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C European Historical Economics Society 2011
European Review of Economic History, 15, 443–474. doi:10.1017/S1361491611000037 First published online 25 March 2011
Remittances, capital flows and
financial development during the
mass migration period, 1870–1913
R U I E S T E V E S ∗ A N D D A V I D K H O U D O U R - C A S T É R A S ∗∗
∗
Department of Economics, University of Oxford, Oxford OX1 3UQ, UK, and
CEMPRE – Centro de Estudos Macroeconómicos e de Previsão, Oporto,
Portugal, [email protected]
∗∗
OECD Development Centre, 2 rue André Pascal, 75775 Paris Cedex 16,
France, [email protected]
This article addresses the question whether the substantial financial flows
received by emigration countries contributed to domestic financial
development in peripheral Europe before 1914. We quantify a sizable and
significant relation between remittances and measures of financial
development that is both larger than the contribution of other
international capital flows and the best estimates of the same relation
today. Given that financial development is regularly included among the
conditions for economic growth and catch-up of developing nations, this
article adds to our understanding of the multiple impacts of the mass
migration phenomenon on the economies of emigration countries.
1. Introduction
At the end of the nineteenth century, the majority of European countries
formed a periphery of developing nations catching up with the developed
core. Like today, the high volatility of foreign capital flows was a factor of
instability for the ‘emerging economies’ of eastern and southern Europe
and of Scandinavia. But unlike contemporary developing nations, which
face restrictive immigration policies, pre-1914 European countries benefited
from almost unfettered access to the international labour market. New
World countries, which had a huge need for labour, acted as magnets
for would-be migrants. As a result, movements of labour played a more
significant role than today in terms of international convergence (Taylor
and Williamson 2006).
Migration flows were also at the origin of large money transfers
that emigrants sent to their relatives or brought back with them when
returning home. The contemporary and historical literature on remittances
emphasizes their contribution to the consumption and investment decisions
of families left behind and consequently to the catch-up process (Hatton
and Williamson 2005). Some authors focus on the role of remittances as
a mechanism for international risk sharing in relation to the well-known
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European Review of Economic History
paradox about consumption co-movements across nations (Backus et al.
1992). Thus, Fenoaltea (1988) argues that Italian remittances helped with
financing current account deficits, especially after 1887, when international
capital inflows began to decrease. In the same vein, Esteves and KhoudourCastéras (2009) show that remittances reduced the incidence of financial
disturbances (sudden stops and current account reversals) among peripheral
European countries integrated in the gold standard.
This article takes a different perspective on the relevance of remittance
flows before World War I by analysing their effects on financial development.
Our working concept of financial development follows on the long tradition
of identifying it with the change in financial structure, as inferred from
consolidated balance sheets (Golsdmith 1969; Rajan and Zingales 2003).
Recent literature relates remittances to financial development in developing
countries, finding that they are either substitutes (Calderón et al. 2007;
Giuliano and Ruiz-Arranz 2009) or complements (Aggarwal et al. 2006;
Martínez Pería et al. 2007).
Our purpose is to investigate the significance of remittances in promoting
late nineteenth-century financial development in eight peripheral countries,
with relatively limited access to international lending. Other than sharing
the characteristics of emerging economies, these eight countries are singled
out in this study because of their relevance in the context of European
emigration. On average, they represented around 60 per cent of the total
outflow of European migrants between 1880 and 1913 (data from Ferenczi
and Willcox 1929).
The historical literature provides estimates of remittances for four of these
countries: Austria–Hungary, Italy, Portugal and Spain. The first contribution
of this article is to estimate remittances for four additional countries
(Finland, Greece, Norway and Sweden), based on indirect evidence from
the emigration process itself and the economic conditions that emigrants
encountered in destination countries.
We then investigate the statistical relation between remittance flows and
standard measures of the development of the local financial institutions. Our
findings imply that there is a complementary relation between remittances
and financial development, as the size of remittances has a positive impact
on our measures of financial development. This suggests that international
migration contributed to the catch-up process before 1914, by means other
than income convergence.
2. The interaction between remittances and financial
development
2.1. Substitutes or complements?
Current discussions on the relation between remittances and financial
development are based on the question of whether they are substitutes
Remittances, capital flows and financial development
445
or complements. According to the substitutability hypothesis, remittances
partially offset the lack of financial development in emigration countries by
allowing poor people to invest in high-return projects. On the other hand,
the complementarity hypothesis argues that there is a positive interaction
between remittances and financial development. High levels of financial
development help migrants send more money home and, in turn, a significant
inflow of remittances stimulates the interest of financial institutions and
public authorities. This brings about higher levels of competition between
financial intermediaries, as well as institutional reforms aiming at channelling
remittances towards productive investment.
The main arguments in favour of the substitutability hypothesis are
presented by Giuliano and Ruiz-Arranz (2009), who analyse the respective
roles of remittances and the financial sector in promoting economic growth.
They show, based on a data set of 73 developing countries over the period
1975–2002, that the impact of remittances on growth is stronger when
financial markets are underdeveloped. Remittances are supposed to release
credit constraints in countries where credit markets are imperfect. This result
is confirmed by Calderón et al. (2007), who find that the effect of remittances
on growth is inversely related to financial depth in Latin America.
But there is also evidence of complementarity. Mundaca (2005) and Bettin
and Zazarro (2008) find that the more developed the financial sector, the
higher the impact of remittances on growth. They interpret the results
as evidence that financial institutions help channel remittances towards
productive investment projects, particularly in the case of small and mediumsized businesses. These studies also find that remittances have a higher
impact when used as collateral for loans from financial intermediaries.
Most statistics on remittances underestimate the real value of money
transfers to developing countries, either because they do not take into
account money transfer operators, such as Western Union, or because
they exclude informal channels (de Luna Martínez 2005). In this respect,
countries with better financial development should receive – or at least
measure – more (official) remittances. But beyond the mere accounting
aspect, broad and deep financial markets contribute to reducing transfer
costs, hence increasing remittance flows, while a stable and reliable banking
system leads migrants to remit through formal channels (Aggarwal et al.
2006). By contrast, inefficiencies in the financial sector, expressed as delays
in money transfers, high intermediation costs, or unfavourable exchange
rates, tend to curb remittance inflows (Ratha 2005).
Remittances also play a key role in strengthening financial institutions in
developing countries. They contribute to increasing the demand for financial
services, not only for deposit accounts, but also, as remittances exceed the
immediate needs of families, for savings accounts. Such demand is met
by new financial institutions through a double process of deepening and
widening; banks and other money transfer operators open more branches
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European Review of Economic History
in migration-intensive areas, and offer more services. This increase in
competition for financial services decreases intermediation costs to the
benefit of the recipients. The fact that migrants’ families receive stable and
significant remittances also facilitates their access to loans, making possible
the expansion of the domestic credit market.
Aggarwal et al. (2006) use balance of payments data for 99 developing
countries over the period 1975–2003 to show that remittances contribute
to increasing the ratio of bank credit to the private sector and the share of
bank deposits, as a percentage of GDP. In their estimates, an increase of
remittances worth 1 per cent of GDP generates a rise in credit of around 0.3
per cent, and between 0.5 and 0.6 per cent in the deposits variable. Martínez
Pería et al. (2007) study 25 Latin American and Caribbean countries over
the same period and similarly conclude that the impact of remittances is
positive, although the effect is smaller than in other developing regions.
An explanation is that recurrent crises in Latin America created a climate
of distrust in the banking system, such that remitters were less prone to
use the financial system than in other regions. Nevertheless, the same
authors provide micro-level evidence from 19 household surveys conducted
in 11 countries showing that the probability of using financial services,
namely bank accounts and credit, is higher among households that receive
remittances than in the rest of the population.
2.2. The impact of remittances on pre-1914 European financial
development
Although there is very little literature on the effects of remittances on
the nineteenth-century financial sector, the substantial amount of money
sent by migrants to their families raises the question of whether the two
were not related, at least in the European periphery. Informal channels
were quite common during the nineteenth century. Migrants used to send
banknotes or even coins through the ordinary mail (Semmingsen 1978).
They also entrusted envelopes with money inside to acquaintances travelling
back home, or carried their savings themselves when returning –temporarily
or definitively (Douki 2001; Magee and Thompson 2006a). But, as the
migration phenomenon spread, remitters required more reliable transfer
systems, and official intermediaries blossomed.
The Western Union Company, the quintessence of today’s remittance
business, began its money transfer activities in 1871. Several ethnic banks
also appeared, like the Emigrant Industrial Savings Bank, oriented towards
the Irish community in New York (Ó’Gráda 1998) or the Bank of Italy in
San Francisco (Mittone 1984). The newly created intermediaries developed
links with European financial institutions and extended their activities to the
countries of emigration.
Remittances, capital flows and financial development
447
In Spain, due to the lack of banks outside Madrid and Barcelona, many
mercantile houses began to offer remittance services, by setting up direct
relations with trading partners overseas or by acting as local correspondents
for national or even foreign banks. With time, these ‘merchant-bankers’
specialized in such operations and progressively turned into banking houses
or became integrated into the branch network of larger banks (García López
1992). New banks also appeared and specialized in remittance activities,
such as the Banco Hispano Americano and the Crédito Ibero Americano,
which opened their doors in 1901 and 1903, respectively.1 In other cases,
foreign banks entered the domestic market in order to take advantage of
the remittance business, such as the Banco Español del Río de la Plata, an
Argentinian bank that opened several branches in Spain at the beginning of
the twentieth century.
Financial reforms were sometimes encouraged by public authorities. In
Italy, the 1901 law on emigration aimed at channelling remittances through
official financial institutions to protect migrants and their families against
untrustworthy intermediaries, and to use these funds to finance development
projects. One significant measure was to expand the post office network in
rural areas, so that migrants’ families could have closer access to financial
services (Douki 2001).
As recipients were able to save part of the additional income, the need for
savings accounts rose in proportion. This was encouraged by the strategy of
many European migrants to spend some years in the New World accumulating enough money to buy a farm or a small business when returning to
their countries of origin (Magee and Thomson 2006b). In Portugal, the
surge of new banking institutions was largely related to remittances, but also
to so-called ‘Brazilians’, who returned with a large amount of capital (Alves
1993).
In Italy too competition between financial institutions was raging, and
local operators faced pressures from national banks (Douki 2001). Savings
banks adapted to this new clientele by offering attractive interest rates
and the number of account owners consequently increased: the amount
of postal accounts deposits went up from 323 m lire in 1890 to 2108 in 1913
(+553 per cent in 23 years). During the same period, the share of emigrants’
savings in total postal accounts went from 0.03 to 4.4 per cent (authors’
calculations based on ISTAT 1958).
Remittances also helped migrants’ families free themselves from usury, a
common practice in rural Europe (Massulo 2001). Remittances gave rise to
an unusual availability of capital that contributed to reducing dependency
in two ways. First, direct recipients could use this capital surplus to finance
their investment projects, without getting into excessive debt. Second, some
1
As underlined by Hatton and Williamson (1994) and Sánchez Alonso (2000), emigration
from Spain really only took off at the beginning of the twentieth century.
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European Review of Economic History
people used their new economic situation to lend money with lower interest
rates than usurers. The result was a redistribution of economic power that
changed local social structures.
3. Sending money home before World War I
3.1. Data
Quantitative information on remittances before World War I is fragmented,
both in terms of countries and periods. The existence of micro-data, mainly
coming from banks’ or post offices’ balance sheets, helps us to understand
better the remitting patterns of emigrants in terms of transfer channels and
periodicity. Yet the aggregation of micro-data into macro-series faces several
pitfalls:
– First, many migrants remitted money through informal channels, or
brought their savings with them when returning home (Wyman 1993).
As today, these invisible transfers are difficult to estimate.
– Second, there is no precise information on the number of emigrants who
sent money home and for how long.2
– Third, not all migrants followed the same pattern when transferring
money, which complicates the task of estimating the average amount
of remittances by country. This depended, among other factors, on the
country where migrants went, their professional activities, marital status
and on who travelled with them. In addition, the average amount of
remittances differed from one country of origin to another.3
Despite these difficulties, several authors provide estimates for
some European countries (Austria–Hungary, Italy, Portugal, Spain and
the UK) using migration figures and contemporary information on average
remittances sent by emigrants (see Appendix A). These studies vary in the
amount of direct information extracted from archival sources that they bring
to bear on the aggregation problems mentioned above.4 Nevertheless, the
2
3
4
Studies in today’s developing countries show that remittances decrease proportionally to
the length of immigrants’ stay. Funkhouser (1995) concludes that remittances between the
United States and Nicaragua decrease by three dollars for every month spent in the US.
DeSipio (2002) estimates that a 1% increase in time spent by Mexicans in the United
States lowers the probability of transferring money home by 2%. Filipski and Taylor
(2010) show that the annual rate of decay of remittances to Mexico is about 3.5%.
Durand et al. (1996) argue that not only the wages and job situation of migrants, but also
their age, level of education, marital status and the number of dependents at home,
influence the amount of remittances. De la Brière et al. (2002), based on the Dominican
case, find that the magnitude of remittances also depends on migrants’ destination, gender
and household composition.
To our knowledge, Magee’s (2006a and b) work on remittances to the UK is the most
detailed exercise of aggregation of remittances estimates from archival material.
Remittances, capital flows and financial development
449
partly unobservable nature of the transactions we try to measure implies that
all estimates of remittances are really just approximations to the actual flows,
even today (de Luna Martínez 2005). Moreover, for other countries there is
very little available information and no published estimates. Fully aware of
the pitfalls of such an exercise, we estimate new remittance series for four
countries (Finland, Greece, Sweden and Norway), by using all available
direct information and following, where possible, the methods used by our
predecessors.
We can break down this exercise in two steps: first, the estimation of the
stock of emigrants abroad likely to remit to country i in year t (Mit ); second,
the calculation of the average amount of remittances sent by each emigrant
(remit ). The total amount of remittances (remit ) is then given by:
remit = Mit × remit
The stock of emigrants likely to remit money is based on cumulated past
migrant inflows. We are aware that not all migrants sent money home, that
a certain proportion of them came back after a few years or even months,
and that the propensity to transfer remittances tended to decrease with the
passing of time. In order to take heed of these facts we first assume that only
male migrants between 14 and 44 years old sent remittances. In general,
the youngest migrants came with their parents, while the oldest travelled
with their children or joined them later thanks to pre-paid tickets (Jerome
1926). Most women who migrated were married or went to the New World
to marry settled immigrants. Men were therefore mostly in charge of those
left behind.5
We then consider, following Morys (2005), Prados de la Escosura (2006)
and Simon (1960), that most migrants sent money home only during the first
five years of their stay. After that, they had either returned home or decided
to settle permanently. We also take into consideration short-term migration
by deducting from the stock of remitters the number of emigrants who had
returned to their home countries in previous years. The number of remitters
is therefore defined as follows:
4
i
i i
i
μit−n Eit−n
Mt = μt Et + (1 − ρ )
n=1
where Eit is the annual number of emigrants from country i in year t, μit is
the share of male migrants between 14 and 44 years old, and ρ i the rate of
return to country i.6
5
6
The average share of male migrants between 14 and 44 years old, in the period 1899–1913,
was 53% for Norway and Sweden, 57% for Finland, and 89% for Greece (authors’
calculations based on Ferenczi and Willcox 1929).
According to the US Immigration Commission (1911, vol. 1, p. 182), the ratio of returnees
to immigrants admitted into the United States between 1908 and 1910 was 14% for
Norwegians and Swedes, 17% for Finns and 25% for Greeks.
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European Review of Economic History
Then, we calculate the annual level of remittances per remitter from contemporary sources. Since the United States was by far the main destination
for the nationals of Greece, Finland, Norway and Sweden (around 95 per
cent of Scandinavian emigrants went to the US before World War I), we
concentrate on these four countries.
We base calculations on the figures given by different sources to set
the total amount of remittances in one or more reference years (see
Appendix A). We then use our estimate of the annual number of remitters to
calculate the average amount of remittances in each country. We extrapolate
these per capita values to other years by calculating an index of the expected
nominal wages of immigrants from country i in the US (wti ):
us
wti = 1 − uit wtus · e t i
where, uit is the unemployment rate in the US, wtus is the nominal wage index
us
in the US, and e t i is the exchange rate between the dollar and each domestic
currency (see Appendix A).
As a result,
remit =
remiref
i
wref
· wti
i
where remiref and wref
are, respectively, the average amount of remittances
to country i and the expected nominal wage index of immigrants in the US
in the reference years. In using a single national wage series for the US,
we are abstracting from several sources of differentiation across immigrants,
according to their education, occupation, country of origin and settlement
patterns in the US (Dunlevy and Saba 1992). Although Hatton (2000) and
Hatton and Williamson (2005) provide information on the difference in
productivity between native and foreign-born workers in the US, such a
measure is only available for 1909 and therefore cannot be used.7
As for regional differences, previous research concluded that a wellintegrated labour market was already operating by 1880 in the north-east
and north-central regions, which absorbed the vast majority of Scandinavian
and Greek migrants to the US (Rosenbloom 1996). Since our estimates of
remittances depend on the changes in the wage index, differences in wage
levels across regions are less of a concern.
7
In 1909, earnings in industry in the US after 20 years were, respectively, 4.8% and 5.5%
higher for Finnish and Scandinavian immigrants than for the native-born workers. By
contrast, Greek immigrants earned 7.5% less than native workers (Hatton 2000).
Remittances, capital flows and financial development
451
Finally, the total amount of remittances in year t is estimated as:
4
remiref
i
i i
i
i
i
remt = μt Et + (1 − ρ )
μt−n Et−n ×
· wti
i
wref
n=1
The complete list of remittances series, together with our reconstruction of
the stocks of remitters is available from Appendix B. It should be noted that
the number of remitters is different from the stock of migrants in the US, as
estimated by Hatton (1995). If we follow his method to interpolate foreignborn populations between census years, we conclude that, on average, 12
per cent of Norwegians and Swedes living in the US remitted money home,
compared to 33 per cent of Finns and 59 per cent of Greeks.8 By using
the 1909 survey of immigrant workers conducted by the US Immigration
Commission (1911), we can also estimate the percentage of annual income
sent by migrants to their home countries. The figures are: 27 per cent for
Swedes, 23 per cent for Greeks, 22 per cent for Norwegians and only 13 per
cent for Finns.9
3.2. The stylized facts of pre-1914 remittances
Table 1 contains the descriptive statistics of remittances as a share of
GDP between 1870 and 1913 for, respectively, four southern European
countries (Greece, Italy, Portugal and Spain) and three Scandinavian
countries (Finland, Norway and Sweden) plus Austria–Hungary. In the
former group of countries, in particular Greece, Portugal and Italy, the
weight of remittances grew to very significant levels. By contrast, remittances
had a lower contribution in the second group of countries, never reaching
3.5 per cent of GDP in any year. This happens to be the average estimate of
contemporary remittances as a fraction of recipient nations’ GDP in 2006
(IFAD 2007).
8
9
These proportions are in direct relation with what we know about the different
composition of migrant flows, namely the Scandinavian pattern of emigration by complete
families, contrasted with the predominance of males and the high rates of temporary
migration among southern European emigrants. According to the data compiled in
Ferenczi and Wilcox (1929), only 6% of Greek emigrants to the US between 1899 and
1913 were women, while the corresponding figures were 36% for Finland and 38% for the
Scandinavians.
The values are relative to the annual income of male workers in manufacturing and
industry aged 18 and above. By way of comparison, Magee and Thompson (2006a)
estimate that the proportion of average remitter’s income sent as remittances from the US
to the UK was between 11.7 and 16% in 1905–9, and between 13.7 and 18.7% in 1910–13.
Castillo and Orozco (2008), based on interviews with immigrants in the US from eight
Latin American countries, argue that today’s remittances represent around 15% of
migrants’ income.
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European Review of Economic History
Table 1. Summary statistics of remittances
Country
Greece (1876–1913)
Italy (1876–1913)
Portugal (1870–1913)
Spain (1870–1913)
Average
0.958
2.662
2.698
1.021
Min
0.005
0.260
1.138
0.268
Max
5.084
5.823
7.071
3.200
Coef. of var.
1.565
0.617
0.423
0.808
Austria–Hungary (1880–1913)
Finland (1886–1913)
Norway (1870–1913)
Sweden (1870–1913)
0.743
1.366
1.253
1.010
0.089
0.325
0.198
0.094
2.212
2.514
3.151
2.098
0.967
0.447
0.594
0.522
Note: Values are expressed as a share of GDP.
Source: See text and Appendix A.
The coefficient of variation shows that remittances were more stable in
Scandinavia and Portugal than in other countries. Nonetheless, remittances
were subject to fluctuations, mainly driven by the changes in the stock
of remitters. For most countries this measure explains all the variation in
total remittances or even over-explains it.10 The exceptions are Norway
and Spain, where wage movements explain about 12 per cent of the
variation in remittances, and especially Portugal, whose remittance flows
were dominated in this period by the swings in the Brazilian exchange rate.
This dependence of remittances on migratory flows implies that the former
were also generally related to the economic activity in immigration countries,
as potential emigrants reacted to the conditions in the labour market in their
countries of sojourn. For instance, the US downturn of 1908 brought about
a strong increase in unemployment that negatively affected remittances to
Europe: between 1907 and 1909, remittances dropped by 11 per cent to Italy,
25 per cent to Sweden, 26 per cent to Norway and 30 per cent to Finland.
Similarly, the decrease in remittances to Portugal at the turn of the century
(−65 per cent between 1898 and 1902) was largely due to the economic and
political problems in Brazil.
Remittances also tended to exhibit a countercyclical role in European
economies, which is suggestive of an international risk-sharing motive. A
drop in domestic economic activity was sometimes accompanied by an
increase in remittances, while faster economic growth at home could be
followed by a reduction in flows – of emigrants, and remittances. Thus, the
strong increase in GDP in Finland in 1897–8 (+10.4 and +10.1 per cent)
came with a drop in remittances of 36 per cent between 1896 and 1898. By
contrast, the economic recession of 1901–2 (−1.3 in 1901 and −2.5 per cent
10
The latter happens mainly in cases when adverse exchange rate changes contributed
negatively to the flow of remittances. We decomposed the contribution of the variables in
the estimation formula for Remt (stock of migrants, wage levels and exchange rates)
through analysis of covariance.
Remittances, capital flows and financial development
453
in 1902) was followed by an increase in remittances of 98 per cent between
1900 and 1902 (+58 per cent between 1901 and 1902). Likewise, after
the depression of the Norwegian economy in 1878 (−11.4 per cent) and
1879 (−6.2 per cent), remittances doubled (1878–80), while the period
of economic growth during the second half of the 1890s brought about a
significant decrease in remittances. A similar pattern is also manifest in Spain,
where the strong economic growth of 1877 (+10.3 per cent) entailed a drop
in remittances by 19 per cent. By contrast, the crises of 1889 (−8.2 per cent)
and 1910 (−4.9 per cent) were offset by an increase in remittances by 42 and
18 per cent, respectively.11
4. Empirical model
We will approach our empirical question, that is, the impact of remittances
on pre-1914 European financial development, by estimating variants of the
following model:
Fi ,t = β1 Remi ,t−1 + β2 Xi ,t−1 + αi + ϕt + εi ,t
in which Fi,t stands for a measure of financial development of country i in year
t, Remi,t is the amount of remittances received from abroad (normalized by
GDP), Xi,t is a vector of controls, and α i and ϕ t are country and time effects,
respectively. We lag all independent variables to minimize endogeneity
concerns, although we will tackle this problem more fully below.
In computing financial development at a macro level, we followed two
common measures in the literature on financial development: the ratio
between narrow money (M1) and GDP and the ratio between total deposits
in the banking system and GDP (King and Levine 1993; Rajan and
Zingales 2003). By using measures reflecting the size of the liabilities of
the consolidated banking system, we implicitly take the view that banks
were the main source of financial development in the eight countries in
our sample. This is warranted by the traditional contrast in the literature
between the bank-based model of financial development, prevalent on the
European ‘Continent’, and the market-based ‘Anglo-Saxon’ financial system
(Gerschenkron 1962; Goldsmith 1969). To be sure, recent literature has
questioned this simple division of financial systems (Fohlin 2007), but
data limitations prevented us from exploring the development of securities
markets in the countries included in our sample.12 Similarly, we lack data on
11
12
It would be interesting to verify whether the renowned paradox about the excessively low
correction of consumption across nations (Backus et al. 1992) extends to the pre-1914
period and, in particular, whether remittances increased the co-movement of
consumption levels. That is, however, beyond the scope of this article.
Rajan and Zingales’s (2003) database, for instance, although covering measures of stock
market development, only starts in 1913.
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European Review of Economic History
Table 2. Summary statistics of financial development (M1)
Country
Greece (1876–1913)
Italy (1876–1913)
Portugal (1870–1913)
Spain (1870–1913)
Average
31.731
21.279
19.534
25.359
Min
17.829
16.182
16.153
20.301
Max
45.258
25.968
23.733
35.729
Coef. of var.
0.178
0.118
0.096
0.141
Austria–Hungary (1880–1913)
Finland (1886–1913)
Norway (1870–1913)
Sweden (1870–1913)
12.603
31.731
7.184
NA
10.321
17.829
5.821
NA
16.965
45.258
8.243
NA
0.099
0.178
0.073
NA
Note: Values are expressed as a share of GDP.
Source: See Appendix A.
Table 3. Summary statistics of financial development (deposits)
Country
Greece (1876–1913)
Italy (1876–1913)
Portugal (1870–1913)
Spain (1870–1913)
Average
17.440
38.171
2.821
3.350
Min
6.663
27.776
1.658
0.453
Max
51.161
48.406
5.388
7.094
Coef. of var.
0.702
0.161
0.329
0.550
Austria–Hungary (1880–1913)
Finland (1886–1913)
Norway (1870–1913)
Sweden (1870–1913)
76.063
33.986
44.139
44.735
37.631
7.033
22.464
5.975
115.918
70.373
69.624
70.885
0.320
0.602
0.336
0.425
Note: Values are expressed as a share of GDP.
Source: See Appendix A.
banking assets (credit) for all but two of the countries. Nevertheless, there
is considerable variation in time and, especially, across countries in the two
variables we use, of which summary statistics by country are available in
Tables 2 and 3. The sources for these and all other variables can be found
in Appendix A.
Both indicators aim at measuring the penetration of financial services
in the economy. Ideally, we would like to further disaggregate our results
by the type of financial instruments available to potential remitters, e.g.
savings vs demand or time deposits. For some countries we could separate
between types of banking institutions (deposits in commercial and savings
banks), but not for others.13 As a result, we use here an aggregate measure
of total deposits – in commercial and savings banks – as a proxy for financial
development.
As mentioned, we normalize our principal right-hand side variable of
interest, the level of remittances (as estimated in Section 3), by recipient
nations’ GDP. In our base model, we consider three groups of controls.
First, we control for country size and economic development, the former
13
See Appendix A for details.
Remittances, capital flows and financial development
455
proxied by the natural log of GDP expressed in pounds sterling, and the
latter by per capita GDP, also in sterling. Both variables are included to
capture the presumption that the development of financial services has fixed
costs, which are more easily defrayed in larger and/or richer nations. The level
of per capita GDP may also perhaps account for a time-varying component
of domestic institutional quality (not captured by country-fixed effects). We
will return to this question in more detail later. A second group of variables
controls for the degrees of trade and financial openness. Recent literature
has emphasized the positive effects of openness on the development of local
financial sectors that can tap into larger pools of savings and acquire superior
technology and know-how via FDI (Chinn and Ito 2002; Errunza 2001;
Levine 2001). We measure trade openness as the export share of GDP and
financial openness by the trade account, also normalized by the recipient
country’s GDP.14 Finally, we include a third group of variables that account
for the well-known negative link between monetary instability (domestic and
external) and financial development (Boyd et al. 2001). Participation in the
gold standard and inflation rates are the indicators used for this purpose
(Battilossi 2006; Carosso and Sylla 1991). The summary statistics of the
covariates are reported in Table 4. As we do not have information on all
variables for all countries over the whole period, our estimation will be based
on unbalanced panels.15
The first set of results for this model can be read from Table 5. The
estimation method is pooled OLS with robust standard errors. We also
adjusted the model using panel techniques (within estimators) but the point
estimates (and significance levels) of the coefficients were virtually identical
to the pooled model because the panel variance component was consistently
insignificant.
The control variables generally behave as expected. Richer nations exhibit
higher levels of financial development. The size of the economy also has the
expected positive impact, except when we measure financial development
by narrow money, which, however, is probably not the best proxy, as it
excludes some of the sources of longer-term financing by banks (time and
savings accounts). Inflation is detrimental to financial development, but loses
significance once we introduce country and time effects. Monetary stability,
proxied by the participation in the gold standard, does have the predicted
(and sometimes very strong) positive effect on financial development.
Openness also shows up with the expected sign, both when measured by
14
15
Even if this is not the best measure of financial openness, we could not find reliable series
for the capital account of the majority of countries included in our sample. We use trade
instead of current account to avoid double counting remittances in the empirical
specification.
The results based on a smaller, but balanced sample (1890–1913) are virtually identical to
those reported here.
456
European Review of Economic History
Table 4. Summary statistics of covariates and instruments
Variable
M1/GDP
Deposits/GDP
Log (GDP)
GDP per cap.
Inflation
Gold standard
Exports/GDP
Trade account/GDP
Polity
Duration
Executive openness
Exec. competitiveness
Exec. constraints
Participation
competitiveness
Creditors’ rights
N
293
321
336
336
352
352
342
342
352
352
352
352
352
352
Average
19.7173
30.9786
4.7838
21.9627
0.3523
0.5170
13.5013
−3.9483
−1.1136
36.8296
2.4489
1.3977
4.6364
2.7472
Max
45.2584
115.9184
7.8325
88.0675
31.9444
1.0000
26.7616
5.5687
10.0000
102.0000
4.0000
3.0000
7.0000
5.0000
Min
5.8209
0.4533
2.1801
4.7533
−95.5124
0.0000
3.017241
−18.2213
−10.0000
0.0000
1.0000
1.0000
1.0000
0.0000
St. Dev.
8.4253
26.9532
1.4053
14.9139
7.6662
0.5004
5.7616
4.2702
6.2282
27.8168
0.9944
0.7741
2.1024
1.3102
352
1.5000
2.0000
1.0000
0.5007
Exchange rates
Distance cost
270
352
1.0118
70.8182
2.2561
117
0.2138
45
0.2161
19.3987
Notes: Exchange rates are a weighted index of exchange rates of destination currencies
against sterling, used as instrument (base 1913 = 1). The distance cost is Isserlis’s (1938)
index of tramp shipping freight, also used as instrument (base 1869 = 100).
export intensity and the trade account. The estimated effect is again weaker
in specifications that use M1 as dependent variable.
The size of remittances has a clear impact on financial development with
some revealing patterns. The size of the coefficient is much larger when
using total deposits as the left-hand side variable than M1. This implies
that emigrant money was channelled into the financial sector primarily
through longer-maturity accounts. Interestingly, the size of the coefficient
of remittances is consistently larger than the estimated impact of aggregate
capital flows, as measured by the trade account balance. Although it is
difficult to distinguish between remittances (an item of the current account)
and the items of the financial account, the smaller coefficient of the latter
implies that other capital inflows (portfolio or FDI) contributed less to
the development of the domestic financial sector than remittances. These
estimates are also larger than the evidence on contemporary trends. Indeed,
we estimate a marginal effect of the ratio deposits/GDP to remittances of
about 2.4 to 2.7, while Aggarwal et al. (2006), using a sample of 99 developing
nations between 1975 and 2003, find an effect of only 0.5 to 0.6.
We now consider two variations on this model. The first one explores
the possibility that the effect of remittances on financial development may
be non-linear. Table 6 re-estimates the full model with country and time
effects for two alternative non-linear specifications. In columns (1)–(2) we
Table 5. Results (base model)
M1/GDP
Log (GDP)
GDP per capita
Inflation
Gold standard
Exports/GDP
Trade account
Remittances
Country FE
Year FE
N
R2
(1)
23.8927∗∗∗
(2.5735)
−0.1219
(0.5325)
−0.0116
(0.0573)
0.0474
(0.0732)
−8.9413∗∗∗
(1.1545)
0.0764
(0.0946)
0.173
(0.2111)
0.7002
(0.4395)
No
No
264
0.278
(2)
39.2893∗∗∗
(11.0260)
−6.6105∗∗∗
(2.2984)
0.4492∗∗∗
(0.0972)
0.0041
(0.0296)
0.8624
(0.7194)
0.2591∗
(0.1505)
−0.0051
(0.1240)
0.4400∗∗
(0.1806)
Yes
No
264
0.874
(3)
46.8647∗∗∗
(12.7455)
−8.5814∗∗∗
(2.5263)
0.4616∗∗∗
(0.1180)
−0.0072
(0.0406)
1.6040∗∗
(0.7766)
0.2201
(0.1804)
0.0256
(0.1523)
0.1106
(0.2120)
Yes
Yes
264
0.89
(4)
−82.1432∗∗∗
(4.1821)
6.6122∗∗∗
(0.9084)
1.1262∗∗∗
(0.0627)
−0.2457∗∗
(0.1047)
10.2866∗∗∗
(1.4834)
3.2301∗∗∗
(0.1125)
−1.1841∗∗∗
(0.1935)
2.6670∗∗∗
(0.4669)
No
No
293
0.88
Notes: Robust standard errors in parentheses. ∗∗∗ indicates significance at 1%, ∗∗ at 5%, ∗ at 10%.
(5)
−115.1161∗∗∗
(11.3249)
18.6454∗∗∗
(2.3118)
0.6983∗∗∗
(0.1317)
−0.1133∗∗
(0.0557)
8.3790∗∗∗
(1.4210)
0.7597∗∗∗
(0.1515)
−0.1634
(0.1452)
2.6264∗∗∗
(0.3947)
(6)
−134.9039∗∗∗
(17.1148)
21.0797∗∗∗
(3.0639)
0.8518∗∗∗
(0.1417)
−0.0736
(0.0638)
10.0781∗∗∗
(1.4088)
0.9890∗∗∗
(0.1721)
−0.3552∗∗
(0.1525)
2.4227∗∗∗
(0.3740)
Yes
No
293
0.947
Yes
Yes
293
0.967
Remittances, capital flows and financial development
Dependent
Constant
Deposits/GDP
457
458
European Review of Economic History
Table 6. Results (nonlinearities)
Dependent
Constant
Log (GDP)
GDP per capita
Inflation
Gold standard
Exports/GDP
Trade account
Remittances
Remitt∗ year>1887
Remittances2
Country FE
Year FE
N
R2
M1
(1)
52.1132∗∗∗
(12.3141)
−9.2408∗∗∗
(2.4345)
0.4560∗∗∗
(0.1184)
−0.0092
(0.0387)
2.3869∗∗
(0.9603)
0.2362
(0.1776)
0.0825
(0.1536)
−1.0287∗
(0.6121)
1.1115∗
(0.5902)
Yes
Yes
264
0.892
Deposits
(2)
−163.3002∗∗∗
(17.6481)
24.9866∗∗∗
(3.0919)
0.8671∗∗∗
(0.1433)
−0.0752
(0.0611)
5.5670∗∗∗
(1.5996)
0.8911∗∗∗
(0.1781)
−0.6273∗∗∗
(0.1533)
8.6322∗∗∗
(0.9316)
−6.1158∗∗∗
(0.8414)
Yes
Yes
293
0.971
M1
(3)
44.3363∗∗∗
(12.3255)
−8.0267∗∗∗
(2.4404)
0.4295∗∗∗
(0.1141)
0.0046
(0.0390)
1.0281
(0.7485)
0.2166
(0.1674)
−0.0843
(0.1493)
2.3910∗∗∗
(0.6808)
Deposits
(4)
−173.979∗∗∗
−19.5141
26.2168∗∗∗
−3.2103
0.7790∗∗∗
−0.1305
−0.0381
−0.0517
10.4932∗∗∗
−1.3542
1.0605∗∗∗
−0.163
−0.6081∗∗∗
−0.1573
5.9437∗∗∗
−1.1139
−0.3859∗∗∗
−0.1209
−0.9295∗∗∗
−0.2224
Yes
Yes
264
0.898
Yes
Yes
293
0.971
Notes: Robust standard errors in parentheses. ∗∗∗ indicates significance at 1%, ∗∗ at 5%, ∗ at
10%.
introduced an interaction term for the level of remittances to mark the period
when this level rose above 1 per cent of GDP in our sample of countries (1888
onwards). Some evidence of threshold effects for the impact of remittances
is found in contemporary and historical literature (Bugamelli and Paternò
2006; Esteves and Khoudour-Castéras 2009). In columns (3)–(4) we simply
added a quadratic remittances term.
Both variants testify to substantial nonlinearities whereby the impact of
remittances on financial development abated over time or as the country
became richer. Irrespective of the choice of dependent variable (M1 or total
deposits), the results in columns (3) and (4) imply a maximum impact of
remittances on financial development when they are in the proximity of 3
per cent of GDP. The results for the remaining controls are not qualitatively
changed.
The second variation extends the base model by directly including
indicators of local institutional quality. In so doing we are once more limited
by the availability of data, in this case, by the relative difficulty in finding
historical measures of the quality of economic institutions. Consequently, the
Remittances, capital flows and financial development
459
Table 7. Results (political and economic institutions)
Dependent
Constant
Log (GDP)
GDP per capita
Inflation
Gold standard
Exports/GDP
Trade account
Remittances
Polity
Durable
Dur. ∗ exec. cons.
Exec. comp.
Exec. open.
Exec. const.
Part. comp.
M1
(1)
61.1318∗∗∗
(13.4982)
−9.5884∗∗∗
(2.6292)
0.3970∗∗∗
(0.1337)
−0.0047
(0.0391)
1.5680∗∗
(0.7108)
0.3354∗
(0.1767)
−0.1286
(0.1624)
−0.2378
(0.2466)
0.6128
(0.4551)
0.0427
(0.0332)
0.0147∗∗
(0.0071)
−6.5807∗∗
(2.7546)
5.3165∗∗∗
(1.5956)
−1.3161∗∗
(0.5440)
−1.6919∗∗
(0.7216)
Deposits
(2)
−99.5434∗∗∗
(17.4657)
9.9022∗∗∗
(3.1688)
0.7545∗∗∗
(0.1527)
−0.0365
(0.0678)
10.1903∗∗∗
(1.3073)
1.0812∗∗∗
(0.1690)
−0.6123∗∗∗
(0.1549)
1.9483∗∗∗
(0.3805)
−2.9176∗∗∗
(0.7349)
−0.0773∗
(0.0445)
0.0254∗
(0.0144)
9.7964∗∗
(3.7760)
2.6862
(1.6898)
1.2175
(0.8322)
3.8436∗∗∗
(0.9865)
Cred. rights
Country FE
Year FE
N
R2
Yes
Yes
264
0.909
Yes
Yes
293
0.975
M1
(3)
36.5829∗∗∗
(7.0942)
−8.5814∗∗∗
(2.5263)
0.4616∗∗∗
(0.1180)
−0.0072
(0.0406)
1.6040∗∗
(0.7766)
0.2201
(0.1804)
0.0256
(0.1523)
0.1106
(0.2120)
Deposits
(4)
−41.6731∗∗∗
(9.0367)
21.0797∗∗∗
(3.0639)
0.8518∗∗∗
(0.1417)
−0.0736
(0.0638)
10.0781∗∗∗
(1.4088)
0.9890∗∗∗
(0.1721)
−0.3552∗∗
(0.1525)
2.4227∗∗∗
(0.3740)
5.1409
(4.0683)
−46.6154∗∗∗
(6.655)
Yes
Yes
264
0.89
Yes
Yes
293
0.967
Notes: Robust standard errors in parentheses. ∗∗∗ indicates significance at 1%, ∗∗ at 5%, ∗ at
10%.
bulk of variables added to the models of columns (1)–(2) in Table 7 refer to
political institutions. We extracted six variables from the Polity IV database:
the polity democracy score; the durability of political regimes (in years since
last change); three scores referring to the executive power – constraints
(Exec. const.) on the exercise of this power, competitiveness (Exec. comp.)
and openness of nomination (Exec. open.); and a final score for the degree of
460
European Review of Economic History
competitiveness in political participation (Part. comp.). One would expect
a positive association between the five scores and measures of financial
development, along the lines of the political economy of financial regimes
(Haber et al. 2003). Because the relation between tenure and institutional
quality is unclear, we also interacted the duration of the political regimes
with the measure of executive constraints.
In Table 7, the coefficient of remittances is still strongly significant and
has a size very similar to Table 5. The political markers generally have
correct signs. Stability of political regimes also shows up as having a negative
impact on its own on financial development. However, when interacted with
the index of constraints on the executive it is marginally positive, which
suggests that except with the worst possible political institutions, the tenure
of political regimes did affect the levels of financial development.16 The
only counterintuitive results are those of the model for M1, which reinforces
our doubts about the usefulness of this variable as an indicator of financial
development.
In the last two columns we experimented with a model controlling for the
quality of economic institutions. Since we do not have historical measures,
we included a popular contemporary measure of economic institutions – the
index of creditors’ rights compiled by Djankov et al. (2006). Given that all
nations in our sample come from a civil law tradition, we cannot investigate
the related hypothesis about the persistence of ‘legal origins’ (La Porta
et al. 1997). Nonetheless, if we are to interpret the results of the coefficient
on creditors’ rights based on information collected almost a century after our
sample period, we need to assume a remarkable degree of persistence in the
quality of legal orderings dealing with economic activity. Since this is not the
topic of this article, we only notice the very large estimates for this coefficient,
which, however, do not affect the direct impact of remittances on financial
development. The sign of the coefficient on contemporary creditors’ rights
is also counterintuitive in the case of the regression for deposits.
4.1. Outliers and endogeneity
There are two main concerns to address in running our model. First, with
a small sample in the cross-section dimension we need to worry about the
possibility that the results are driven by outlier observations. We took this
into consideration by using Li’s (1985) robust estimation method. The results
(unreported here) are virtually similar to the base estimates of Table 5. We
16
Because tenure and constraints on the executive are interacted, the interpretation of the
coefficient on tenure is conditional on a value of zero for the constraints on the executive
(the worst possible in the Polity IV database).
Remittances, capital flows and financial development
461
also tried excluding countries (one at a time), without affecting the tenor of
the results
A more significant concern has to do with the potential for reverse causality
and measurement error. Better domestic financial institutions might actually
attract more remittances. As already mentioned, many specialized banks
were created in this period to attract or improve the efficiency in money
transfer. Measurement error could have been introduced by the method
used to estimate four of the remittances series, as described in Section 3.
It can also follow from the hypothesized reverse causality, as it is not
clear whether better financial institutions actually increased the volume of
remittances or just diverted a greater share from informal conduits (hard to
estimate accurately) to formal and more quantifiable channels. We take heed
of these joint concerns through two methods. We initially lag all independent
variables by five years, hoping that the passage of time allows us to identify
the correct direction of causality. Because the relation between independent
and dependent variables may act with some lag, we confirm our results by
using instrumental variable estimation.
In this specification, remittances are instrumented with measures of
economic opportunities in the countries of destination and a proxy for
the costs of emigration. The first instrument is an index of the exchange
rate of the recipient countries’ currencies against sterling. The rationale
for this variable is that emigrants sometimes postponed sending money
when the currency of their country of adoption depreciated significantly – in
expectation of a future recovery (Esteves and Khoudour-Castéras 2009). In
a world increasingly dominated by the gold standard (a regime with meanreverting exchange rates), such expectations were probably rational in the
context of an inter-temporal decision-making process. As a matter of fact,
Figure 1 suggests a strong relation between exchange rate movements and
remittance flows. We weight the currencies comprised in this index by the
share of the main destination countries in each nation’s emigration flows, as
gathered by Ferenczi and Wilcox (1929). The second instrument is a measure
of the cost of distance, namely an index of tramp shipping freights compiled
by Isserlis (1938). As imperfect a proxy of the costs of transatlantic migration
as this may be, it has a strong and negative relation with remittances
(Figure 2).
Table 8 reports the results for this model adding five lines – for R2
of the first stage regression, Hansen’s J statistic of overidentification,
Anderson’s canonical correlation statistic (relevance of instruments), and
for the Cragg–Donald test of weak instruments. Our instruments pass the
tests of exogeneity, relevance and weak instruments.17
Both identification methodologies sustain the positive and significant
impact of remittances on measures of financial development, with the
17
We use Stock and Yogo’s (2002) critical levels for the Cragg–Donald F statistic.
0
2
Remittances (%GDP)
4
6
8
European Review of Economic History
0
.5
1
1.5
2
2.5
Exchange Rate Index (1=1913)
Figure 1. Remittances (share of GDP) and weighted exchange rate
indices, 1870–1913
.5
1
1.5
2
2.5
Sources: See text and Appendix A.
Average Remittances (%GDP)
462
40
Figure 2.
60
80
Freight Index (100=1869)
100
120
Remittances (share of GDP) and freight index, 1870–1913
Sources: See text and Appendix A. For each year we plot the average remittance level
in the eight countries of the sample.
Remittances, capital flows and financial development
463
Table 8. Results (causality)
Five-year lags
Identification
Dependent
Constant
Log (GDP)
GDP per capita
Inflation
Gold standard
Exports/GDP
Cur. account
Remittances
Country FE
Year FE
N
R2
F stat (1st stage)
Hansen J stat
p-value
Anderson can.
corr. stat
Cragg-Donald
F stat
M1
(1)
46.2105∗∗∗
(16.8825)
−8.3984∗∗
(3.3578)
0.5750∗∗∗
(0.1445)
−0.0035
(0.0372)
2.0194∗∗∗
(0.6047)
0.102
(0.1436)
0.1919
(0.1376)
−0.0366
−0.3067
Yes
Yes
233
0.897
Instrumental variables
Deposits
(2)
−85.1102∗∗∗
(21.1743)
18.5932∗∗∗
(4.3388)
0.5888∗∗
(0.2374)
−0.0925
(0.0719)
11.6708∗∗∗
(1.3715)
0.0405
(0.2167)
−0.1022
(0.1715)
2.8373∗∗∗
−0.6117
M1
(3)
56.7873∗∗∗
(14.2696)
−9.2218∗∗∗
(2.4093)
0.4615∗∗∗
(0.1002)
−0.0116
(0.0409)
2.6650∗∗∗
(0.7917)
0.2299
(0.1896)
−0.0529
(0.1679)
0.7010∗
−0.3873
Deposits
(4)
−159.7375∗∗∗
(17.9422)
22.4710∗∗∗
(2.8483)
0.8902∗∗∗
(0.1331)
−0.1373∗∗
(0.0560)
8.7826∗∗∗
(1.4991)
0.9186∗∗∗
(0.1796)
−0.2531
(0.1658)
3.1476∗∗∗
−0.647
Yes
Yes
258
0.97
Yes
Yes
229
0.89
16.368
1.069
0.301
112.642∗∗∗
Yes
Yes
253
0.968
18.851
1.815
0.178
120.834∗∗∗
57.822∗∗
62.752∗∗
Notes: Robust standard errors in parentheses. ∗∗∗ indicates significance at 1%, ∗∗ at 5%, ∗ at
10%.
coefficients rising in value and significance relative to the base model.
Table 9 details the first stage results of the IV estimation, which confirm
the strong relation between the remittance level and our instruments.
Furthermore, the fact that the IV estimate of the remittances effect is larger
than the OLS also provides some evidence in favour of the substitution
hypothesis between remittances and local financial development. According
to these results, the real causal effect of remittances on financial development
is underestimated by OLS due to the negative partial reverse effect of
financial and economic development on the flow of remittances. In any
case, the complementarity between remittance flows and local financial
development clearly outweighs the substitution effect.
464
European Review of Economic History
Table 9. First stage results of IV estimation
Dependent
Constant
Log (GDP)
GDP per capita
Inflation
Gold standard
Exports/GDP
Trade account
Exchange rates
Distance cost
N
R2
M1
(1)
−6.7268∗
(3.8822)
1.4178∗∗∗
(0.4735)
−0.0541∗∗∗
(0.0166)
−0.0054
(0.0099)
1.2140∗∗∗
(0.1911)
−0.039
(0.0271)
0.0566∗∗
(0.0234)
2.7482∗∗∗
(0.4632)
−0.0361∗∗∗
−0.0133
229
0.775
Deposits
(2)
−2.1607
(3.5648)
0.7869∗
(0.4592)
−0.0597∗∗∗
(0.0184)
−0.004
(0.0090)
1.3587∗∗∗
(0.1703)
−0.00004
(0.0257)
0.0308
(0.0201)
2.6149∗∗∗
(0.4841)
−0.0363∗∗∗
−0.0106
253
0.786
Notes: Robust standard errors in parentheses. ∗∗∗ indicates significance at 1%, ∗∗ at
5%, ∗ at 10%. Exchange rates are a weighted index of exchange rates of destination
currencies against sterling, used as instrument (base 1913 = 1). The distance cost is
Isserlis’s (1938) index of tramp shipping freight (base 1869 = 100).
5. Conclusion
The evidence in this article furthers our understanding of the economic
role of remittances during the age of mass migration. Other than the effects
on the demographic composition of the labour force, wage convergence,
consumption and savings patterns, and financial stability, we confirm
the positive influence of remittances on domestic financial development.
The more-than-proportional estimate of their impact on measures of the
penetration of financial services also underscores the relative size of this
impact, as compared with the (less-than-proportional) effect from other
foreign financial flows. This result is remarkably stable across alternative
modelling scenarios and when controlling for potential endogeneity and
measurement error in our estimates of aggregate remittances.
Our measured results are also larger than the best estimates for the
contemporary effect of remittances. The marginal effect of the ratio
deposits/GDP hovers between 2 and 3 in our sample, compared to 0.5/0.6 in
Aggarwal et al. (2006), despite the fact that the ‘emerging economies’ of the
nineteenth century started the build-up of their financial sectors from levels
Remittances, capital flows and financial development
465
of development similar to present-day large recipients of remittances.18 Part
of the difference may be due to sample composition effects, as the recent
study includes emerging economies but also less-developed nations that have
had a harder time at building up their financial sectors and are less open to
foreign capital.
But it is likely that the potential for positive spillovers is limited today by
restrictive immigration policies, which pre-1914 peripheral European nations
(unlike Asian countries) were relatively spared. Our findings suggest that
public authorities in today’s developing countries should try to maximize
the impact of remittances by adopting policies aiming at promoting financial
democracy, that is, policies that facilitate the access to bank services, provide
information about the remittance market, and ensure greater transparency
in the financial system (Orozco and Fedewa 2006; Terry and Wilson 2005).
Insofar as financial development has positive repercussions in terms of
economic growth, such policies should also contribute to accelerating the
catch-up process of emigration countries.
Acknowledgements
The opinions expressed and arguments employed in this article are the sole
responsibility of the authors and do not necessarily reflect those of the OECD
or of the governments of its member countries. The authors would like to thank
the editors, two anonymous referees, and the participants at the 24th Annual
Congress of the European Economic Association, Barcelona, the 8th Conference
of the European Historical Economics Society, Geneva, the 58th Meeting of the
French Association of Economic Sciences (AFSE), Nanterre, and at seminars in
the Universities of Geneva and Lille for helpful comments. The authors are also
grateful to Agnès Bénassy-Quéré, Martine Carré-Tallon, Marc Flandreau, Olena
Havrylchyk and Marc Weidenmier for valuable comments on previous drafts; and
to Rita Hjerppe, George Kostelenos and Ilkka Lavonius for generous sharing of
data. The usual disclaimer applies.
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471
Appendix A: Data sources
Remittances series were already available for four countries in our sample: Austria–
Hungary and Italy (Morys 2005), Portugal (Mata 2002) and Spain (Prados de la
Escosura 2006). The series for Finland, Greece, Norway and Sweden were estimated
from information on stocks of remitters in the US, the amounts sent per remitter
from the US in reference years, and on US wages converted to local currencies. The
information on emigration flows to build up the stocks comes from Ferenczi and
Wilcox (1929) for all countries except Greece (Carter et al. 2006). The reference
values for the average amount of money sent per remitter were established from the
following sources:
– For Greece, Mears (1923) estimates that in 1913 29 m drachmae entered the
country as remittances. To recover the per remitter amount, we divided this
value by our estimate of the stock of Greek remitters in 1913.
– For Finland, Bärlund (1992), based on information from Hoppu (1920), gives
figures of remittances sent, both formally and informally, by Finnish emigrants
from Canada and the United States between 1909 and 1913. The average
annual amount of remittances was 21.9 m markkaa during this period and we
extrapolated this average to the years before 1908.
– For Norway and Sweden, we used information on two reference years. The
US Immigration Commission (1911, vol. 37) contains an estimate of the
total remittances sent by ‘Scandinavians’ in 1907 (25 m dollars). The same
source breaks down this amount by banks, international money orders, and an
adjustment based on extra ‘figures obtained from reliable sources’ (p. 276). In
apportioning this total amount by the emigrants of the two countries, we followed
three steps. (1) We divided the common value of banking remittances according
to information on the per remitter amount of banking transfers gathered by the
Commission from a sample of banks. This amount is practically identical for
the two nationalities: $29.77 for the Norwegians and $25.03 for the Swedes. (2)
We added up the values of international money orders, which were reported by
country instead of ‘race’. (3) We applied the same proportional adjustment used
by the reporters of the Commission to convert the visible amounts to the total
remittances. Lastly, Beckman (1883; quoted by Hovde 1934) estimates, using
data from American banks, that Sweden received around 3 m dollars (11.2 m
kronor) in 1882. Given the similarity in the per remitter amounts in 1912 between
Norway and Sweden, we used the same imputed per remitter amount in 1882
for Norway.
Data on US wages come from Williamson (1995), adjusted by unemployment
rates from Romer (1986) and Vernon (1994).
Exchange rates (number of local currency units per pound sterling) were calculated
from Schneider et al. (1991) and Flandreau and Zumer (2004), with the following
exceptions: Autio (1992) for Finland; Lazaretou (1993) for Greece; Eitrheim et al.
(2004) for Norway; and Carreras and Tafunel (2005) for Spain. For Sweden we
used the series prepared by Håkan Lobell and available from the Bank of Sweden
website at: www.riksbank.se/templates/Page.aspx?id=27402
472
European Review of Economic History
Money supply (M1) series (m of local currency units) were obtained from Komlos
(1987) for Austria–Hungary; Kostelenos et al. (2007) for Greece; Reis (1990) for
Portugal; Carreras and Tafunel (2005) for Spain. Data for Finland were kindly
provided by Jaakko Autio. For Norway we used the M0 series listed in Eitrheim
et al. (2004) since the authors comment that demand deposits were but a small
portion of the total money stock (around 2 per cent of M2) before 1914. De Mattia
(1990) follows similar arguments in applying a definition of M1 that is actually
closer to M0. We use his series for Italy. We were not able to find a M1 series for
Sweden.
Deposits in commercial banks (m of local currency units) were collected from
Komlos (1987) for Austria–Hungary; Mitchell (2003) for Finland, Spain and
Sweden; Kostelenos et al. (2007) for Greece; Cotula (1996) for Italy; Eitrheim
et al. (2004) for Norway; and Reis (1990) for Portugal.
Deposits in savings banks (m of local currency units) have the same sources except
for Austria–Hungary (Mitchell 2003) and Finland, for which we used statistics
kindly communicated by Risto Herrala and Vappu Ikonen. There is also no series
for Portugal.
Nominal GDP figures (in m local currency units) were gathered from Flandreau
and Zumer (2004) for Austria–Hungary; Hjerppe (1989) for Finland; Kostelenos et
al. (2007) for Greece; ISTAT (1957) for Italy; Mitchell (2003) for Norway; Nunes
et al. (1989) for Portugal; Carreras and Tafunel (2005) for Spain; and Johansson
(1967) for Sweden.
Population series (thousands) were taken from Mitchell (2003) for Austria–
Hungary; Maddison (2003) for Finland, Italy, Norway and Sweden; Kostelenos
et al. (2007) for Greece; Valério (2001) for Portugal; and Carreras and Tafunel
(2005) for Spain.
Foreign trade statistics (in m local currency units) were taken from Mitchell (2003)
with the following exceptions: Finland (Hjerppe 1989); Portugal (Valério 2001); and
Spain (Carreras and Tafunel 2005).
Inflation was calculated from price series (usually GDP deflators) taken from
Flandreau and Zumer (2004) for Austria–Hungary; Hjerppe (1989) for Finland;
Kostelenos et al. (2007) for Greece; ISTAT (1957) for Italy; Michell (2003) for
Norway; Valério (2001) for Portugal; Carreras and Tafunel (2005) for Spain; and
Johansson (1967) for Sweden.
Gold standard participation was coded from Flandreau and Zumer (2004) and
Meissner (2005).
Political variables were taken from the database of the Polity IV project available
at: www.systemicpeace.org/polity/polity4.htm
Creditors rights is an index compiled by Djankov et al. (2006) available at:
www.economics.harvard.edu/faculty/shleifer/dataset
Exchange rates (instruments) for the USA, France, Austria–Hungary, Argentina
and Brazil were taken from Flandreau and Zumer (2004).
Appendix B. Remittances and number of remitters, by nationality
Portugal
Remittances
1.88
2.14
2.53
2.76
2.81
3.16
2.80
2.81
2.59
2.46
2.55
2.61
2.64
2.73
2.72
2.37
2.54
2.88
3.34
3.91
3.34
2.32
3.74
3.72
4.51
Greece
Remitters
0.04
0.04
0.04
0.06
0.08
0.08
0.08
0.09
0.08
0.07
0.07
0.07
0.16
0.19
0.19
0.32
0.36
0.54
1.11
1.06
1.37
2.17
2.30
2.59
3.45
Finland
Remittances Remitters
0.001
0.001
0.001
0.001
0.001
0.001
0.002
0.002
0.002
0.003
0.003
0.004
0.01
0.01
0.01
0.02
0.01
0.01
0.01
2.89
5.51
6.55
8.19
10.97
12.54
12.95
15.52
13.37
Norway
Remittances Remitters
0.06
0.11
0.13
0.17
0.23
0.26
0.27
0.32
0.27
33.23
33.42
31.73
25.17
20.20
16.70
12.11
9.87
11.47
19.49
29.82
41.70
49.11
51.82
49.18
44.32
41.05
40.73
39.10
37.58
37.43
35.85
34.77
30.61
Sweden
Remittances Remitters
Remittances
0.26
0.25
0.24
0.20
0.16
0.14
0.09
0.08
0.09
0.15
0.25
0.39
0.58
0.70
0.66
0.69
0.61
0.53
0.67
0.78
0.69
0.65
0.57
0.41
0.15
0.13
0.08
0.07
0.10
0.24
0.40
0.61
0.89
1.04
0.92
1.00
0.98
0.97
1.34
1.74
1.64
1.57
1.34
0.96
19.22
14.99
10.86
8.54
13.45
30.09
47.23
66.41
74.81
76.44
68.24
63.16
65.37
74.37
78.05
83.25
87.48
85.44
81.40
70.67
Remittances, capital flows and financial development
Austria–
Hungary
Italy
Spain
Year Remittances Remittances Remittances
1870
0.71
1871
0.70
1872
0.79
1873
0.90
1874
1.14
1875
1.04
1876
3.99
1.19
1877
4.05
1.23
1878
4.21
1.00
1879
0.96
1.06
1880 0.99
1.19
1.06
1881
1.51
1.51
0.99
1882
1.76
2.10
1.12
1883
1.95
3.11
1.24
1884
2.49
3.57
1.31
1885
2.41
4.04
1.14
1886
2.53
4.44
1.42
1887
2.94
5.60
1.87
1888
3.30
8.38
2.32
1889
3.18
9.29
3.24
1890 4.10
10.00
2.48
1891
4.99
11.20
2.83
1892
5.60
9.62
3.23
1893
2.57
9.89
3.56
1894
1.77
9.32
2.96
473
474
Italy
Remittances
9.60
10.69
11.37
12.09
11.50
11.47
13.58
16.89
20.66
23.19
25.64
32.15
37.76
36.68
33.19
32.60
29.84
33.06
38.04
Spain
Remittances
2.27
2.60
2.70
2.56
3.01
3.20
3.11
2.76
3.20
4.20
5.47
6.92
7.73
9.69
10.28
12.13
12.48
14.67
13.67
Portugal
Remittances
4.71
5.31
6.76
7.64
6.73
4.98
4.07
3.35
3.54
3.31
2.27
2.12
2.20
3.85
3.37
3.68
4.91
4.02
3.63
Greece
Remitters
3.33
4.40
3.98
5.22
5.87
8.31
11.28
16.79
25.97
31.37
35.69
46.75
69.56
71.14
71.35
84.23
88.80
77.64
78.83
Remittances
0.01
0.02
0.02
0.03
0.03
0.04
0.06
0.09
0.15
0.23
0.34
0.59
0.90
0.85
0.99
1.23
1.25
1.10
1.14
Finland
Remitters
12.69
12.96
10.41
7.89
13.78
16.64
20.34
31.41
37.20
36.08
40.04
42.39
39.03
32.74
37.90
38.64
33.85
31.35
38.99
Remittances
0.27
0.26
0.22
0.17
0.30
0.37
0.47
0.74
0.90
0.84
0.97
1.08
0.98
0.76
0.69
0.86
0.93
0.84
0.98
Norway
Remitters
28.49
25.03
19.30
12.99
13.51
15.87
18.70
25.88
35.51
41.75
45.75
49.44
50.09
41.33
39.32
38.44
33.73
27.63
28.01
Remittances
0.53
0.41
0.36
0.27
0.32
0.42
0.56
0.84
1.21
1.31
1.64
2.05
1.99
1.52
1.53
1.48
1.25
1.03
1.07
Sweden
Remitters
64.47
54.76
40.33
27.09
28.39
29.27
32.05
43.50
55.93
57.73
59.84
60.32
53.88
40.99
41.60
43.36
40.19
37.59
41.17
Remittances
1.21
0.91
0.77
0.58
0.69
0.79
0.96
1.44
1.95
1.84
2.19
2.55
2.19
1.54
1.65
1.70
1.52
1.43
1.61
Notes: Remittances in m pounds sterling; remitters in thousands. The Greek remittance series is shorter than the stock of remitters because we
only have drachmae exchange rates after 1875 from Lazaretou (1993).
Sources: See Appendix A.
European Review of Economic History
Year
1895
1896
1897
1898
1899
1900
1901
1902
1903
1904
1905
1906
1907
1908
1909
1910
1911
1912
1913
Austria–
Hungary
Remittances
2.08
2.93
2.52
3.45
4.45
7.02
9.86
13.18
16.29
17.25
21.66
29.71
35.80
43.26
32.75
42.41
52.12
51.89
49.89