Remittances and Remittances and competitiveness: competitiveness: Evidence for Evidence for Latin Latin

AmericaAmericaMigration and Development Migration and Development

Thematic Group SeminarThematic Group Seminar

Humberto LopezHumberto LopezNovember 26, 2006 November 26, 2006

Presentation based onPresentation based on

Close to Home:Close to Home: The The development impact of development impact of

remittances in Latin remittances in Latin AmericaAmerica

Pablo Fajnzylber and Humberto Pablo Fajnzylber and Humberto LopezLopez

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

Remittances to LAC have increased dramatically over

the past 25 years

05

10

1520253035

404550

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$

bill

ions

And now LAC is the top recipient region of

remittances

(*) 2004 data.

44

31

48

24

357

EAP ECA LAC MENA SA SSA

Remittances flows to LAC are large no matter how we

measure them

(*) 2004 data.

Region Remittances Remittances RemittancesUS$billions % of FDI flows relative to ODA

EAP 43 66.2 6.2ECA 20 32.3 1.7LCR 43 70.5 6.2MENA 21 420.0 2.0SA 32 457.1 4.8SSA 81 736.4 3.1

Remittances volumes: above $1.5 billion in 10 LAC

countries

0

5

10

15

20

25

Mex

ico

Co

lom

bia

Bra

zil

Gu

atem

ala

El

Sal

vad

or

Do

min

ican

R.

Hai

tiE

cuad

or

Ho

nd

ura

sJa

mai

caP

eru

Arg

enti

na

Nic

arag

ua

Co

sta

Ric

aT

rin

idad

an

d T

.B

oli

via

Par

agu

ayB

arb

ado

sG

ren

ada

Pan

ama

Ch

ile

Uru

gu

ayS

uri

nam

eB

eliz

eA

nti

gu

a an

d B

.D

om

inic

aS

t. K

itts

St.

Vin

cen

tS

t. L

uci

a

US

$ b

illi

on

s

Remittances per capita: highest in LAC, >$200 p/c in

11 countries

0100200300400500600700800900

Gre

nad

aJa

mai

caB

arb

ado

sE

l S

alv

ado

rD

om

inic

an R

.H

aiti

Tri

nid

ad a

nd

T.

Ho

nd

ura

sA

nti

gu

a an

d B

.M

exic

oG

uat

emal

aE

cuad

or

Nic

arag

ua

Co

sta

Ric

aS

t. K

itts

Co

lom

bia

Bel

ize

Do

min

ica

Per

uS

uri

nam

eS

t. V

ince

nt

Par

agu

ayP

anam

aA

rgen

tin

aB

oli

via

Bra

zil

St.

Lu

cia

Uru

gu

ayC

hil

e

US

$

Remittances as a % of GDP: above 10% in 8 countries

0

10

20

30

40

50

60

Hai

tiH

on

du

ras

Gre

nad

aJa

mai

caE

l S

alv

ado

rN

icar

agu

aG

uat

emal

aD

om

inic

an R

.E

cuad

or

Bar

bad

os

Co

lom

bia

Mex

ico

Par

agu

ayC

ost

a R

ica

An

tig

ua

and

B.

Bo

liv

iaT

rin

idad

an

d T

.B

eliz

eD

om

inic

aP

eru

Su

rin

ame

St.

Vin

cen

t S

t. K

itts

Pan

ama

Arg

enti

na

Bra

zil

St.

Lu

cia

Uru

gu

ayC

hil

e

% o

f G

DP

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 growth1.1 Workers' Remittances vs. Economic Growth

ARG

ATG

BENBFA

BGD

BGR

BLZ

BOL

BRABRB

BWA

CHN

CIV

CMRCOG

COL

COM

CPV

CRI

DMADOM

DZA ECU

EGY

ETH

FJI

GAB

GHA

GIN

GMB

GNB

GRD

GTMGUYHND

HTI

HUN

IDN

IND

IRN JAM

JOR

KEN

KNA

LAOLCA

LKA LSO

MAR

MDG

MEXMLI

MOZ

MRT

MUS

MWI

MYS

NER

NGA

NIC

OMN

PAK

PAN

PER

PHL

PNG

POL

PRYRWA

SDN

SEN

SLE

SLVSUR

SWZSYR

TGO

THA

TTO

TUN

TURTZA

VCT

VENVUT

YEM

ZAF

ZWE

y = 0.3x + 1.1137

R2 = 0.0641

-4

-2

0

2

4

6

8

-4 -3 -2 -1 0 1 2 3 4 5

Workers' Remittances as percentage of GDP (in logs)

Gro

wth

rate

in

GD

P p

er

cap

ita (

% p

er

an

nu

m)

2.0

2.2

2.4

2.6

2.8

3.0

3.2

3.4

3.6

3.8

4.0

-4 -3 -2 -1 0 1 2 3 4 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

…raise school enrollment rates

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

Nic

arag

ua

Gu

atem

ala

Ho

nd

ura

s

Per

u

Ecu

ado

r

Hai

ti

El

Sal

vad

or

Par

agu

ay

Do

m. R

ep.

Jam

aica

Mex

ico

Country

Dif

f. R

ecip

vs.

No

Rec

ip.

…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…

(i) reductions in labor supplyMales

Females

405060708090

100

Mex

ico

El

Sal

vad

or

Gu

atem

ala

Hai

ti

Ho

ndura

s

Jam

aica

Nic

arag

ua

Do

m. R

ep

Ecu

ador

Par

aguay

Per

u

%

No Rem

Rem

303540455055606570

Mex

ico

El

Sal

vad

or

Gu

atem

ala

Hai

ti

Ho

ndura

s

Jam

aica

Nic

arag

ua

Do

m. R

ep

Ecu

ador

Par

aguay

Per

u

%

No Rem

Rem

(ii) real exchange rate appreciation

Honduras

02468

101214

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

Perc

en

t o

f G

DP

4.5

4.6

4.7

4.8

4.9

5

5.1

Lo

g o

f R

EE

R

Remittances/GDP REER

El Salvador

7

9

11

13

15

17

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

Perc

en

t o

f G

DP

4.34.44.54.64.74.84.9

Lo

g o

f R

EE

R

Remittances/GDP REER

Guatemala

0

2

4

6

8

10

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

Perc

en

t o

f G

DP

4.3

4.4

4.5

4.6

4.7

4.8

Lo

g o

f R

EE

R

Remittances/GDP REER

Dominican Republic

02468

101214

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

Perc

en

t o

f G

DP

1.5

1.5

1.5

1.5

1.6

Lo

g o

f R

EE

R

Remittances/GDP REER

Haiti

0

10

20

30

40

50

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03P

erc

en

t o

f G

DP

4.2

4.4

4.6

4.8

5

5.2

Lo

g o

f R

EE

R

Remittances/GDP REER

Ecuador

0

2

4

6

8

10

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

Perc

en

t o

f G

DP

44.14.24.34.44.54.64.74.8

Lo

g o

f R

EE

R

Remittances/GDP REER

Jamaica

0

5

10

15

20

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

Perc

en

t o

f G

DP

4.44.54.64.74.84.95

Lo

g o

f R

EE

R

Remittances/GDP REER

Nicaragua

02468

1012

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

Perc

en

t o

f G

DP

4.6

4.6

4.7

4.7

4.8

4.8

Lo

g o

f R

EE

R

Remittances/GDP REER

Beyond correlations…Labor markets

Estimate

Li=+β Xi+ Hi +δ Ri +εi

L is hours worked/labor market participationX is a vector of personal characteristicsH is a vector of household characteristicsR 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 workedAge GroupDependent Variable

Males Females Males Females

Mexico -15.473*** -13.187*** -12.686*** -7.561***(1.022) (1.979) (1.473) (2.175)

El Salvador -4.498*** -12.257*** -5.546*** -8.580***(0.986) (2.089) (0.847) (1.115)

Guatemala -0.969 -15.253*** -6.180*** -7.228***(1.426) (3.418) (1.601) (2.427)

Honduras -3.052*** -12.813*** -6.307*** -10.067***(0.704) (2.046) (0.816) (1.152)

Ecuador -2.186* -4.399** -3.391*** -5.622***(1.264) (1.723) (1.117) (1.621)

Paraguay -15.395** -5.583 10.865 7.506(7.247) (13.027) (11.680) (10.789)

Haiti -8.410*** -2.925 -1.221 2.308(2.831) (3.069) (1.170) (1.412)

Peru -12.711*** -7.455*** (1.870) (2.306)

Nicaragua -3.096 -0.701 -7.216*** -7.776***(1.889) (5.208) (1.643) (2.134)

Dominican Republic -5.278*** -8.844*** -7.240*** -10.245***1.301 2.828 1.031 1.514

Rural UrbanSample

20-59 Years OldHours worked last week

Remittances and participationAge GroupDependent Variable

Boys Girls Boys Girls

Mexico -0.329*** -0.245*** -0.097 0.023(0.048) (0.049) (0.135) (0.146)

El Salvador -0.087 -0.598*** -0.032 -0.309***(0.070) (0.083) (0.101) (0.100)

Guatemala 0.007 -0.095 -0.228 -0.261(0.170) (0.221) (0.140) (0.206)

Honduras -0.006 -0.135** -0.096 -0.095(0.068) (0.067) (0.094) (0.095)

Ecuador -0.228** -0.154* -0.310** 0.211(0.090) (0.085) (0.134) (0.203)

Paraguay -0.009 0.052 -0.530* 0.908**(0.092) (0.174) (0.321) (0.380)

Haiti 0.254 0.338** 0.114** 0.263***(0.164) (0.165) (0.051) (0.088)

Peru -0.334*** -0.284**(0.099) (0.123)

Nicaragua -0.181* 0.337 -0.211* -0.008(0.099) (0.208) (0.127) (0.140)

Jamaica -0.047 -0.027 -0.128** -0.056(0.051) (0.051) (0.064) (0.061)

Dominican Republic -0.222** -0.010 -0.108 -0.131(0.092) (0.126) (0.071) (0.082)

Sample

20-59 Years OldLabor Force Participation

Rural Urban

Remittances and participation (cont.)

Age GroupDependent Variable

Boys Girls Boys GirlsMexico Receive Remittances -0.434*** -0.283*** -0.250 0.188

(0.055) (0.066) (0.153) (0.204)

Receive Remittances * Educ 4+ 0.214*** 0.059 0.233 -0.223 (0.073) (0.069) (0.186) (0.203)

El Salvador Receive Remittances -0.108 -0.623*** -0.045 -0.376***(0.076) (0.087) (0.120) (0.108)

Receive Remittances * Educ 4+ 0.050 -0.072 0.018 0.118 (0.059) (0.067) (0.074) (0.072)

Guatemala Receive Remittances -0.037 -0.119 -0.164 -0.407*(0.183) (0.223) (0.191) (0.224)

Receive Remittances * Educ 4+ 0.214 0.417* -0.091 0.328 (0.168) (0.248) (0.175) (0.223)

Honduras Receive Remittances 0.032 -0.148** -0.257** -0.326**(0.084) (0.097) (0.130) (0.129)

Receive Remittances * Educ 4+ -0.067 0.022 0.212** 0.315*** (0.076) (0.086) (0.093) (0.102)

Ecuador Receive Remittances -0.256 -0.158 -1.161** 0.241(0.158) (0.127) (0.454) (0.368)

Receive Remittances * Educ 4+ 0.035 0.006 0.870** -0.033 (0.160) (0.120) (0.432) (0.300)

Paraguay Receive Remittances -0.125 -0.231 -0.296 0.461(0.138) (0.203) (0.587) (0.498)

Receive Remittances * Educ 4+ 0.167 0.469* -0.269 0.537 (0.148) (0.260) (0.579) (0.460)

Country Variable

20-59 Years OldLabor Force Participation

Rural Urban

Remittances and participation (cont.)

Age GroupDependent Variable

Boys Girls Boys GirlsHaiti Receive Remittances 0.029 0.463** 0.029 0.241**

(0.215) (0.191) (0.074) (0.099)

Receive Remittances * Educ 4+ 0.288* -0.204 0.109 0.056 (0.175) (0.148) (0.081) (0.082)

Peru Receive Remittances -3.458* -0.748*(1.780) (0.410)

Receive Remittances * Educ 4+ 3.190* 0.522 (1.757) (0.417)

Nicaragua Receive Remittances -0.366** 0.380 -0.215 0.038(0.161) (0.232) (0.163) (0.212)

Receive Remittances * Educ 4+ 0.298** -0.093 0.007 -0.054 (0.152) (0.227) (0.141) (0.171)

Jamaica Receive Remittances -0.133 -0.075 0.125 -0.100(0.129) (0.115) (0.169) (0.144)

Receive Remittances * Educ 4+ 0.092 0.053 -0.289* 0.050 (0.128) (0.118) (0.176) (0.151)

Dom. Rep. Receive Remittances -0.220* -0.075 -0.194* -0.222*(0.122) (0.158) (0.103) (0.121)

Receive Remittances * Educ 4+ 0.001 0.104 0.096 0.108 (0.093) (0.120) (0.083) (0.102)

20-59 Years OldLabor Force Participation

Country VariableRural Urban

Beyond correlations…Exchange rate

Estimate

qt=+β Xt+δ Rt +εt

q is the real exchange rateX 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 variationsi) 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

(I) (II) (III) (IV) (V)FE FE/IV1 FE FE/IV1 FE/IV2

Change Remittances 2.444 17.783 2.419 18.043 24.0613.26 2.93 3.22 2.85 2.35

Interest Rates 0.011 0.017 0.011 0.017 0.0231.27 1.01 1.24 1.00 1.00

Terms of Trade 0.280 0.241 0.269 0.244 0.3352.96 1.38 2.81 1.37 1.32

Government consumption 0.623 1.318 0.686 1.314 1.0251.43 1.52 1.54 1.50 0.85

Growth 0.096 -0.027 -1.0000.86 -0.13 -1.03

LAC…

(I) (II) (III) (IV) (V)FE FE/IV1 FE FE/IV1 FE/IV2

Change Remittances 2.044 21.434 2.059 20.066 29.3871.95 2.31 1.96 2.31 1.96

Change Remittances x LAC 0.831 -7.870 0.750 -4.784 -10.5270.55 -0.54 0.49 -0.34 -0.52

Interest Rates 0.012 0.009 0.011 0.012 0.0141.32 0.43 1.29 0.56 0.44

Terms of Trade 0.276 0.275 0.266 0.261 0.3872.91 1.42 2.77 1.39 1.34

Government consumption 0.614 1.262 0.676 1.289 0.9301.40 1.38 1.51 1.44 0.71

Growth 0.092 0.005 -1.0710.83 0.02 -1.01

Exchange Rates…

(VI) (VII) (VIII) (IX) (X) (VI) (VII) (VIII) (IX) (X)FE FE/IV1 FE FE/IV1 FE/IV2 FE FE/IV1 FE FE/IV1 FE/IV2

Change Remittances x Fixed ERA 1.255 -0.773 1.290 -1.858 -2.511 0.931 -2.709 0.962 -3.571 -4.2961.12 -0.15 1.15 -0.37 -0.42 0.84 -0.51 0.86 -0.70 -0.71

Change Remittances x Float ERA 3.523 3.345 3.451 3.288 3.3142.83 1.24 2.76 1.21 1.21

Change Remittances x Intermed ERA 10.366 15.853 10.346 15.545 15.3352.90 1.96 2.89 1.91 1.85

Change Remittances x Non fixed ERA 4.215 5.046 4.150 4.916 4.8813.52 2.06 3.46 1.98 1.93

Interest Rates 0.011 0.012 0.011 0.012 0.012 0.013 0.015 0.012 0.015 0.0151.15 1.01 1.09 1.00 1.01 1.29 1.36 1.23 1.32 1.31

Terms of Trade 0.324 0.358 0.313 0.350 0.347 0.300 0.318 0.289 0.311 0.3083.19 3.30 3.07 3.17 3.08 2.95 2.97 2.83 2.85 2.76

Government consumption 0.631 0.488 0.715 0.556 0.585 0.759 0.715 0.842 0.773 0.8021.35 0.93 1.51 1.04 1.05 1.63 1.41 1.77 1.49 1.48

Growth 0.113 0.124 0.173 0.110 0.113 0.1750.96 0.99 0.61 0.93 0.89 0.59

Misalignment

(I) (II) (III) (IV) (V)FE FE/IV1 FE FE/IV1 FE/IV2

Change Remittances 1.295 10.283 1.308 11.144 14.1932.30 2.66 2.31 2.65 2.27

Interest Rates 0.017 0.021 0.017 0.022 0.0242.65 1.97 2.65 1.92 1.69

Terms of Trade 0.257 0.240 0.259 0.244 0.2594.04 2.40 4.07 2.31 1.98

Government consumption 0.286 0.670 0.255 0.638 0.5040.87 1.22 0.77 1.10 0.69

Growth -0.048 -0.127 -0.611-0.58 -0.89 -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:Close to Home: The The development impact of development impact of

remittances in Latin remittances in Latin AmericaAmerica

Pablo Fajnzylber and Humberto Pablo Fajnzylber and Humberto LopezLopez