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Remittances, explained for Donald Trump (and everyone else)

How money sent home by migrants becomes a powerful economic engine.

Moneygram booth for sending remittances

Donald Trump's immigration proposals have generally been imaginative, impractical, inhumane, and sometimes all three.

But the plan Trump released this week on how he'd get Mexico to pay for the wall along the southern border of the US hinged on something called remittances. Essentially the idea is to prevent Mexican immigrants in the US from sending money home to their families until the Mexican government agrees to pay for a border wall.

Remittances are an easy political target for Trump's base: The idea of tens of billions of dollars leaving the US to support the families of poor immigrants isn't terribly appealing to people who view the global economy as a zero-sum fight between the US and everyone else.

And this part of the pitch might be Trump's most imaginative, impractical, inhumane proposal yet.

Remittances, which Trump calls "welfare," are actually an economic engine that dwarfs what a government program can do — and isn't as easy to shut off as Trump thinks.

Remittances are a huge boon to people in developing countries

Remittances are a tremendous force in the global economy. They're essentially a shadow foreign aid system that's bigger (and arguably more effective) than official foreign aid.

Immigrant workers in wealthier countries sent back roughly $435 billion to the developing world in 2015. According to the World Bank, that's three times the size of official development aid from governments — and larger than private sector investment.

In the United States, immigrant workers officially sent $56 billion back home in 2014 — a number substantially higher than the $36 billion from the US foreign aid budget. And economists agree that substantially understates remittances, since it only counts two of the ways migrants can send money home (we'll get to that later). The World Bank estimates that the true number might be closer to $130 billion in remittances — nearly four times what we send in foreign aid.

Map showing the outflow of remittances from the US to other countries in 2012.
Map showing the outflow of remittances from the US to other countries in 2012.
Pew Research Center

Mexican immigrants are sending way less money home than they used to

Trump gets one thing right: Mexican immigrants sent about $24 billion home to the US in 2014 (at least via the methods the World Bank can track). Of course, it's impossible to measure how much of that came from US citizens, legal immigrants, or unauthorized immigrants.

But remittances from the US to Mexico are actually a lot smaller than they were a decade ago: In 2006, for instance, Mexican immigrants sent home $30 billion.

While the global economy went into a tailspin in 2009 — with private foreign investment dropping 40 percent — remittances declined just 5.2 percent and quickly recovered. The one big exception was Mexican immigrants in the United States — their remittances in 2013 were almost 30 percent lower than the amount they sent in 2006. (They've grown slightly since then, but they're still down 20 percent from pre-recession levels.)

There are a few reasons for this. For one, there are fewer Mexican immigrants in the United States than there were 10 years ago: The Pew Research Center estimates that the Mexican-born population in the US fell by nearly 1 million people from 2007 to 2014. Fewer Mexicans are coming to the US, and more have departed for Mexico.

There's an ongoing debate as to why this has happened — and how much of the decline is due to the Great Recession in the US (and economic recovery in Mexico), as opposed to stricter enforcement of immigration laws. Both of these factors could also dampen remittances among Mexican immigrants who stay in the US.

Mexican immigrants in the United States tend to remit about a third of their paychecks, according to some surveys. (This can vary: Mexican farmworkers in North Carolina — who travel to and from Mexico on employer-funded buses for the growing season — remit around 80 percent of the money they make, according to the North Carolina Growers Association.) But they can only remit part of their paychecks if they have paychecks to begin with — and the collapse of the housing sector in the Great Recession was particularly hard on Mexican immigrants in the US, who dominated the construction industry.

Furthermore, if an immigrant is worried she'll have to leave the country — whether she's concerned about losing her job or being deported — she's likely to need to save more of her paycheck herself.

It's tough to track remittances — which makes them hard to regulate

Immigrants can send money by banks, or by companies like Western Union, from one country to another. But migrant workers can also send money home via transfer systems, like the hawala system in the Middle East and India, that use a series of brokers to transfer money without having to physically send it abroad. Or they can send money in the pocket of someone flying home.

That makes it tough for officials to track these money flows, which is why there's such a huge difference between the official and unofficial statistics for remittances sent out of the US. It also, obviously, makes it very difficult to regulate remittances, as Trump is proposing to do.

The government has already learned this — after 9/11, it increased scrutiny of funds going to certain countries. The informal hawala networks suffered, damaging remittances to Indonesia and the Philippines. Furthermore, international banks started simply refusing to send to some countries rather than risk a terrorism investigation: No bank, for example, is willing to send a remittance to a family in Somalia.

For Donald Trump's purposes, that probably doesn't sound too bad. After all, if banks respond to a ban on remittances to Mexico sent by unauthorized immigrants by refusing to send any remittances to Mexico at all, it will (theoretically) put even more pressure on the Mexican government to pay for that border wall he wants so much. But the harder it gets to send remittances through formal channels, the more tempting alternatives become.

Cubans returning to Cuba with lots of luggage. Adalberto Roque/AFP/Getty

One alternative!

In Africa, for example, where transaction fees on remittances tend to be highest (13 percent of remittances get eaten up in fees), people have started sending money directly by cellphone for much lower fees than banks charge. In some countries, banks and transfer companies have been able to push through regulations to prevent this kind of innovation, but Kenya, for example, has been wildly successful in using one of these platforms.

From the US to Mexico, of course, it wouldn't even have to be that high-tech. People would be able to send money with friends or family members traveling to Mexico. Unless Donald Trump is planning to deputize Border Patrol agents to physically pat down literally every human being traveling to Mexico from the US, and steal their money, this isn't going to work.

Remittances help the people they're sent to, which could help the US

Some studies have estimated that every $1 sent back home as remittances creates around $1.60 to $1.70 in economic activity.

That makes it an extremely effective form of foreign development aid. People who receive remittances tend to spend the money quickly, so it circulates through local economies.

And it can make it easier for countries to recover from, say, natural disasters. When, for instance, a hurricane hits "one of the poorest developing countries," according to economist Dean Yang, remittances account for 20 percent of repair funding.

The way Trump looks at it, that's a very bad thing: In his view, it's better to keep $1 here in the US than have some other country get $1.70. But of course, one of the things that people in other countries can do with an extra $1.70 on the dollar is buy US-made goods with it.

Donald Trump is extremely concerned about the US's trade deficit, and characterizes it as "losing" whenever the US buys more of a country's goods (say, China) than that country buys in American-made products. But US export growth is driven in large part by how much money people in other countries have.

That's a good thing when exports helped pull the US out of recession in the early 2010s; it's not so great now, when China's recession is putting the hurt on exporters in the US and elsewhere. And it would definitely not be great if countries like Mexico didn't have the economic multiplier effect that receiving remittances provides.

export ship John Greim/LightRocket/Getty

At the same time, remittances don't save entire national economies. They can help individual people in poor countries, but they won't change those countries from being poorer than the US. "It's clear that Haiti would be vastly worse off if 10 percent of Haiti was not living outside Haiti [and sending 33 percent of the country's GDP in remittances]," economist Michael Clemens of the Center on Global Development told Vox in 2014. "But have those remittances transformed Haiti's prospects? No way.

"But nothing is going to turn Haiti into a rich country in the short term. And given that that is the sad truth, in the short term, there is no better way of helping people escape poverty than letting them take the best option available to them, which is going somewhere else."

People would still rather be with their families

When Clemens calls it the "sad truth," he's not just being rhetorical. Academics have found that families with migrant members are less happy than families without them — and suggest that perhaps migration itself is to blame.

Clemens points out that it's difficult to tease out causation here: "If you're likely to migrate, maybe you have some stress at home that is leading you to do that?" he said. "We shouldn't be surprised if migrant homes have other things that are making them unhappy." One study of migrant workers themselves showed that migration led to a decrease in happiness but an overall increase in self-reported mental health.

But ultimately, people don't want to have to choose between supporting their families and being with them. That's why any attempt to make it impossible to send home remittances — depriving immigrants of both options — would probably result in a lot of immigrants sending for their families to join them in the US.

Again, this is something that's happened before. When the US increased physical security between the US and Mexico, by staffing up on border agents in the late 1990s, immigrants who had previously cycled back and forth between the two countries started settling in the US and bringing their families here.

If Donald Trump were to do the same thing with remittances — an "economic wall" — he might succeed in keeping more of that money in the US, just like the physical wall kept more people here. But the people would probably come with it. And having more immigrants in the US is probably not the solution Trump has in mind.

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