Topic 11

Remittances and Economic Growth

Despite the positive contribution of remittances to household welfare, most studies have found that international remittances do not have a positive effect on economic growth at the macro-level.  Part of the reason for this finding may lie in the difficulty of disentangling the complicated links between remittances and economic growth.  For example, identifying the direction of the links between remittances and economic growth may not be fully solvable by using instrumental variables to control for endogeneity and reverse causation.  Also, it might not be possible to identify the impact of international remittances on a key component of economic growth — human capital formation – except over very long periods of time.

In a study covering up to 113 countries over the period 1970 to 1998, Chami et al (2005) find that international remittances actually have a negative and significant effect on economic growth (GDP growth).  Using a variety of fixed effects models, the authors find a negative and significant relationship between international remittances and economic growth for different groups of countries over various sets of years.  On the basis of this finding, the authors conclude that remittances do not serve as capital for economic development, but rather as a type of compensation for countries with poor economic outcomes.

However, in a similar study covering up to 101 countries for the period 1970 to 2003, Spatafora (2005) comes to slightly different conclusions.  Specifically, the author finds no statistically significant link between international remittances and per capita output growth.  The author also finds no significant link between remittances and investment (investment/GDP), or between remittances and education.  The author, however, cautions that identifying the impact of remittances on these and other outcomes may be complicated by the problem of reverse causation, that is, remittances may both influence and be influenced themselves by economic growth, investment and education.

In the literature it is sometimes argued that international remittances may harm economic growth by leading to real currency appreciation and a loss of competitiveness in tradable goods (Dutch disease).  In a cross-national study of 8 Latin American countries over the period 1990 to 2003, Lopez et al (2007) find that large-scale remittances do lead to significant real exchange rate appreciation.  Controlling for endogeneity and potential reverse causality, the authors find that a 1 percent increase in the remittances to GDP ratio would lead to a real effective exchange rate appreciation of between 18 and 24 percent.

Focusing on the country-level, Amuedo-Dorantes and Pozo (2006) use household survey data from the Dominican Republic to examine the impact of international remittances on family business ownership.  Using an instrumental variables approach to control for endogeneity, they find that households receiving international remittances are not more likely to own a family business than households not receiving remittances.  According to the authors, one reason for this outcome may be that remittances increase the reservation wage of household heads, making them less likely to invest in business.

In another country-level study, Mishra (2007) examines the impact of international migration on wages in Mexico.  Using an instrumental variables approach, the author finds that emigration has a positive and significant effect on Mexican wages:  a 10 percent decrease in the number of Mexican workers due to emigration in a skill group increases the average wage in that skill group by 4 percent.  However, the impact of emigration on Mexican wages varies dramatically across schooling groups, with the greatest wage increase being for high wage earners.

 

Topic 11- Articles

Amuedo-Dorantes, Catalina, and Susan Pozo. 2006. Remittance Receipt and Business Ownership in the Dominican Republic. World Economy 29 (7):939–956. (Publisher Link)

This study uses several small, non-representative household surveys from the Dominican Republic (1999-2001) to examine the impact of international remittances on family business ownership.  Since the receipt of remittances and business ownership may be jointly determined, the authors estimate a system of simultaneous probit models.  Results suggest that households receiving international remittances are not more likely to own a family business than households not receiving remittances.  According to the authors, one reason for this outcome may be that remittances increase the reservation wage of household heads, making them less likely to invest in business.

Chami, Ralph, Connel Fullenkamp, and Samir Jahjah. 2005. Are Immigrant Remittance Flows a Source of Capital for Development? International Monetary Fund (IMF) Staff Paper 52 (1) (April).

This paper uses panel data on international remittances covering up to 113 countries over the period 1970 to 1998 to analyze the impact of remittances on economic development.  Using instrumental variables and a variety of fixed-effects models the authors find that international remittances have a negative and significant effect on economic growth (GDP growth).  On the basis of this finding, the authors conclude that remittances do not serve as capital for economic development, but rather as a type of compensation for poor economic performance.

Lopez, Humberto, Luis Molina, and Maurizio Bussolo. 2007. Remittances and the Real Exchange Rate. In World Bank Policy Research Working Paper 4213. Washington, DC: World Bank.

This study uses cross-national data from 8 Latin American countries over the period 1990-2003 to examine the impact of international remittances on real exchange rate appreciation.  Using an instrumental variables approach to control for endogeneity and reverse causality, the authors find that a 1 percent increase in the remittances to GDP ratio would lead to a real effective exchange rate appreciation of between 18 and 24 percent.  Since such a large rate of appreciation would lead to a loss in international competitiveness, the authors also investigate policy options for mitigating these effects, such as controlling fiscal policy, limiting the use of sterilization, and shifting to VAT or sales taxes.

Mishra, Prachi. 2007. Emigration and Wages in Source Countries: Evidence from Mexico. Journal of Development Economics 82 (1):180–199.

This paper uses data from nationally-representative US and Mexico Population Censuses (1970-2000) to examine the impact of international migration (Mexico to US) on wages in Mexico.  Using an instrumental variables approach, the author finds that emigration has a positive and significant effect on Mexican wages:  a 10 percent decrease in the number of Mexican workers due to emigration in a skill group increases the average wage in that skill group in Mexico by 4 percent.  However, the impact of emigration on Mexican wages varies dramatically across schooling groups, with the greatest increase in wages being for high wage earners (those with 12-15 years of schooling).

Spatafora, Nikola. 2005. Worker Remittances and Economic Development. World Economic Outlook (April):69-84.

This paper uses data on international remittances covering up to 101 countries over the period 1970 to 2003 to analyze the impact of remittances on economic growth.  Using an instrumental variables approach to account for endogeneity, it finds no statistically significant link between remittances and per capita output growth.  The paper also finds no significant link between remittances and education (secondary enrollment) and remittances and investment (investment/GDP).  The author, however, cautions that identifying the impact of remittances on economic growth may be difficult using macro-economic data alone because of the difficulty of disentangling the various links.