April 18 th , 2013

1. Immigration Reform in the United States: • Implications for Latin America April 18th, 2013

2. Contents Motivation Immigration Debate in the US Understanding Immigration from LA to US Impact of expected reforms on LA Concluding Remarks Immigration Reform in the United States: Implications for Latin America

3. 1. Motivation • Most Latin American countries, especially Mexico, are deeply influenced by policy decisions in the US. Currently one of the most relevant policy issues for Latin America, immigration, is ranked highly in the US political agenda. • The importance of Hispanic voters brought to the table the immigration reform, now with a more lenient view of undocumented immigrants. • Such a reform would alter the flows of remittances to migrants’ countries, and thus, their economies; however, the direction of the impact is unclear. • To understand the possible effects of a reform, it is important to consider the basic characteristics of immigration, including its size, trends, and the main incentives that generate it as well as its relationship with remmittances. Immigration Reform in the United States: Implications for Latin America

4. Contents Motivation Immigration Debate in the US Understanding Immigration from LA to US Impact of expected reforms on LA Concluding Remarks Immigration Reform in the United States: Implications for Latin America

5. 2. Immigration Debate in the US Background • The most important legislative reform process relevant to the current discussion is the Immigration Reform and Control Act (IRCA) of 1986. • It legalized farm workers and others who had been in the US for at least five years. • It sought to discourage illegal immigration through sanctions for employers who knowingly hire unauthorized workers. • However, new enforcement strategies have been developed through time as a reaction towards migration patterns. * • Expenditures and personnel assigned to border enforcement have grown between four and five fold since 1990. • Worksite arrests exploded and deportations doubled in the 2000s. *Martin (2012) Immigration Reform in the United States: Implications for Latin America

6. 2. Immigration Debate in the US • The current debate on immigration is centered on two policies, as outlined in the Bipartisan Framework for Comprehensive Immigration Reform published by eight senators on January 28 of this year: • Legalization of certain undocumented immigrants • Proposals include a “tough but fair” process, which would entail paying a fine and overdue taxes, being subjected to background checks, and a probationary period during which they must work and pass englishand civics exams in order to be granted a “green card.” • Certain cases, such as immigrants who arrived as children, would be given special treatment in the legalization process. • Tightening of border enforcement policies • Including more surveillance technology along the border, and more border patrol personnel. • President Obama has stated his intentions to pass a final, comprehensive bill by this summer (March 27, 2013). Immigration Reform in the United States: Implications for Latin America

7. Contents Motivation Immigration Debate in the US Understanding Immigration from LA to US Impact of expected reforms on LA Concluding Remarks Immigration Reform in the United States: Implications for Latin America

8. 2. Understanding Immigration: Current Trends Latin American Immigrants in the United States Census Data (Thousands) Source: Calculations by Banco de México with information obtained from the microdata of the Current Population Survey of the U.S. Census Bureau. Source: EncuestaNacional de Ocupación y Empleo (ENOE), INEGI. Households in Mexico that Received Remittances (% of total households) Mexican Immigrants in the United States Current Population SurveyData (Thousands) • Immigration to the US has declined after the global crisis. In particular, immigration of Mexicans has practically halted. Likewise, the percentage of Mexican households receiving remittances has fallen consistently. Source: Calculations by Banco de México with information obtained from the microdata of the Current Population Survey of the U.S. Census Bureau. Immigration Reform in the United States: Implications for Latin America

9. 2. Understanding Immigration: Current Trends • Remittances in Latin America and Mexico are significant as a share of GDP, and as compared to other elements of the Balance of Payments. MexicanWorkers’ Remittances (Share of GDPand Millions of US Dollars) Latin American Workers’ Remittances (Share of GDPand Millions of US Dollars) MexicanWorkers’ Remittances (As a share of Other Accounts of the Balance of Payments) Source: World Bank Source: World Bank. Source: Banco de México Immigration Reform in the United States: Implications for Latin America

10. 2. Understanding Immigration: Current Trends • Determinants of migration • The main incentive to migrate is the differential between wages net of expenses in the two countries considering the expected time spent in the target country. • The main cost of migrating is the fixed cost of crossing the border. • Lately, • incentives have decreased due to the economic downturn and to an increase in deportations • costs have increased due to a series of policy actions that have intensified surveillance and barriers throughout the border. • While policies to strengthen border security have been in place for at least a decade, the most significant reduction of immigration coincides with the economic downturn. Immigration Reform in the United States: Implications for Latin America

11. 2. Understanding Immigration: Current Trends • Lower economic segments of the population have a larger share of families receiving remittances. Thus the impact of any change in those reflects more harshly on the poor. • Wage incentives for migration are much greater for the less educated than for those with more years of schooling. Families Receiving Remittances, by Income Decile1/ (%) 1/ Deciles are computed including both households that receive remittances and those that do not. Households are ordered by deciles according to their quarterly current income. Source: EncuestaNacional de Ingresosy Gastosde los Hogares 2010, INEGI. Preliminary population weights computed by INEGI based on the 2010 Census were used. AverageHourlyWages of Mexicans in the US and in Mexico in 2000, byYears of Schooling (2010 Dollars; Differentials in Parentheses) Source: Hanson (2006) Immigration Reform in the United States: Implications for Latin America

12. Contents Motivation Immigration Debate in the US Understanding Immigration from LA to US Impact of expected reforms on LA Concluding Remarks Immigration Reform in the United States: Implications for Latin America

13. 4. Impact on Latin America The two main discussion subjects on immigration, enforcement and legalization, have different impacts. • A more lenient approach towards legalization of undocumented individuals could affect remittances in at least three ways: • Reduces uncertainty regarding the future stay of illegal immigrants and allows families to unite in the US, thus reducing the need to save or keep ties to their native communities. • Increases incentives for people to enter the US illegally due to a higher expected present value. • Reduces volatility of employment for immigrants, which is very important for migration decisions. • The final effect of these three forces is not obvious. However, the experience with the 1986 Immigration Reform Control Act, which included amnesty, shows that remittances initially fell and that it did not change long term migration patterns.* * Amuedo-Dorantes and Mazzolari2009; Orrenius and Zavodny2003. Immigration Reform in the United States: Implications for Latin America

14. 4. Impact on Latin America • Stricter immigration policy enforcement makes illegal border crossings more costly and dangerous; though this may deter marginal migrants, the literature suggests that the effect on immigration may not be considerable.* • The marginal deterrence created by the tightening of enforcement efforts to reduce immigration has two main costs, the direct cost of the policy and an increase in wages due to reduced labor supply. • Immigrant-labor intensive industries, such as agriculture, could experience significant output reductions and wage increases. Zahniser et al (2012) suggest a relative fall in agricultural output of 2-5%, and a relative wage increase of 7-9% in the long run if the undocumented immigrant labor force were reduced by 40%.** *Cornelius and Salehyan 2007, Parrado 2012. ** Martin, Calvin 2010; Martin 2012; Immigration Reform in the United States: Implications for Latin America

15. 4. Impact on Latin America • Remittances have a myriad of effects on welfare and other economic variables: • Reduce poverty Esquivel and Huerta-Pineda (2007) estimate that remittance recipient households in Mexico are 23-36% less likely to live under the poverty line than their non-recipient counterparts. Adams (2004); Yang and Martínez (2005); López-Córdova (2005); Orrenius et.al. (2009) • Foster financial penetration and promote growth Demirgüç-Kunt et al. (2011) find that remittances increase the number of bank branches and accounts per capita, as well as amounts deposited as a share of GDP in Mexico. Giuliano and Ruiz-Arranz (2009) • Improve health Frank and Hummer (2002) find that being born in a remittance recipient household protects newborn infants from the risk of low birth weight. Hildebrandt and McKenzie (2005); Amuedo-Dorantes and Pozo (2009) Immigration Reform in the United States: Implications for Latin America

16. 4. Impact on Latin America • Improve human capital Alcaraz, Chiquiar and Salcedo (2010) find that the negative recessionary shock on remittances of 2008-2009 caused a significant rise in child labor and a significant fall in school attendance. Yang (2008); Acosta (2006); Mansuri (2006); Hanson and Woodruff (2003); Amuedo-Dorantes, et al. (2010). • Promote entrepreneurship Woodruff and Zenteno (2007) find that micro entrepreneurs associated with migration networks are less capital-constrained, and their micro enterprises have higher investment and profit levels. Yang (2008); • The positive effects on growth and development that remittances have generated in recipient areas have reduced the incentives to migrate. Immigration Reform in the United States: Implications for Latin America

17. Contents Motivation Immigration Debate in the US Understanding Immigration from LA to US Impact of expected reforms on LA Concluding Remarks Immigration Reform in the United States: Implications for Latin America

18. 5. Concluding Remarks • Fiscal and political conditions in the US have increased the probability of an immigration reform. • Despite the recent decline remittances are still relevant for the Mexican economy. • An immigration reform with a more lenient approach towards legalization of undocumented immigrants and stricter immigration policy enforcement would likely generate: • Benefits for immigrant workers already in the US and US workers • A marginal increase in the number of migrants to the US • An ambiguous effect on remittances to Mexico • The previous reform with similar characteristics (IRCA 1986) reduced remittances in the short term, but had no impact on long term migration patterns. Immigration Reform in the United States: Implications for Latin America

19. 5. Concluding Remarks • Since remittances affect fundamental elements of welfare for Mexican families, such as health, education and poverty in general, the effects immigration reform on them are a sensible topic for the country. • Moreover, the subject is also relevant for the US as immigrant labor provides a significant push to labor supply in relevant industries and regions in the US and has a positive impact on growth as shown in the literature.* *Gans 2008, Zahniser et al. 2012 Immigration Reform in the United States: Implications for Latin America