close to home: the development impact of remittances in latin america pablo fajnzylber and humberto...
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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
Close to Home:Close to Home: The The development impact of development impact of
remittances in Latin remittances in Latin AmericaAmericaColaborative effort of a large team:Pablo Acosta
Cesar CalderonMassimo CirasinoMario Guadamillas
Yira MascaroMaria Soledad Martinez
Luis MolinaFlorencia Moizeszowicz
Caglar OzdenPedro 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
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
LAC is the top remittances recipient region in the World
(US$ billion)
(*) 2005 data.
44
31
48
24
357
EAP ECA LAC MENA SA SSA
Remittances are very large in comparison with other
international financial flows
(*) 2004 data.
Region Remittances Remittances Remittances US$billions % of FDI flows relative to ODA ------------------------------------------------------------------------------------- EAP 43 66.2 6.2 ECA 20 32.3 1.7 LCR 43 70.5 6.2 MENA 21 420.0 2.0 SA 32 457.1 4.8 SSA 8.1 73.6 0.3
Remittances above 10% of GDP in 7 LAC 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
In several countries more than 1 in every 10
families receives remittances...
0
5
10
15
20
25
30
Hai
ti
Dom
.Rep
.
El S
alv.
Nic
arag
ua
Hon
dura
s
Gua
tem
ala
Mex
ico
Ecu
ador
Par
agua
y
Bol
ivia
Per
u
Per
cen
t
Large cross country heterogeneity in socio-
economic status of recipients…
0
10
20
30
40
50
60
70
Mexic
o
Nic
ara
gua
Guate
mala
El
Salv
ador
Peru
Haiti
Q1
Q2
Q3
Q4
Q5
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
Remittances also 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)
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
…economic costs…Potential GDP loses associated to
migration flows
-7
-6
-5
-4-3
-2
-1
0E
l S
alv
ado
r
Hai
ti
Do
min
inca
n
R.
Gu
atem
ala
Nic
arag
ua
Per
u
Ho
nd
ura
s
Mex
ico
Ecu
ado
r
Par
agu
ay
% o
f G
DP
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Mex
ico
Bel
ize
Cos
ta R
ica
El
Sal
vado
r
Gua
tem
ala
Hon
dura
s
Nic
arag
ua
Pan
ama
Cub
a
Dom
inic
an R
ep.
Hai
ti
Jam
aica
Ant
igua
-Bar
buda
Bah
amas
Bar
bado
s
Dom
inic
a
Gre
nada
St.
Kit
ts-N
evis
St.
Luc
ia
St.
Vin
cent
Tri
nida
d &
Tob
ago
Bol
ivia
Col
ombi
a
Ecu
ador
Per
u
Arg
enti
na
Bra
zil
Chi
le
Guy
ana/
Br.
Gui
ana
Par
agua
y
Uru
guay
Ven
ezue
la
…“Brain Drain”… (Share of College Graduates who migrated)
And challenges, like reductions
in labor force participation...Males
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
Exchange Rate Effects
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
Impact of remittances on Bank deposits and credit is
lower in LAC
0
5
10
15
20
Bank Deposits Bank Credit
World LAC
Fees have declined… (cost of sending US$300 to MX)
…but they are only one component of the cost…
-
2
4
6
8
10
12
14
16
18
20
Western Union Delgado Citibank MoneyGram OrderExpress Ria Envia
Tota
l cos
t of t
he s
ervi
ce (U
S$)
Fees Exchange rate revenue
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: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