Defining Ideas

Immigrant Remittances Are Private Foreign Aid

Tuesday, June 25, 2019

One objection of some critics of immigration is that immigrants, both legal and illegal, send substantial amounts of money back to relatives and friends in their country of origin. These monies sent are called “remittances.” Their main objection is that the money is lost to the U.S. economy where it could have been used to buy goods and services from Americans.

That objection does not hold water.

But before getting to what’s wrong with that objection, it’s important to note what’s so right about immigrant remittances. They are a large, voluntary, and effective form of foreign aid.

The Pew Research Center keeps close tabs on remittances sent from the United States to people in other countries. In 2017, the last year for which Pew has complete data, those remittances totaled a whopping $148.5 billion. To put that number in perspective, U.S. Gross Domestic Product that year was $19.39 trillion. That means that remittances were 0.76 percent of GDP. By contrast, in 2017 the U.S. government’s spending on foreign aid, both in economic and military assistance, totaled $50.1 billion. That’s only about a third of individual remittances.

Not surprisingly, the top 10 recipients of U.S. remittances in 2017 were all countries where the majority of people are poor by U.S. standards. Mexico led the list with receipts of $30 billion from the United States, followed by China ($16.1 billion), India ($11.7 billion), and the Philippines ($11.1 billion.)

This demonstrates that remittances are a major form of foreign aid to people in poor countries.

Moreover, all these remittances, unlike foreign aid provided by government, are voluntary. Taxpayers, with no direct say in the matter, pay for foreign aid provided by government. But individuals voluntarily pay remittances.

The fact that remittances are voluntary is good in itself. But it also has good effects. Those who send remittances are virtually always sending them to people they care about those who are poorer than they. So remittances are effective charity across international borders.

Consider, by contrast, what we normally call foreign aid: aid by governments. Almost all the foreign aid that the U.S. government spends money on is sent to foreign governments. The vast majority of people in those countries whose governments receive foreign aid have no say in how that money is spent. So it’s bad on both ends. Foreign aid is paid for by taxpayers who, in their role as taxpayers, have scarcely any say, and it is received by governments who also give their people little say.

In some extreme cases, heads of governments that receive foreign aid have spent much of it on themselves. The most striking example is that of Mobutu Sese Seko, the president—actually the dictator—of Zaire from November 1965 to May 1997. Winsome J. Leslie, in a 1987 book titled The World Bank and Structural Change in Developing Countries: The Case of Zaire, wrote that the Mobutu regime “views agencies such as the [World] Bank and bilateral donors as sources of foreign exchange, not partners as development.” She also wrote that Mobutu “sees development assistance as yet another means to accumulate personal wealth.”

And it worked—for Mobutu. He had a fleet of Mercedes Benzes, a yacht on the Congo River, and a luxurious palace, and sometimes chartered a Concorde from Air France so that he could fly to Paris on shopping sprees. At one time, Transparency International estimated his net worth at between $1 billion and $5 billion.

Remittances have another advantage over foreign aid: they offset the “brain drain” that poor countries face when they lose their most skilled and most talented workers. In his 2006 book, Immigrants: Your Country Needs Them, British economist Philippe Legrain gives a numerical example to make the point. An engineer earns an annual income of $5,000 in a poor country. He then migrates to a rich country where he earns $30,000 annually and sends $5,000 back to people in his country of birth. He’s better off, but so are the people to whom he sends the money. When he lived there, he needed to spend a large part of his earnings on himself. Now his relatives can have the entire $5,000 for themselves. And these are realistic numbers. People who migrate from poor to rich countries typically earn a large multiple of their previous income. 

Economists believe, with good reason, that people’s pay approximately equals the value of their output, at least in the private, for-profit sector. So the foregone productivity in the poor country when the skilled person leaves is made up for by the remittance.

You might think that all these characteristics of private foreign aid—they are large, voluntary, and effective—would be seen by everyone as virtues. But some members of the anti-immigration lobby see an apparent cloud that goes with the silver lining. Exhibit A is a short study published in May by the Federation of American Immigration Reform (FAIR), titled The United States Loses $150 Billion Annually in Remittances. (The whole study has suddenly been made unavailable to the public; a friend managed to pull down the full study before FAIR put it off limits.) The authors, Matthew O’Brien, Spencer Raley, and Casey Ryan, find a number of faults with remittances. In a short section titled “Why Should You Be Concerned About Remittances?” they answer that question. Here it is in full:

 

The answer is simple: Remittance payments are just one more way that unchecked mass migration hits average Americans in the wallet.

 

The remittance funnel that channels billions of dollars out of our economy every year is directly tied to our overly generous immigration policies and our lax enforcement of America’s borders. The majority of remittance payments are made by immigrants – illegal aliens, lawful permanent residents or naturalized citizens.

Consider the phrase “hits average Americans in the wallet.” Who do they think is sending these remittances? They state the answer in the second paragraph. The majority of the remittances are made by immigrants. I guarantee that unless there’s some nasty relative back in the home country brow-beating them to send money, these people who send the money don't see themselves as being “hit in the wallet” (even as they often make sacrifices in order to send money home). They are making voluntary contributions.

The only way FAIR’s statement would make sense is if they excluded these immigrants from the category of “average Americans.” One can argue for doing that with one of the three groups: illegal aliens. But what about the other two? Naturalized citizens are citizens. So they would fall under the category of average Americans. And it’s not much of a stretch to extend the category to include lawful permanent residents.

It’s almost as if the authors think that immigrants, even legal ones, don’t count.

The authors’ biggest source of indignation is that the money sent abroad is not spent in America. To that there are two answers. First, that’s probably incorrect. When people in those countries get U.S. dollars, they are likely to spend a substantial percentage of them on goods from the United States.

The second answer is even more interesting. What if they don’t spend those dollars here? What if, in the extreme, they hoard those dollars, keeping them as a stable source of value in their economies where, in many cases, they trust the U.S. dollar more than they trust the local currency?

That’s even better for the United States than if they spend it on American goods. The reason is that they are holding on to pieces of paper that the U.S. government spent pennies to produce but are worth dollars. Consider, for example, the $100 bill. Producing it costs the U.S. government’s Bureau of Engraving and Printing only 12.3 cents. So the U.S. government produces something that costs 12.3 cents and is worth $100. An immigrant who sent a $100 bill back to his home country typically got it by producing something that American residents paid $100 to get. Since people don’t typically pay more for something than the value they put on it, we can be assured that they valued that output at $100 or more.

So notice what just happened. American residents got at least $100 worth of output and in return paid $100 bills whose cost to the U.S. economy was only 12.3 cents.  If they paid in $50 or $20 bills, they got at least $50 or $20 worth of output for $50 and $20 bills that each cost 10.5 cents to produce. Now that’s a deal.

But aren’t those high-value currencies lost to the U.S. economy? Sure, in the extreme case that foreigners hold on to them. Now we come to what I call the Jay Leno “Doritos principle,” which I’ve named after an ad in the late 1980s in which Mr. Leno urged people to buy Doritos. Said he: “Crunch all you want; we’ll make more.” Hold on to all those Benjamins you want, foreigners; we (actually the U.S. government) will make more.

What do FAIR’s authors, O’Brien, Raley, and Ryan, propose to do about the “problem”? They want a special tax on remittances. It’s true that such a tax would reduce remittances somewhat. It would also raise revenue for the federal government, but much less than the government gets by spending 12.3 cents to produce $100 bills. But a tax on remittances would be one more restriction on people’s freedom to spend their money as they wish. It’s a form of capital controls—in a word, un-American.

I’m an American who became a naturalized citizen after growing up in Canada, eh? When my sister was alive, I sent her checks for Christmas and for her birthday. I’m incensed that a fellow American would advocate taxing me for doing so. We Americans should hold on to our freedom—and that of our fellow residents—to give our money to fellow Americans or to foreigners.