13   A Globalization that Opens Frontiers to Just About Everything Except People

William Krehm

That is not what the Good Book prescribed, though it is the True Believers who are manning the southern frontier with rifles to keep the downtrodden out of the country. We seem to remember that when a drought struck Asia Minor Abraham and his sons had no difficulty in moving down to Egypt, and Joseph even had a celebrated career in the local civil service. But now the Statue of Liberty that incites the downtrodden to seek refuge in the Land of the Free risks being taken down from her pedestal and sent off to Syria for a bit of roughing up to get her to confess her violation of the security laws.

And yet the US - like Canada but unlike most of the European countries historically - is an immigrant land. So badly did it need immigrants that southern plantation owners brought slaves in Africa to fill the labour gap. The historic pattern was - if there was not enough money for the boat fare for the entire families to come to America together, the eldest son would arrive and send remittances earned in his new country to bring over the rest of his family. Undoubtedly that helped compensate for the lack of social services. As Keynes put it - let the goods we consume be homespun, but our ideas and people should travel freely across frontiers.

The Wall Street Journal (1/ 11/06, "Migrants' Money Is Imperfect Cure for Poor Nations" by Bob Davis) paints the picture:

"Ciudad Barrios, El Salvador - This mountain town survives on money sent by its sons and daughters living in the US. On days payments arrived, lines at the local credit union can reach 150 deep. The crowds then hail motorcycle taxis and head for the local market to stock up in the town's open-end market on food and clothing or browse tiny appliance stores stuffed with blaring TVs and stereos.

"It's the sort of scene that many development economists believe could transform some of the world's most impoverished regions, by putting cash directly into the pockets of the poor. With tens of millions of migrants around the globe sending remittances home, the flood of money has grown immense - $167 billion last year, according to the World Bank.

"But Ciudad Barrios also demonstrates why reliance on remittances may turn out to be the latest development fad that fails to live up to its hype. The downside: a cycle of continued poverty, as dependence on remittances turns the town into a kind of ward of the US. Those with entrepreneurial ambitions head north, emptying the town of talent. Only a tiny fraction of the money they send home is invested in industry or agriculture. And with the breadwinners away, organized thugs pounce on a place where money pours in from the outside. All of that leaves little opportunity for the next generation except to follow their predecessors north, if they can.

"As soon as people go home and see what their salaries are [there], they come back to the US again,' says Israel Barrios, 38 years old, who left Ciudad Barrios in 1998 and has been cleaning houses in Washington, DC. He has sent enough cash home for her to buy a house. She misses him, but urges him to stay up north."

Remittances do not Spur Lasting Gains

"Though remittances fuel some spending, there isn't much evidence they have added to sustained growth. Instead they often distort the local economy and reduce the long-term prospect for gains.

"The flood of money from abroad can raise the value of the local currencies, making it harder for exporters to compete since the effective price of their goods goes up. About 85% of the remittances goes to pay the daily bills of the people left behind, with little left over for savings and investment. Migrants eventually return to retire in their home nations, not to help build their economies.

"`Labor export and remittances and remittances,' says Dean Yang, a public policy professor at the University of Michigan, `won't turn El Salvador, the Philippines and other poor countries into the next development tigers.' Even the World Bank which has pushed the developmental potential of remittances is now having second thoughts. In a report it released yesterday, the bank says that remittances are neither `manna from heaven, nor a substitute for sound development policies.'

"Remittances have received increasingly widespread attention in recent years as a way to boost aid without spending government money, as other policies for growth have failed to produce widespread gains. In the 1970s, and early 1980s, many nations tried closing their borders to protect their local industries from competition. That led to high prices and monopoly control. Then they tried the opposite approach, free trade and market liberalization, with limited effect except in Asia. Meanwhile foreign aid has been too small to make much of a difference.

"Remittances do directly help many poor families feed themselves and educate their children. Money sent home from abroad accounts for about 60% of the income of the poorest families in Guatemala, and has helped reduce the number of people living in poverty by 11 percentage points in Uganda and six percent in Bangladesh, according to World Bank studies.

"Nevertheless a look at El Salvador shows the ways in which the cash also can hinder impoverished nations. The nation of seven million has revamped its economy since the civil war ended in 1992 in a so-far elusive effort to spur rapid growth. El Salvador abolished price controls, privatized industries, slashed tariffs that were as high as 290% and adopted the dollar as its currency ion 2001 to limit inflation. Earlier this year it joined a free-trade bloc with the US. Salvadorans had started to flee the country in great numbers in the 1980s as the civil war intensified. Now one in six Salvadorans live abroad, many of them illegally in the US. They send home nearly $3 billion annually, nearly 16% of the country's GDP.

"Ciudad Barrios, a remote town 100 miles east of San Salvador, ping-ponged between Guerrilla and government control during the civil war. Jose Edgardo Diaz Cordero worked in the town's hospital pharmacy in 1990 when guerrillas demanded that he give them medicine to treat their wounded. Then, he says, he received an anonymous message from a right-wing death squad accusing him of being a guerrilla ally and warning him to leave the country.

"Mr. Diaz made his way to Washington, DC, an area in which others from his town had settled, attracted by a booming construction industry. He started sending home several hundred dollars a month to his wife to care for their five children. He has been home just once, for about a year in 1995. He returned to the US and was later joined by two sons, who became his partners in a flooring business. Another burst of Ciudad Barrios natives, who worked in the region's coffee fields, headed for the US starting in 2000 when coffee prices plummeted.

"The gains in consumption financed from abroad lead to a fall instead of a rise in domestic savings as a percentage of GDP. Result: the country makes little progress. Between 1999 and 2005, remittances doubled to $2.5 billion, but the country limped along at an annual growth rate of just 2.4% - far too low for a poor country to advance much.

"The tide of money from abroad boosted the value of its currency compared with that of its neighbors by nearly 50% between 1992 and 2001, which damaged exports. El Salvador has since adopted the US dollar as its currency, but competition from China has intensified and competition from other Central American countries has intensified since they kept their currencies undervalued. So Salvadoran exports have not recovered."

William Krehm

from Economic Reform, January 2007


"Thus, our national circulating medium is now at the mercy of loan transactions of banks, which lend, not money, but promises to supply money they do not possess."

Irving Fisher, economist and author

"If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial banks. Someone has to borrow every dollar we have in circulation, cash, or credit. If the banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless situation is almost incredible -- but there it is."

Robert Hemphill. Credit Manager, Federal Reserve Bank of Atlanta