Download Close to Home: The development impact of remittances in

Close to Home: The development impact
of remittances in Latin America
Pablo Fajnzylber and Humberto Lopez
Close to Home: The development impact of
remittances in Latin America
Colaborative effort of a large team:
Pablo Acosta
Cesar Calderon
Massimo Cirasino
Mario Guadamillas
Yira Mascaro
Maria Soledad Martinez
Luis Molina
Florencia Moizeszowicz
Caglar Ozden
Pedro Olinto
Emmanuel Salinas
Main Messages (I)
• Remittances have positive effects…
– Lower poverty and faster growth
– Lower output volatility
– Better education and health indicators
• but these effects are modest, in part
because migration flows have costs…
– Broken families
– VA lost to migrant destination country
– Brain drain
Main Messages (II)
• …and pose important policy
challenges
– Reduction in labor supply
– Real exchange rate appreciation
– Need to expand role of the financial
sector
– High transaction costs
– Effects vary with complementary policies
(macro, governance, education)
Main Messages (III)
• On the whole
– Remittances HAVE a positive impact on
development and are an opportunity…
– …and hence should be welcomed and
encouraged.
– However, they also have costs and
create new policy challenges…
– …and definitely are not a substitute for
sound development policies.
Outline
• Stylized Facts
• Development Impact: Poverty, Growth,
Volatility, Human Capital
• Costs: VA lost to destination country, brain
drain
• Challenges: labor supply, real exchange rate,
role of the financial sector, transaction costs
• Conclusions
I. Stylized Facts
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
US$ billions
Remittances to LAC have
increased dramatically over the
past 25 years
50
45
40
35
30
25
20
15
10
5
0
LAC is the top remittances recipient
region in the World (US$ billion)
7
44
35
24
31
48
EAP
(*) 2005 data.
ECA
LAC
MENA
SA
SSA
Remittances are very large in
comparison with other international
financial flows
Region
EAP
ECA
Remittances
Remittances
Remittances
US$billions
% of FDI flows
relative to ODA
------------------------------------------------------------------------------------43
66.2
6.2
20
32.3
1.7
LCR
43
70.5
6.2
MENA
SA
SSA
21
32
8.1
420.0
457.1
73.6
2.0
4.8
0.3
(*) 2004 data.
0
Haiti
Honduras
Grenada
Jamaica
El Salvador
Nicaragua
Guatemala
Dominican R.
Ecuador
Barbados
Colombia
Mexico
Paraguay
Costa Rica
Antigua and B.
Bolivia
Trinidad and T.
Belize
Dominica
Peru
Suriname
St. Vincent
St. Kitts
Panama
Argentina
Brazil
St. Lucia
Uruguay
Chile
% of GDP
Remittances above 10% of GDP
in 7 LAC countries…
60
50
40
30
20
10
In several countries
more than 1 in every 10 families
receives remittances...
30
20
15
10
5
Peru
Bolivia
Paraguay
Ecuador
Mexico
Guatemala
Honduras
Nicaragua
El Salv.
Dom.Rep.
0
Haiti
Percent
25
Large cross country
heterogeneity in socio-economic
status of recipients…
70
60
Q1
50
Q2
40
Q3
30
Q4
20
Q5
10
Haiti
Peru
El
Salvador
Guatemala
Nicaragua
Mexico
0
II. Development Impact
Remittances tend to reduce
poverty…
• Two different methodologies:
– Macro: cross country regressions with
large global sample (controlling for
endogeneity of remittances)
– Micro: country case studies using
household surveys (controlling for
counterfactual income prior to
migration)
But magnitude of effects is
modest…
• Both methodologies yield same
result:
 0.4% poverty decline for each
increase in remittances of 1% of GDP
 average poverty in LAC is 25%
(under $2/day), would be 27.8%
without remittances
They also accelerate growth…
• Methodology: standard cross country
panel regression adding remittances
(controlling for endogeneity)
• Results: small but robust effect of
remittances on growth and investment
Increase in remittances of 1.6% of GDP
in 1991-2005 responsible for an additional
0.27% in annual p/c GDP growth
…and reduce output volatility
• They move counter-cyclically with
respect to recipient countries’ GDP
 reducing the volatility of economic
growth
• They increase significantly after natural
disasters and financial crises
 minimizing impact of negative external
and policy shocks
-0.05
-0.10
Country
Mexico
Jamaica
Dom. Rep.
Paraguay
El Salvador
Haiti
Ecuador
Peru
Honduras
Guatemala
Nicaragua
Diff. Recip vs. No Recip.
Remittances also raise school
enrollment rates…
0.20
0.15
0.10
0.05
0.00
…and improve health indicators.
Nicaragua (weight and height for age)
III. Costs and Challenges
There are also social costs…
• For regular and irregular migrants
– Broken families
– Adaptation costs for migrants
– Cost to those left behind (especially
children)
• And particularly for irregular migrants
– Physical risks of crossing the border
Haiti
Dominincan
R.
Guatemala
El Salvador
0
-1
-2
-3
-4
-5
-6
-7
Paraguay
Ecuador
Mexico
Honduras
Peru
Nicaragua
% of GDP
…economic costs…
Potential GDP loses associated to
migration flows
0%
Venezuela
Uruguay
Paraguay
Guyana/Br. Guiana
Chile
Brazil
Argentina
Peru
Ecuador
Colombia
Bolivia
Trinidad & Tobago
St. Vincent
St. Lucia
St. Kitts-Nevis
Grenada
Dominica
Barbados
Bahamas
Antigua-Barbuda
Jamaica
Haiti
Dominican Rep.
Cuba
Panama
Nicaragua
Honduras
Guatemala
El Salvador
Costa Rica
Belize
Mexico
…“Brain Drain”…
(Share of College Graduates who migrated)
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
Peru
Paraguay
Ecuador
Dom. Rep
Nicaragua
Jamaica
Honduras
Haiti
Mexico
El
Salvador
Guatemala
%
Peru
Paraguay
Ecuador
Dom. Rep
Nicaragua
Jamaica
Honduras
Haiti
Mexico
El
Salvador
Guatemala
%
And challenges, like reductions
in labor force participation...
Males
100
90
80
70
60
50
40
No Rem
Rem
Females
70
65
60
55
50
45
40
35
30
No Rem
Rem
30
4.8
20
4.6
10
4.4
0
4.2
20
15
10
5
0
5
4.9
4.8
4.7
4.6
4.5
4.4
Remittances/GDP
REER
6
4
2
0
10
8
6
4.7
4.6
4
4.5
2
4.4
0
4.3
14
12
10
8
6
4
2
0
5.1
5
4.9
4.8
4.7
4.6
4.5
REER
Remittances/GDP
Jamaica
12
10
8
6
4
2
0
4.7
4.7
4.6
4.6
Remittances/GDP
REER
Log of REER
4.8
4.7
4.6
4.5
4.4
4.3
4.2
4.1
4
Log of REER
8
Log of REER
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
10
Log of REER
5
Remittances/GDP
2003
40
Remittances/GDP
2002
5.2
2001
Haiti
2000
50
1999
Remittances/GDP
REER
1998
7
Percent of GDP
Dominican Republic
1997
El Salvador
1996
9
4.9
4.8
4.7
4.6
4.5
4.4
4.3
1995
Remittances/GDP
REER
1994
11
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
13
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
15
Percent of GDP
1.5
1993
17
Percent of GDP
1.5
Log of REER
1.6
Percent of GDP
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Percent of GDP
1.5
Log of REER
Remittances/GDP
Log of REER
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Percent of GDP
1.5
Log of REER
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Percent of GDP
14
12
10
8
6
4
2
0
1992
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Percent of GDP
Exchange Rate Effects
Ecuador
REER
Guatemala
4.8
REER
Honduras
REER
Nicaragua
4.8
4.8
Impact of remittances on Bank
deposits and credit is lower in LAC
20
15
10
5
0
Bank Deposits
Bank Credit
World
LAC
Fees have declined…
(cost of sending US$300 to MX)
…but they are only one
component of the cost…
Total cost of the service (US$)
20
18
16
14
12
10
8
6
4
2
Western Union
Delgado
Fees
Citibank
MoneyGram
OrderExpress
Exchange rate revenue
Ria Envia
More on the relevance of
policies…
•Impact on growth larger in countries with
higher investments in education
• Impact also increases with indexes of
institutional quality (ICRG)
• Larger effects in more open and stable
countries
IV. Conclusions
Concluding Remarks
• Remittances have a positive effect on the
development indicators of recipient countries.
• Yet, the overall impact is modest because of the
associated costs to migration/remittances
(social, VA lost, brain drain…)
• and a number of challenges that may require
policy responses (competitiveness issues,
financial sector role, costs of remitting)
• On the whole, remittances are opportunities,
not substitutes for sound development policies
Close to Home: The development impact
of remittances in Latin America
Pablo Fajnzylber and Humberto Lopez