Can Remittances Break the Cycle of Poverty in El Salvador? 

Amy L. Damon

(January 20, 2003) Currently more than a million Salvadorans in the United States routinely send money, known as remittances, back to family members in El Salvador. In 1999, remittances surpassed official development assistance, foreign direct investment, and tourism as a source of foreign exchange for El Salvador. Remittances have surged in recent years in this small Central American country making it the second highest recipient of remittances in all of Latin America and the Caribbean. 

Increasingly, El Salvador relies on remittances to sustain its economy. Accounting for 12.6 percent of the gross domestic product (GDP), remittances have bolstered the national economy, enabled consumerism to grow within Salvadoran borders, and provided a windfall to families suffering from natural disasters such as the earthquakes and the drought of 2001. Remittances often sustain the present day Salvadoran family budget, paying for health care costs, school fees, debt payments, and daily household needs. However, the sustainability of remittances as a main source of income should be questioned. Reliance on remittances has both social and economic implications, discussed below, that should be strongly considered as the Salvadoran government promotes remittances as a pillar of their economic strategy. 

The high rate of migration from El Salvador to the United States is symptomatic of deeply rooted structural problems in El Salvador. During the 1980s, Salvadorans largely fled as wartime refugees. Today people leave, not as wartime refugees, but as economic refugees as both the agricultural and non-agricultural sectors struggle to create new employment opportunities. Workers are increasingly displaced from traditional economic activities in the agricultural sector, and face few opportunities outside of agriculture. While some Salvadorans find low paying jobs in maquilas, or sweatshops, many see migration as their only viable option. Salvadorans migrate to find work abroad to support family members who remain in El Salvador and generally find relatively low-paying jobs in the United States and other countries in Central America. Typically, remittances sent by individuals range from $200-$300 every four to six weeks, though the amount varies widely. 

Remittances help to boost individual household consumption, increase national foreign exchange earnings, and provide temporary financial relief at the household level. In El Salvador, a large portion of remittances is sent to the poorest segment of the population. Often these households, headed by women, use remittances for household necessities such as food, clothing, and health care for themselves and their children. 

Socially, the culture of remittances has a strong impact. Increasing dependence on remittances implicitly introduces a new family structure. The new Salvadoran family typically consists of a mother or grandmother raising children whose parents live in the United States. Growing up in this family structure, it is natural for these children to migrate also, as they see this as the only option to earn a living. This trend has community level implications as well, since young adults have little incentive to contribute to their own community's growth and well being since their ultimate goal is to leave El Salvador to find work in the United States. 

Migration is destructive to Salvadoran family structure and often dangerous for those who migrate. Many times migrants leave without documentation to enter the United States and pay "coyotes", or middlemen, to help them across the border. This trend is a problem both for the United States and El Salvador. Migrants are extremely vulnerable during the journey to the United States, and remain vulnerable under the constant threat of deportation once inside the United States. Several recent cases that discovered chains of child smugglers, transporting children from Central America to the United States, highlight this very problem. 

The economic impact of remittances also deserves more analysis. In the long run reliance on remittances sets up an arguably more steadfast low-level equilibrium, dependent on remittances and migration. Using remittances as a primary source of economic sustenance and growth is risky. Remittances generally have minimal impact on investment spending, savings, or other indicators of economic development since they are used primarily for daily expenditures. 

Migrants, in the case of El Salvador, are disproportionately poor, rural men. These men have historically supported their family with the sales of modest agricultural surpluses from small commercial and subsistence farms. As the agricultural sector struggles, the share and diversity of Salvadoran agricultural products diminishes. Salvadorans have very few employment options besides farming in the rural areas. With falling global commodity prices, rising input costs, and unstable markets, farmers are being squeezed out of agriculture. This is leading to exploding cities and massive migration out of rural areas. However, leaving the risky business of agriculture does not necessarily ensure a reliable source of family income. As the United States goes into recession, and low-paying jobs dry up quickly, so do remittances. Without remittances, many families are acutely vulnerable to food insecurity. Rural families, whose male household heads have left the farm, have lower household food production capacity, and without remittances cannot afford to buy food in the market. 

Due to the necessity of remittances for daily needs, remittances are rarely invested in economic ventures or used as productive capital. They therefore have had minimal impact on efforts to improve public services or remedy other critical problems that reinforce the cycle of poverty. Remittances overwhelmingly remain in the informal sector, with few remittances ever entering the banking system. The current remittance system therefore fails to contribute to the multiplier effect essential for economic growth. 

In order to break the long run cycle of poverty through equitable and sustainable agricultural and industrial development, employment opportunities in El Salvador need to be created through microproductive investment in small businesses; improved education and health services; and catastrophic environmental degradation needs to be halted. Remittances so far have largely failed to support the fundamental building blocks toward sustainable economic development. This failure is in large part due to a weak institutional system that fails to provide economic incentives, investor confidence, and transparent markets, as well as the fact that remittances, rather than supplementing existing incomes, are increasingly the main source of income for many poor families. 

Currently, the Salvadoran government's long run economic plan is based on two main inputs, remittances and sweatshops. Both may offer short-term solutions to immediate household food insecurity; however, neither offer options to break the endemic cycle of long-term poverty. The cycle of poverty can not be broken by increased remittances without structural and institutional reform that would provide opportunities to collectively leverage remittances to address root causes of hunger and poverty. Additionally, international labor market reforms allowing workers to move safely and more freely between the United States and El Salvador must also be implemented. The dependence on remittances within the current policy framework arguably has an aggregately negative effect, breeding economic dependence on family members abroad, fostering cultural erosion, splitting families, as well as providing disincentives to invest in real domestic economic growth. Remittances further allow the government and international agencies to become complacent since many of the basic needs of poor families are met through the tenuous system of remittances. 

There are examples of policies that provide incentives for families and communities to invest remittances into productive activities. Mexico, for example, is one of the leaders in this area. The Mexican government developed a matching funds program, where every dollar sent from abroad and invested in a community project or activity is matched threefold by the local, state, and federal government. This program has been quite successful in leveraging remittances to contribute to local and regional development in Mexico. El Salvador is following Mexico's example in this area and has recently started a matching funds program, also. However, in the case of El Salvador, funds directed at community projects are in large part raised by community associations in the United States that send money back to their communities as a whole. Matching funds programs have yet to come up with a strategy to provide incentives for individuals to invest in projects or employment-generating activities. 

Is development based on remittances a viable long-term development option? Does several hundred dollars every six weeks from a father abroad really constitute a step in the right direction, toward sustainable and equitable development? While it may be the only option many families have at this time, the real challenge lies in developing a vibrant, healthy, and equitable economy in El Salvador that can provide meaningful work, contribute to the improvement of public services, and ultimately maintain the Salvadoran social fabric. The reality of the situation is that the system of remittances, whether good or bad, is already in place and growing. Therefore, the challenge lies in harnessing the enormous potential of remittances to help build a strong, equitable, and dynamic national economy. Remittances have the potential to help this internal transformation, however remittances should be looked at as a means toward developing an internal engine of growth in El Salvador, not an engine of growth in and of itself.

Damon is a Mickey Leland International Congressional Hunger Fellow of the Congressional Hunger Center. She is currently completing the second year of her fellowship at the International Institute for Food Policy Research in Washington, DC. More on Mickey Leland Hunger Fellows.

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