Download Close to Home: The development impact of

Remittances and competitiveness:
Evidence for Latin America
Migration and Development Thematic Group
Seminar
Humberto Lopez
November 26, 2006
Presentation based on
Close to Home: The development impact
of remittances in Latin America
Pablo Fajnzylber and Humberto Lopez
Main messages of the report
• Remittances have positive effects…
• …but their impact is quantitatively
modest…
• …in part because they also have
costs…
• …pose important policy challenges…
• …and their development impact is very
heterogeneous across countries.
Outline
• Stylized Facts of Remittances to LAC
• The development impact of
remittances in LAC
• Challenges related to competitiveness
– labor supply,
– real exchange rate
• Conclusions
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
And now LAC is the top recipient
region of remittances
7
44
35
24
31
48
(*) 2004 data.
EAP
ECA
LAC
MENA
SA
SSA
Remittances flows to LAC are large
no matter how we measure them
Region
EAP
ECA
LCR
MENA
SA
SSA
(*) 2004 data.
Remittances
US$billions
43
20
43
21
32
81
Remittances
Remittances
% of FDI flows relative to ODA
66.2
6.2
32.3
1.7
70.5
6.2
420.0
2.0
457.1
4.8
736.4
3.1
0
Mexico
Colombia
Brazil
Guatemala
El Salvador
Dominican R.
Haiti
Ecuador
Honduras
Jamaica
Peru
Argentina
Nicaragua
Costa Rica
Trinidad and T.
Bolivia
Paraguay
Barbados
Grenada
Panama
Chile
Uruguay
Suriname
Belize
Antigua and B.
Dominica
St. Kitts
St. Vincent
St. Lucia
US$ billions
Remittances volumes: above
$1.5 billion in 10 LAC countries
25
20
15
10
5
US$
900
800
700
600
500
400
300
200
100
0
Grenada
Jamaica
Barbados
El Salvador
Dominican R.
Haiti
Trinidad and T.
Honduras
Antigua and B.
Mexico
Guatemala
Ecuador
Nicaragua
Costa Rica
St. Kitts
Colombia
Belize
Dominica
Peru
Suriname
St. Vincent
Paraguay
Panama
Argentina
Bolivia
Brazil
St. Lucia
Uruguay
Chile
Remittances per capita: highest in
LAC, >$200 p/c in 11 countries
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 as a % of GDP:
above 10% in 8 countries
60
50
40
30
20
10
Remittances tend to reduce
poverty…
• Typical LAC country: 0.4% poverty decline for
each 1% of GDP.
• These results are robust to the use of country
case studies or cross country analysis.
• Reductions in 6/11 countries: 5.2% in poverty
• Examples:
– Ecuador: 3.3%
– El Salvador: 7.2%
– Haiti: 4%
…accelerate growth
1.1 Workers' Remittances vs. Economic Growth
8
CHN
Growth rate in GDP per capita (% per annum)
6
BWA
THA
IDN
MWI
-4
-3
GAB
MYS4
POL
LAO
MUS
KNA
ATG
VCT
LKA EGY
CPV
GRD
BLZ
LCA
TUN
PAK DMA
BGD
DOM
2
HUN
OMN
TUR
JOR
MOZ
MAR
BGR
TTO
CRI
TZA BRB SDN BFA
COL
PAN
MEX
GIN
YEM
BRA
SYR
BENPHL SWZ
FJIPRY
RWA
MLI
DZA
MRT
CMR
HND
ECU
GTM
GHA
ETH
SEN
GUY
COG
KEN GMB
ARG
SUR
0
SLV
ZAF
JAM
IRN
PER NGA
PNG BOL
-2
-1
0
1
3
TGO
COM 2 VUT
VEN
GNB
SLE
NER
MDG
CIV
ZWE
HTI
LSO
IND
4
-2
NIC
y = 0.3x + 1.1137
R2 = 0.0641
-4
Workers' Remittances as percentage of GDP (in logs)
1.2 Workers' Remittances vs. Domestic Investment
5
…accelerate growth
• Approach: cross country panel regression
with remittances, instrumental variables
• Robust but small effect of remittances
• Additional 0.27% in p/c GDP growth in
1991/2005
• Increased investment is one half of
growth effect
-0.05
-0.10
Country
Mexico
Jamaica
Dom. Rep.
Paraguay
El Salvador
Haiti
Ecuador
Peru
Honduras
Guatemala
Nicaragua
Diff. Recip vs. No Recip.
…raise school enrollment rates
0.20
0.15
0.10
0.05
0.00
…and improve health indicators.
Nicaragua (weight and height for age)
Two potential challenges
that affect competitiveness
• i) Reductions in labor supply
– Remittances affect the income of recipient
households and if individuals value leisure…
• ii) Real exchange rate appreciation
– To the extent that remittances positively affect
consumption and that part of the
consumption is directed to non tradable
sector…
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
%
(i) reductions in labor supply
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
(ii) real exchange rate appreciation
Ecuador
REER
Guatemala
4.8
REER
Honduras
REER
Nicaragua
4.8
4.8
Beyond correlations…
Estimate
Labor markets
Li=+β Xi+ Hi +δ Ri +εi
L is hours worked/labor market participation
X is a vector of personal characteristics
H is a vector of household characteristics
R is a dummy variable for remittances
IV estimation (Hanson and Woodruff, 2003)
Parameter of interest is δ
Main results…
• Hours worked: Significant effects in 11/11
countries
•Fewer hours worked by active individuals in
recipient households
• Lower probability of labor force participation
• Effects on males, females, urban and rural
areas
•Larger impact on unskilled workers
Remittances and hours worked
Age Group
Dependent Variable
Sample
Mexico
20-59 Years Old
Hours worked last week
Rural
Urban
Males
Females
Males
Females
-15.473*** -13.187*** -12.686*** -7.561***
(1.022)
El Salvador
-0.969
(1.426)
Honduras
Ecuador
Paraguay
Haiti
(2.089)
Dominican Republic
(0.847)
-15.253*** -6.180***
(3.418)
(1.601)
(2.175)
-8.580***
(1.115)
-7.228***
(2.427)
-3.052*** -12.813*** -6.307*** -10.067***
(0.704)
(2.046)
(0.816)
(1.152)
-2.186*
-4.399**
-3.391***
-5.622***
(1.264)
(1.723)
(1.117)
(1.621)
-15.395**
-5.583
10.865
7.506
(7.247)
(13.027)
(11.680)
(10.789)
-8.410***
-2.925
-1.221
2.308
(2.831)
(3.069)
(1.170)
(1.412)
Peru
Nicaragua
(1.473)
-4.498*** -12.257*** -5.546***
(0.986)
Guatemala
(1.979)
-12.711*** -7.455***
(1.870)
(2.306)
-3.096
-0.701
-7.216***
-7.776***
(1.889)
(5.208)
(1.643)
(2.134)
-5.278***
1.301
-8.844***
2.828
-7.240*** -10.245***
1.031
1.514
Remittances and participation
Age Group
Dependent Variable
Sample
Mexico
El Salvador
Guatemala
Honduras
Ecuador
Paraguay
Haiti
20-59 Years Old
Labor Force Participation
Rural
Urban
Boys
Girls
Boys
Girls
-0.329***
-0.245***
-0.097
0.023
(0.048)
(0.049)
(0.135)
(0.146)
-0.087
-0.598***
-0.032
-0.309***
(0.070)
(0.083)
(0.101)
(0.100)
0.007
-0.095
-0.228
-0.261
(0.170)
(0.221)
(0.140)
(0.206)
-0.006
-0.135**
-0.096
-0.095
(0.068)
(0.067)
(0.094)
(0.095)
-0.228**
-0.154*
-0.310**
0.211
(0.090)
(0.085)
(0.134)
(0.203)
-0.009
0.052
-0.530*
0.908**
(0.092)
(0.174)
(0.321)
(0.380)
0.254
0.338**
0.114**
0.263***
(0.164)
(0.165)
(0.051)
(0.088)
-0.334***
-0.284**
(0.099)
(0.123)
Peru
Nicaragua
Jamaica
Dominican Republic
-0.181*
0.337
-0.211*
-0.008
(0.099)
(0.208)
(0.127)
(0.140)
-0.047
-0.027
-0.128**
-0.056
(0.051)
(0.051)
(0.064)
(0.061)
-0.222**
-0.010
-0.108
-0.131
(0.092)
(0.126)
(0.071)
(0.082)
Remittances and participation (cont.)
Age Group
Dependent Variable
Country
Variable
Mexico
Receive Remittances
Receive Remittances * Educ 4+
El Salvador
Receive Remittances
Receive Remittances * Educ 4+
Guatemala
Receive Remittances
Receive Remittances * Educ 4+
Honduras
Receive Remittances
Receive Remittances * Educ 4+
Ecuador
Receive Remittances
Receive Remittances * Educ 4+
Paraguay
Receive Remittances
Receive Remittances * Educ 4+
20-59 Years Old
Labor Force Participation
Rural
Urban
Boys
Girls
Boys
Girls
-0.434*** -0.283***
-0.250
0.188
(0.055)
(0.066)
(0.153)
(0.204)
0.214***
0.059
0.233
-0.223
(0.073)
(0.069)
(0.186)
(0.203)
-0.108
-0.623***
-0.045
-0.376***
(0.076)
(0.087)
(0.120)
(0.108)
0.050
-0.072
0.018
0.118
(0.059)
(0.067)
(0.074)
(0.072)
-0.037
-0.119
-0.164
-0.407*
(0.183)
(0.223)
(0.191)
(0.224)
0.214
0.417*
-0.091
0.328
(0.168)
(0.248)
(0.175)
(0.223)
0.032
-0.148**
-0.257**
-0.326**
(0.084)
(0.097)
(0.130)
(0.129)
-0.067
0.022
0.212**
0.315***
(0.076)
(0.086)
(0.093)
(0.102)
-0.256
-0.158
-1.161**
0.241
(0.158)
(0.127)
(0.454)
(0.368)
0.035
0.006
0.870**
-0.033
(0.160)
(0.120)
(0.432)
(0.300)
-0.125
-0.231
-0.296
0.461
(0.138)
(0.203)
(0.587)
(0.498)
0.167
0.469*
-0.269
0.537
(0.148)
(0.260)
(0.579)
(0.460)
Remittances and participation (cont.)
Age Group
Dependent Variable
Country
Variable
Haiti
Receive Remittances
Receive Remittances * Educ 4+
Peru
20-59 Years Old
Labor Force Participation
Rural
Urban
Boys
Girls
Boys
Girls
0.029
0.463**
0.029
0.241**
(0.215)
(0.191)
(0.074)
(0.099)
0.288*
-0.204
0.109
0.056
(0.175)
(0.148)
(0.081)
(0.082)
-3.458*
-0.748*
(1.780)
(0.410)
3.190*
0.522
(1.757)
(0.417)
Receive Remittances
Receive Remittances * Educ 4+
Nicaragua
Receive Remittances
Receive Remittances * Educ 4+
Jamaica
Receive Remittances
Receive Remittances * Educ 4+
Dom. Rep.
Receive Remittances
Receive Remittances * Educ 4+
-0.366**
0.380
-0.215
0.038
(0.161)
(0.232)
(0.163)
(0.212)
0.298**
-0.093
0.007
-0.054
(0.152)
(0.227)
(0.141)
(0.171)
-0.133
-0.075
0.125
-0.100
(0.129)
(0.115)
(0.169)
(0.144)
0.092
0.053
-0.289*
0.050
(0.128)
(0.118)
(0.176)
(0.151)
-0.220*
-0.075
-0.194*
-0.222*
(0.122)
(0.158)
(0.103)
(0.121)
0.001
0.104
0.096
0.108
(0.093)
(0.120)
(0.083)
(0.102)
Estimate
Beyond correlations…
Exchange rate
qt=+β Xt+δ Rt +εt
q is the real exchange rate
X is a vector of controls (tot, ir, gov, growth)
R is remittances as % of GDP
IV estimation (Aggarwal, Dermirguc-Kunt, Martinez
Peria, 2005)
Parameter of interest is δ
Three variations
i) Is LAC different?
qt=+β Xt+δ Rt + λ * lac* Rt +εt
ii) Is there a difference between countries with fix and
flexible exchange rates?
qt=+β Xt+δ Rt + θ * FE* Rt + εt
iii) Is the observed change consistent with changes in the
fundamentals?
qt=qdt+qet
qdt=+β Xt+δ Rt +εt
Main results
• More than just correlations: remittances
appear to cause exchange rate appreciations
•LAC does not appear to be different.
•Countries with fixed exchange rates do not
appear to experience significant overvaluations.
•About half of the effect is consistent with the
evolution of fundamentals: the rest is temporary
Base model
Change Remittances
Interest Rates
Terms of Trade
Government consumption
Growth
(I)
FE
2.444
3.26
0.011
1.27
0.280
2.96
0.623
1.43
(II)
FE/IV1
17.783
2.93
0.017
1.01
0.241
1.38
1.318
1.52
(III)
FE
2.419
3.22
0.011
1.24
0.269
2.81
0.686
1.54
0.096
0.86
(IV)
FE/IV1
18.043
2.85
0.017
1.00
0.244
1.37
1.314
1.50
-0.027
-0.13
(V)
FE/IV2
24.061
2.35
0.023
1.00
0.335
1.32
1.025
0.85
-1.000
-1.03
LAC…
Change Remittances
Change Remittances x LAC
Interest Rates
Terms of Trade
Government consumption
Growth
(I)
FE
2.044
1.95
0.831
0.55
0.012
1.32
0.276
2.91
0.614
1.40
(II)
FE/IV1
21.434
2.31
-7.870
-0.54
0.009
0.43
0.275
1.42
1.262
1.38
(III)
FE
2.059
1.96
0.750
0.49
0.011
1.29
0.266
2.77
0.676
1.51
0.092
0.83
(IV)
FE/IV1
20.066
2.31
-4.784
-0.34
0.012
0.56
0.261
1.39
1.289
1.44
0.005
0.02
(V)
FE/IV2
29.387
1.96
-10.527
-0.52
0.014
0.44
0.387
1.34
0.930
0.71
-1.071
-1.01
Exchange Rates…
Change Remittances x Fixed ERA
Change Remittances x Float ERA
Change Remittances x Intermed ERA
(VI)
FE
1.255
1.12
3.523
2.83
10.366
2.90
(VII)
FE/IV1
-0.773
-0.15
3.345
1.24
15.853
1.96
(VIII)
FE
1.290
1.15
3.451
2.76
10.346
2.89
(IX)
FE/IV1
-1.858
-0.37
3.288
1.21
15.545
1.91
(X)
FE/IV2
-2.511
-0.42
3.314
1.21
15.335
1.85
Change Remittances x Non fixed ERA
Interest Rates
Terms of Trade
Government consumption
Growth
0.011
1.15
0.324
3.19
0.631
1.35
0.012
1.01
0.358
3.30
0.488
0.93
0.011
1.09
0.313
3.07
0.715
1.51
0.113
0.96
0.012
1.00
0.350
3.17
0.556
1.04
0.124
0.99
0.012
1.01
0.347
3.08
0.585
1.05
0.173
0.61
(VI)
FE
0.931
0.84
(VII)
FE/IV1
-2.709
-0.51
(VIII)
FE
0.962
0.86
(IX)
FE/IV1
-3.571
-0.70
(X)
FE/IV2
-4.296
-0.71
4.215
3.52
0.013
1.29
0.300
2.95
0.759
1.63
5.046
2.06
0.015
1.36
0.318
2.97
0.715
1.41
4.150
3.46
0.012
1.23
0.289
2.83
0.842
1.77
0.110
0.93
4.916
1.98
0.015
1.32
0.311
2.85
0.773
1.49
0.113
0.89
4.881
1.93
0.015
1.31
0.308
2.76
0.802
1.48
0.175
0.59
Misalignment
Change Remittances
Interest Rates
Terms of Trade
Government consumption
Growth
(I)
FE
1.295
2.30
0.017
2.65
0.257
4.04
0.286
0.87
(II)
FE/IV1
10.283
2.66
0.021
1.97
0.240
2.40
0.670
1.22
(III)
FE
1.308
2.31
0.017
2.65
0.259
4.07
0.255
0.77
-0.048
-0.58
(IV)
FE/IV1
11.144
2.65
0.022
1.92
0.244
2.31
0.638
1.10
-0.127
-0.89
(V)
FE/IV2
14.193
2.27
0.024
1.69
0.259
1.98
0.504
0.69
-0.611
-1.05
How to respond?
– Do nothing
• Particularly if one believes that remittances are
permanent and that observed changes in labor and
exchange rate markets are consistent with
changes in economic fundamentals.
– Otherwise…
• Fiscal restraint, but probably not enough
• Explore micro interventions:
– increased flexibility,
– competitiveness
• Consider shift from payroll to sales taxes
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, and
there is substantial hetereogeneity (not all
countries benefit in the same fashion!!!).
• And remittances come with a number of policy
challenges that may require government
reaction.
• 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