not growth

In the Washington Post, Marcela Sanchez takes a look at the two-edged sword of Salvadoran emigration and remittances with statistics from the recent UN Development Program report. Here is an excerpt:

Money coming from abroad, however, has handicapped a part of El Salvador's economy at home. Far from becoming an export economy, Salvadoran consumption of foreign goods has increased dramatically. In other words, as soon as remittance money comes in, it leaves, tilting the economy more toward consumption and imports, and away from local production and exports.

Economic growth has slowed to a trickle over the last few years -- 1.8 percent in 2003, 1.5 percent in 2004 and 2 percent in 2005 -- lower than any other Central American country.

If remittances stayed longer in the country, they would have what the UNDP report coordinator William Pleitez calls a "multiplying effect" that would allow the money to touch more hands than those of retailers and importers. Pleitez argues that money doesn't stick around because the government is not taking action in crucial areas such as tax policy and job creation, relying too much instead on market forces to improve the fundamentals of the economy.


Anonymous said…
If Salvadoreans are lucky, it will be market forces and not government that most influences the economy. Consumption IS growth. Just check out Hiper Paiz, the Galleria, Multiplaza, and the fabulous new Gran Via for proof. Feliz Navidad.
Tim said…
Consumption of imported luxury goods, sold by multinational corporations does not necessarily translate into growth. When you buy a sweater at Benetton in the HiperPaiz, the profits don't stay in the country, but immediately leave. For more of my views, read this earlier post and this one .
Anonymous said…
If its a multinatioanl, then surely one of the nations is El Salvador. Think of the local importer, the transportation firm, the people hired to work at Benetton. Don't the fees and wages associated with all the above stay in this country? Benetton trades fancy sweaters for cash. In turn the local store trades fancy sweaters for cash. The store pays rent and salaries. All this is successful because of the more stable conditions in El Salvador. Therefore more entrepreneurs build more more shopping malls and Benetton stores and put even more people to work. Imported luxury goods are a distinct benefit toa society and a sure indicator of a vibrant economy.
Anonymous said…
I think that increased consumption in this country is very much linked to remittances. If you live in this country, then by all means you'd be aware of the important role remittances play on the income of a huge percentage of the population. But increased consumption in this country shouldn't be any indication of national economic growth. Unemployment is large, lack of education is large... What happens in the country, is that we consume much more than we produce. The money that is put into circulation, it's majority, is redirected back to the outside of the country. There has always been small room of growth for national business. The same entrepeneur that opened Gallerias/Metrocentro are the ones that opened Gran Villa, Multiplaza, it's no indications of international investment, other than the shops that have opened here that is benefitting from the consumist trend of the nation. Another thing to factor in, is that those who consume more openly are those of the middle-upper class, whilst the poor, consume thanks to the remittances, or else they would not. Take the remittances back, and you'd be removing the spine of the country's income generator, and you'd see how vibrant our nation's economy really is.
Anonymous said…
I don't see how remittances can be harmful. Salvadorean ex-pats send money home. The money is spent here. Why the worry? Is there any indication they may stop? I would also suggest that more free market activity would bring improvements in education and employment. The government cannot create jobs. Entrepreneurs can.
Tim said…
It certainly does not appear that the current policies are promoting economic growth. See today's post.

Maybe we can agree on the following:
(1) if the choice is between remittances flowing to the country and not flowing to the country, we would rather have the remittances.
(2) a dollar spent on a foreign-produced luxury good sold in a foreign-owned store produces less overall benefit to the Salvadoran economy than a dollar used (a) to purchase Salvadoran produced goods or (b) to invest in a micro-business to help a family generate their own income, or (c) to obtain a higher level of education for a Salvadoran youth.
(3) We want to encourage (a), (b) and (c) above.
Anonymous said…
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Anonymous said…
James' agruement that the glass towers of La Gran Via, undoubtedly fueled by remittance-based consumption, signifies economic growth reminds me of the joke about the economics professor who lies awake nights wondering if what works in reality could possibly work in theory. If what he posits were the case, we would be seeing a decrease in illegal immigrant flow as jobs grew, greater education demand as a degree would be worth more in an economy with a supply of high value jobs, and finally a decrease in crime. Unfortunately, we see none of these things occuring today in El Salvador.

Where James first goes off the tracks is in equating consumption with economic growth. If supply side economics gave us one thing, it was to prove that it is SUPPLY growth, not consumption growth, that really fuels the engine. In a national economy, too much consumption chasing too little output drives up the price of that output without a net increase in living standards for the consumers. Translation: higher prices for the same amount of goods, or, inflation - exactly what we see today in El Salvador. Sure, some jobs are created in the malls, but these are offset by population growth and loss of jobs in other sectors. And when everything starts costing more, the value of those jobs to society and the individual fall in relative terms. Yeah, perhaps my income has gone up, but my costs have gone up more, so I am now worse off. This is where El Salvador finds itself today. The issue is not that NO jobs have been created, but there has been no NET value creation, yet population HAS increased, so REAL NET VALUE/CAPITA is shrinking, especially among lower income sectors who do not have access to a US based sugar daddy. At the macro level, the ONLY thing bridging the gap is the remesa phenomenon, which, unfortunately, is helping to cause the problem to begin with. In this case, remesas are akin (though not quite as bad) as rampant money printing in Bolivia in the early 80's. The solution lies in increasing supply, and selling it to other countries so as to improve Salvador's current account deficit. Evne the most ardent supply siders would find themselves agreeing on this fact.

I do agree with James in that entrepreneurship creates growth, but there is almost no entrepreneurship in El Salvador for a wealth of reasons, at least one of which is because the money is not re-invested here in small businesses. This WOULD drive sustained growth through a robust multiplier effect. Unfortunately, the remesas have the same effect as a massive program of government hand outs would upon any economy (only with less equity in distribution since only those with family in the US receive these handouts). The result, consumption without production = dependence, lack of diversity in macro level cash flow, and stagflation. Education and small business growth is the answer, and buying $100 sweaters doesn't get us there, not matter how nice the malls look.
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