THEEFFECTOFMIGRANT REMITTANCESON ECONOMICGROWTH

A Thesis submittedtotheGraduateSchoolofArts&Sciences atGeorgetownUniversity inpartialfulfillmentoftherequirements forthedegreeofMasterofPublicPolicy intheGeorgetownPublicPolicyInstitute

By

TheresaA.McCaffrey

Washington,D.C. April10,2007

THEEFFECTOFMIGRANT REMITTANCESON ECONOMICGROWTH TheresaA.McCaffrey ThesisAdvisor:SusanFleck,Ph.D. ABSTRACT Thisstudyinvestigatestheimpactofmigrantremittancesoneconomicgrowth inthedevelopingcountriesthatreceivetheremittances.Afterreviewingtherelevant literatureonremittancesatboththemicroandmacrolevels,itoutlinestheresearch designforamacrolevelstudyontheimpactofremittancesongrowth.Thehypothesis isthatremittancescanhaveapositiveimpactongrowthandthemodel includes variousinteractiontermsinordertodeterminethemacroeconomicsituationunder whichthiscanhappen.Ordinaryleastsquares(OLS)andfixedeffectsregressionsare performedwith crosscountry macroeconomicdatafrom 152lowandmiddleincome countriesfrom1990to2005. Theresultssuggestthatremittanceshaveapositive impactongrowthandthatthisimpactincreasesathigherlevelsofremittancesrelative toGDP. Additionally,remittancesarefoundtohaveamorepositiveimpactin countrieswithcertaincharacteristics:lowdomesticcreditavailable,lowcapital formation,andlowinflation.Theseresultsprovidefurtherjustificationforthepolicy recommendationscurrentlyadvocatedby manyinthedevelopmentcommunityand suggestsomenewpoliciestoincreasethedevelopmentalimpactofremittancesthat fallintotwobroadcategories:steeringremittancestowardthemostproductiveareas andcreatingamacroeconomicclimatewhereremittancescanhavethegreatestimpact. ii

TABLEOFCONTENTS

Chapter1. Introduction .................................................................................... 1 Chapter2. LiteratureReview ........................................................................... 2 Surveys........................................................................................... 2 Dataonremittances ........................................................................ 3 Microlevelstudies ......................................................................... 5 Macrolevelstudies......................................................................... 7 PolicyImplications ....................................................................... 13 Chapter3. HypothesisandStatisticalModel .................................................. 14 Hypothesis.................................................................................... 14 Model ........................................................................................... 14 Chapter4. ResearchDesign ........................................................................... 18 DataSources................................................................................. 18 AnalyticMethodology .................................................................. 18 Chapter5. Findings........................................................................................ 20 DescriptiveStatistics..................................................................... 20 RegressionResults........................................................................ 24 Chapter6. ConclusionsandPolicyRecommendations ................................... 38 Appendix:Correlationsbetweenvariables ......................................................... 41 References......................................................................................................... 43

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Chapter1. Introduction
Remittances,themoneysentbymigrantsworkingabroadtotheirhome countries,areincreasinglybeingproposedasadevelopmenttool.Thisisnotsurprising consideringthatremittancesconstituteahugeinternational capitalflow.Remittances accountedforanestimatedUS$232billionacrossallcountriesin2005,$167billionof whichwassenttodevelopingcountries(WorldBank,2006a).Remittancesaresecond onlytoforeigndirectinvestmentasaflowofcapital todevelopingcountries,andthey areapproximatelydoubletheamountofofficialforeignaidgiven.Althoughtheyare oftencitedasagoodsourcefordevelopmentcapital,littleisknownabouttheactual impactsofthiscurrencyflow.ArecentstudybytheWorldBankfoundremittancesto beeffectiveinreducingpoverty(Adams& Page,2005).However,anIMFstudyfound themtoreduceGDPgrowth(Chami,Fullenkamp,& Jahjah,2005). Thispaper investigatestheimpactofremittancesoneconomicgrowthindevelopingcountries. Chapter2reviewstheliterature,onboththemicroandmacrolevels,ofremittances andgrowth.Chapter3setsoutahypothesisthatremittancescanhaveapositiveimpact ongrowth andproposesatheoreticalmodelfortestingthisrelationship.Chapter4 containsaresearchplan andanalyticmethodologyfortheresearch.Chapter5presents theresultsoftheinvestigation.Chapter6concludesandoutlinesthepolicy implicationsresultingfromthestudy.

Chapter2. LiteratureReview
Internationalmigrationisincreasinglyseenasadevelopmentopportunity.The workerwhomigratesgenerallyimproveshisorherwagesandoftenincreasesthe householdincomethroughremittancessenttothehomecountry.Littleisknownabout whythemoneyissentanditsimpactonthehouseholdevenlessisknownaboutthe impactontheoveralleconomyofthereceivingcountry.However,international organizationsarebeginningtoeyethismassivecapital flow,estimatedataround$232 billionin2005,asasourceoffundingfordevelopment(IMF,2005 WorldBank, 2006a). Thoughtheliteratureonremittancesisgrowing,whatisemergingshowsgreat variationacrosscountriesandstudieson theimpactsofremittances,bothatthemicro andmacrolevels.

Surveys
Forgeneralbackgroundonthetopic,severalauthorsprovidesurveysofthe economicimplicationsofmigrationandremittancesending.RapoportandDocquier (2005) reviewtheeconomicsofremittanceswithafocusonthe theoretical aspects. Theyincludebothmicroleveldeterminantsofremittancesandmacrolevel implicationsofremittances.PageandPlaza(2005)provideacomprehensivesurveyof theissuesofremittancesanddevelopmentandconsiderthepolicyimplicationsfor bothmigrationandremittances.Brown(2006)looksatrecentpatternsinremittance sendingandexaminestheliterature,boththeoreticalandempirical,ontherelationship 2

betweenremittancesanddevelopment. Ellerman(2003)examinestherelationship betweenmigrationanddevelopmentforbothskilledandunskilledworkersbetweena varietyofcontexts,northnorth,southsouth,andnorthsouth.Ratha(2003) summarizessomekeyissuesdealingwithremittances,withaneyetowardusingthem asapossibledevelopmenttool.Acosta,Calderon,Fajnzylber,andLopez(2006) reviewtheliteratureassociatedwithLatinAmericanmigrationandconsidermicroand macroeconomicstudiesoftheeffectofremittancesonpoverty.

Dataonremittances
Althoughaccuratefiguresoninternationalmigrationarescant,remittance flowsareoneofthebettermeasuredindicators.Evenso,availabledataonremittances generally captureonly moneysentthroughofficialchannels,suchasthebanking systemorawiretransferservice,andsoundercounttheamountofmoneysent. Therearethreecategoriesinthebalanceofpaymentstatisticsintowhichthe moneyassociatedwithinternationalworkersfalls(IMF,1993).Workers Remittancesappearsinthecurrenttransferssectionofthecurrentaccountand consistsofmoneytransferredbymigrantswhomovetoanothercountryforaperiodof oneyearorlonger.CompensationofEmployeesisacomponentofincomeinthe currentaccountandrepresentsthewages,salaries,andbenefitsearnedbynonresident workerswhomigrateforaperiodoflessthanayear.Andfinally,Migrants Transfersappearsinthecapitalaccountsectionandrepresentsthefinancial 3

transactionsthataccompanythechangeofresidenceoftheworkerfromonecountryto another.Althoughonlythefirstofthesethreeisofficiallycalledremittances,studiesof theeconomiceffectsofremittancesgenerallyincludeatleastthefirsttwoandmost oftenallthree. Thereareconcernsaboutthereliabilityofthesedataonseveralcounts. AlthoughtheIMFprovidesaframework,ReinkeandPatterson(2005)pointout differencesinaccountingmethodsacrosscountriesthatintroducevariation.Some countriesincludetransfersbymigrantsunderOtherCurrentTransfersinsteadofthe namedcategory.Othercountriescountmigrantsabroadforoverayearasresidents,so alloftheirincomeappearsascompensationofemployees,eventhoughmuchofitis likelyspentinthehostcountry.Theseproblemscanbeseenintheglobalimbalances increditsanddebitsthatexistforworkersremittancesandcompensationof employees,amountingtoabout$12billionin2003(Reinke& Patterson,2005). Althoughthisdifferenceindefinitionsisaseriousproblem,difficultiesinobtainingthe necessarydataprovestobeastilllargerone. Arelatedconcernaboutdataaccuracyistheextenttowhichtheofficialflows capturethetotalflowsofremittancessentbyinternationalworkers.Acostaetal. (2006)addressthisquestionbycomparingbalanceofpayment(BOP)statisticsto householdsurveydatafor10LatinAmericancountriesrepresentingovertwothirdsof remittancestoLatinAmericafortheperiodof20002004. Theyfindthatremittances 4

inhouseholddataaregenerallylessthaninBOPdata,butbyapredictableamount. RegressingremittancelevelsfromhouseholdsurveysonthosefromBOPdata, householdsurveydatacanexplainabout80percent ofthevarianceinBOPdata, and BOPremittancesstatisticstendtobeabout70percentlargerthan householdsurvey statistics.Theyalsopointout,however,thathouseholdsurveysmaynotbetakenfrom arepresentativesampleoftheeconomyandthatthesesurveysoftenhaveerror associatedwithimperfectrecall.However,theiranalysisdoessupporttheacceptability ofusingofficialremittancedatatoproxyfortotalremittances.Ratha(2003)cites anecdotalevidencethattheproportionofofficialremittancesisincreasingasaresultof internationaleffortstocombatmoneylaunderingandthefinancingofterrorism(p.43).

Microlevelstudies
Motivation Thereisawideliteratureonthedistributionandeffectsofremittancesonthe microlevel.Economistsdisagreeon whetherthesendingofremittancesismotivated byaltruismorwhethertheyfulfillsomeeconomicgoal,suchasinsuranceor investment.Sana(2005),usingdatafrommaleMexicanmigrantsintheU.S.,findsthat socialstatusandidentity arekeymotivationsforremittances.RobertsandMorris (2004)reviewthereasonsforremittingthataregenerallygiven,altruism,insurance, andinvestment,andaddafourthreason,accesstovillagebasedemployment networks.

Distribution Asecondquestiononthemicroleveliswhothemigrantssendingthese remittancesareandwhattypeofhouseholdsarereceivingtheseremittances.DeSipio (2000)looksathowindividualmigrationdecisionsaremadeandfindsthatremittances decreaseasmigrantsspendmoretimeabroad.SanaandMassey(2005)examinehow migrantsremitmoneyusingdatafrommigrantcommunitiesinfourLatinAmerican countries.Theyexaminethehouseholdandfamilystructureinthecountryoforigin andfindthatremittancesdifferacrosscountriesinthisrespect.Acostaetal.(2006) lookatLatinAmericaandfinddifferentpatternsofremittancesbyincomeand educationlevels.Insomecountries,suchasMexico,Guatemala,andElSalvador, migrantscomefromandsendremittancesbacktohouseholdsinthelowerlevelsofthe incomedistribution.Inothers,suchasHaiti,Peru,andNicaragua,migrantsare positivelyselectedandcomefromricherhouseholds.Therearelikewisedifferent patternsseenineducationalattainmentlevelsofmigrantandnonmigranthouseholds acrossthesampleofcountries. Howremittancesareused Akeyquestionfordeterminingtheeconomicimpactsofremittancesishowthe moneyisused,i.e.,whetheritisspentorinvested. Basok(2003)examinesthe investmentdecisionsmadebyworkersintheCanadianMexicanSeasonalWorkers Programmeandfindsthatmigrantsfromtheleastendowedcommunities(withrespect toland,infrastructure,andmarketaccess)aremostlikelytoinvesttheirearningsin 6

agriculturalland.Likewise,fromsurveysonahouseholdlevelinGuatemala,Adams (2005)findsthatincreasedremittancesareassociatedwithlowerconsumptionand higherinvestment.Orozco(2004)describestheemergenceofHometownAssociations inMexico,whichprovideaformalmechanismformigrantstoinvestintheir communities.Inthisway,remittancescouldbeanoptionforfinancinglocal developmentprojectsonthegrassrootslevel.LowellanddelaGarza(2004)discuss thispotentialthroughoutLatinAmerica.

Macrolevelstudies
Macroeconomicdeterminantsofremittances Onthemacrolevel,manyauthorspointoutthattheamountofremittancessent isinfluencedbyvariousmacroeconomicfactors. ElSakkaandMcNabb(1999) examinetheeffectthatmacroeconomicfactorshaveonremittancesendingdecisions usingthecaseofEgypt. Theauthorsfindthatbothexchangerateandinterestrate differentialsaresignificantdeterminantsofofficialremittanceflows.Theyalsofinda highincomeelasticityforimportspaidforbyremittances.StudiesbyGammeltoft (2002)andBuchandKuckulenz(2004)compareremittancestoothercapitalflowsand findthemtobemorestablethanprivateandofficialcapitalflows.Chamietal.(2005) pointoutthatremittancesoperateinacountercyclicalmanner,withmigrantsremitting moremoneywhentheirrelativesathomeareworseoff.They pointoutthemoral hazardinherentinthissituationsincethesenderisnotabletoverifywhetherornot

thoseathomeareworkingdiligently.BugamelliandPatern(2005) alsomentionthe countercyclicalnatureofremittancesandpointoutthatthismay reducetheprobability ofcurrentaccountreversals.However,GiulianoandRuizArranz(2005)disputethis conventionalwisdomandshowthatthecounter orprocyclicalnatureofremittances variesbycountryandhighlighttheroleoffinancialdevelopment(discussedbelow). LuethandRuizArranz(2006)developabilateraldatabaseofremittanceflowsbased onelevencountriesinEuropeandAsiathattrackthisdata.Theydevelopagravity modelfordeterminantsofremittancesandfindthatmorethan50percentof the variationinremittancescanbeexplainedbytheGDPdifferences,distance,and commonlanguagebetweenthetwocountries.Theyfindtradelinkagesandcolonial tiestobesignificantaswell. Povertyandinequality Althoughremittancestransfermoneytohouseholdsinpoorcountries,the questionofwhetherornottheyreducepovertyonamacroleveldependson other factors. AdamsandPage(2005)examinetherelationshipamongmigration, remittances,andpoverty,usingcensusdatafromtheU.S.andOECDcountriesin Europetofindmigrationnumbersbycountryoforigin.Theyacknowledgevarious incompleteaspectsoftheirdata,includingtheirlackofmigrationstatisticsfromthe ArabGulfcountriesandtheirrelianceonofficialremittancedata.Toaccountforthe endogenousnatureofmigrationandremittances,theyuseaninstrumentalvariables approach withthreeinstruments:distancefromremittancesendingarea(U.S.,OECD 8

Europe,orArabGulf)toreceivingcountry,education(percentofpopulationoverage 25thathascompletedsecondaryschool),andgovernmentstability.Intheiranalysis, theauthorscontrolforincomelevel,sincethemigrantabroadnolongercontributesto thefamilyincome.Theyfindthatbothmigrationandremittanceshaveastatistically significantnegativeimpactonpoverty,andalargerimpactwhenusingthe instrumentalvariablesapproachtocontrolforendogeneity.UsingOLSregression, theyfindthat,fora10percentincreaseinshareofinternationalmigrants,poverty headcount(measuredat$1/person/day)willdecreaseby2.1percentonaverage.After instrumentingforendogeneity,thisdecreaseinpovertyrisesto3.5percent.Gupta, Pattillo,andWagh(2007)similarlyfindthatremittancesreducepoverty in theircross country analysis,withan evenlargerimpactseeninSubSaharanAfrica,.Theydeal withtheendogeneityofremittancesthroughathreestageleastsquaressystemof regressions. However,otherstudiesprovidecontrastingresults.Bracking(2003)looksat remittancesinZimbabweandfindsthat,althoughtheybenefithouseholdswhoreceive them,theyhaveanadverseeffectonhouseholdswithoutmigrants,due tobothasset priceinflationandtheinflationaryeffectsofparallelcurrencymarkets.Acosta etal. (2006)examinetheliteratureofmicrolevelstudiesoftheimpactofremittanceson inequalityandpovertythroughoutLatinAmericaandfindthataonepercentagepoint increaseinremittancesasashareofGDPlowersthepovertyheadcountbyabout0.4 9

percent,whichtheyjudgetobeaninsubstantialimpact. Theyalsofindnosubstantial impactofremittancesoninequalityinLatinAmerica.Inadditiontotheireffecton poverty,remittancescanalsoimproveotherimportantindicators,especiallyhealthand educationindicators,forreceivinghouseholds(Kanaiaupuni& Donato1999). Growth Chamietal.(2005)publishedaseminalaccountofremittancesandgrowth,in which they developamodelofremittances,basedontheunitofthefamilyand motivatedbyaltruism.Theirmodel showsthatremittancesvarycountercyclicallyand containan elementofmoralhazard.Theyregressgrowthagainstinitialincome, investment,andremittancesandfindthatremittancesarenegativelycorrelatedwith growth.Althoughtheyacknowledgetheendogeneityofremittancesintheir countercyclicalmodel,theydonotcorrectforit.Nonetheless,mostofthesubsequent literatureonremittancesandgrowthusestheirarticleasastartingpoint,whetherornot itsupportstheirconclusions. Anotherstudy (IMF,2005)usesaninstrumentalvariablesapproachtoexamine therelationshipofremittancestogrowthandtocontrolforendogeneity.The instrumentsemployedarethedistancebetweentheremittancereceivingcountryand theremittancesendingcountrywiththelargestnumberofmigrantsandwhetherthese twocountriesshareacommonlanguage.Itfindsnosignificantlinkbetweengrowth

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andremittancesinthegeneralsampleofcountriesnorinasubsetofremittance dependentcountriesinwhichremittancesaccountformorethanonepercentofGDP. However,therearestudieswithamorepositiveviewofthecontributionof remittancesongrowth.Ziesemer(2006)examinestheroleofremittances,through contributionstophysicalandhumancapitalin economicgrowth,byusingtwo differentopeneconomymodels.Heusesageneral methodofmomentswith heteroskedasticityandautocorrelationwithpooleddataforfour groupingsofcountries receivingremittancesin2003.Hefindsthatthecountriesthatbenefitthemostfrom remittancesarethosewithpercapitaincomebelow$1,200. Forthesecountries, remittancescontributeabout2 percenttosteadystatelevelofGDPpercapitaversus havingnoremittances.Theeffectofremittancesongrowthinrichercountriesisfound tobemuchsmaller.Glytsos(2005)usesaKeynesianeconometricmodeltoestimate shortandlongrunmultipliersofremittances,andthendeterminestheimpactof remittancesongrowthinfiveMediterraneancountries.Hemaintainsthatremittances canhaveapositiveimpactongrowth,notonlyiftheyaredirectedtowardsinvestment, butalsothroughtheincreasedconsumptionandimports.Heconsidersonlythedemand impactofremittances,butfindsgreatfluctuationsacrosstimeandcountriesforthe effectofremittancesongrowth.

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Growthandfinancialdevelopment Anotherthreadoftheliteratureonremittancesandgrowthlooksattheirimpact particularlyincountrieswithlowlevelsoffinancialdevelopment,onthetheorythat remittancesmayprovidecapitalforinvestmentincountrieswithoutwidespreadaccess tocredit.GiulianoandRuizArranz(2005)examinetheimpactofremittancesand financialdevelopmentongrowthandfindthat,althoughingeneralremittancesdonot haveasignificanteffectongrowth,theimpactispositiveandsignificantincountries withlowfinancialdevelopment(measuredinfourwaysloans,deposits,credit,orM2 asapercentageofGDP).Mundaca(2005)usesdatafromCentralAmerica,Mexico, andtheDominicanRepublictolookattheimpactofgrowthvolatility,remittances,and financialdevelopmentongrowth,onthetheorythateconomicvolatilitywillinfluence howremittancesarespentorinvested.Shefindsthatremittanceshaveapositiveand significanteffectongrowthinallspecificationsofhermodel,althoughnoneofthe specificationsincludeinteractiontermsbetweenremittancesandvolatilityor remittancesandfinancialdevelopment,bothofwhichwouldseemtobeofprimary importance.Lookingattheissuefromadifferentangle,Aggarwal,DemirgucKunt, andMartinezPeria(2006)andGuptaetal.(2007) findapositiveimpactofremittances onfinancialdevelopment.Sofinancialdevelopmentcouldprovetobeapathwayby whichremittancesbringabouteconomicgrowth.

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PolicyImplications
Thedevelopmentliteratureanddiscourseisnowfilledwithrecommendations onwhatshouldbedonetoenhancethedevelopmentimpactofremittances(Kapur, 2004Sriskandarajah,2005Terry &Wilson,2005Brown,2006). Suggestionscovera hugerangeofpolicytopicsandincluderelaxingforeignexchangecontrols,lowering thecostsofsendingremittances,makinginternationallabormarketsmoreflexible, givinginternationalinstitutionsaroleinaremittancesendingframework,combating braindrain,promotingcircularmigration,andencouragingcollectiveremittances. OrozcoandFedewa(2006)mentionarangeofthepolicyoptionsthatcanbe pursuedinordertoenhancethedevelopmentalimpactofremittances,whetherornot remittancesleadtogrowthinanabsolutesense.Thepoliciesadvocatedinclude: reachingouttodiasporasworkingabroad,reducingthecostsofsendingremittances, providingbankingservicesforunbankedremittancesendersandreceivers,providing investmentandmicroenterpriseopportunitiesfortheremittancemonies,encouraging theuseofhometownassociationstochannelmoneytowardslocaldevelopment,and marketingtourismandnostalgictradetomigrants.However, therangeofpolicy optionswillbegreaterwithmoreinformationaboutthebehaviorofremittancesin variousmacroeconomiccontexts.

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Chapter3. HypothesisandStatisticalModel
Thisstudy extendstheexistingliteratureonremittancesandgrowth,namely theworkof Chamietal.(2005),byconsideringtheimpactofremittancesoneconomic growth,whileallowingfortheimpactofremittancestovaryalongseveral macroeconomiclines.Liketheworkof GiulianoandRuizArranz(2005),itincludes financialdevelopment,anditsinteractionwithremittances,inthemodel,alongwith severalothermacroeconomiccountrycharacteristics.

Hypothesis
Thehypothesisofthisstudyisthatthereareconditionsunderwhich remittanceswillleadtoeconomicgrowth.GiulianoandRuizArranz(2005)have demonstratedlowfinancialdevelopment,measuredbythedepthofthebanking system,tobeoneofthesecases.Thisresearchprojectinvestigatestheimpactof remittancesongrowthatvaryinglevelsofgrosscapitalformationandinflationaswell.

Model
Inordertoprobetheimpactofremittancesongrowth,thefollowingmodel is estimated: growthit = b0 + b1 Remit + b2 Zit + b3 (ZitRemit)+ b4 Xit + mt + hi + eit wheregrowthit isannualgrowthin percapitaGDPinconstant2000dollars,Remit is remittances(workersremittancesandcompensationofemployeesreceived)asa percentageofGDP,Zit isavectorofvariableswhoseinteractionswithremittancesare 14

beingconsidered,andXit isavectorofcontrolvariableswhoseinteractionswith remittancesarenotbeingconsidered.Ofinterestarethecoefficients b1 and b3, which showrespectivelytheimpactofremittancesongrowthandhowthiseffectvarieswith othercharacteristics. TheZit vector includesthefollowingvariables: financialdevelopment(domesticcreditprovidedbybanking sector/GDP) investment/GDP(grossprivatecapitalformation/GDP) inflation(annualpercentagechangeinconsumerprices) Allowingallthreeofthesevariablestointeractwithremittanceswillpaintamore detailedpictureofhowremittancesinteractwithotherfacetsoftheeconomyandshow theconditionsunderwhichtheyarethemosteconomicallyproductive.TheXit vector consistsonlyof populationgrowth,expressedasannualpercentagechange. Othervariablestestedforinclusionrepresentedfactorsofproduction(arable landandpopulationdensity),capitalsources(foreigndirectinvestment),anddegreeof openness(importsplusexportsasapercentageofGDP). Thesevariableswereall foundtobeinsignificantandsome,includingarablelandandpopulationdensity, variedbycountry butnotovertime,thuscausingmulticollinearityissuesandproving ineffectiveforfixedeffectsregressions.Additionalvariablesofinterestincludedfiscal

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balanceandmeasuresofhumancapital,butthesewerenotavailableannuallyfora sufficientnumberofcountries. Thisstudyalsoestimatesamodelwithaquadraticremittanceterm,asusedin oneofthemodelsof Chamietal.(2005). Thismodelspecificationis: growthit = b0 + b1 Remit + b2 Remit2 + b3 Zit + b4 (ZitRemit)+ b5 Xit + mt + hi + eit Thismodeltestswhethertheimpactofremittancesongrowthvariesatdifferentlevels ofremittances. RemittancesareexpressedaspercentagesofGDPthroughout,asin Giuliano andRuizArranz(2005),ratherthanbeingdifferencedasinmanyofthemodelsof Chamietal.(2005),becausetheresearchquestionisconcernedwith theimpactofthe flowofremittancesongrowth,ratherthanin theimpactof marginal changestothis flowongrowth. Asstatedinthehypothesis,theexpectationisthatremittancescanpositively contributetogrowth,soonewouldexpectthecoefficientonremittancestobepositive. Thequadraticmodelspecificationishardertopredict.Ifremittancesprovidea multipliereffectongrowth,thenthequadratictermshouldbesignificant.Glytsos (2005)hintsatthispossibilityinhisresearchonhowremittancesimpactgrowthin Mediterraneancountriesthroughthepathwaysofconsumption,investment,imports, andincome.IftheimpactofremittancesonGDPgrowthispositivebutdecreasing overtime,thenonewouldexpectthequadratictermofremittancestohaveanegative 16

coefficient,whilethelineartermwillhaveapositivecoefficient.Iftheimpactof remittancesispositiveandcumulativeovertime,thenonewouldexpectthequadratic termaswellasthelineartermtohavepositivecoefficients.Iftheimpactof remittancesisonlyfeltinthepresentperiod,thenthequadraticterm shouldbe insignificant. Basedonliteratureinthefieldofeconomicgrowth,strongfinancialmarkets andinvestmentcontributetopositivegrowth,soonewouldexpectthatthecoefficient ofthemeasuresofthesetwovariablesfinancialdevelopmentandinvestmentwill bepositive.Giventhatinflationweakensthevalueofinvestment,andpopulation growthmitigatesgainsinGDP,thecoefficientsforthesevariablesareexpectedtobe negative.Basedontheresultsof GiulianoandRuizArranz(2005),onewouldexpect thecoefficientonremittancestimescredittobenegative,duetoacrowdingouteffect. Withtheexceptionofcredit,thecoefficientsontheinteractiontermsofthesevariables withremittancesaredifficulttopredict,notbeingcoveredextensivelyintheliterature. Thecoefficientontheinteractionofremittancesandcapital formationiscomplex becausegrowthdependsonwhetherremittancesareconsumedorinvested,whether remittancescrowdoutothercapitalformation,andwhattypeofreturnstoscalemight bepresent.Assuming,asthismodeldoes,thatsomeportionofremittanceswouldbe invested,thecoefficientonremittancesandinflationwouldlikelybenegativebecause investedremittancesaremorelikelytoleadtogrowthatlowlevelsofinflation. 17

Chapter4. ResearchDesign DataSources

Thedatasetusedinthisanalysiscontainscrosscountry,timeseries, macroeconomicdatafromlowandmiddleincomecountries,asclassifiedbytheWorld Bank,fortheperiodfrom 1990to2005. Thesedatacomefromavarietyofsources,but arecompiledintheWorldBanksWorldDevelopmentIndicatorsdatabase.This periodoftimeissignificantlyshorterthanthoseusedbyotherspreviously.Chamiet al.(2005)lookattheperiodfrom19701998.GiulianoandRuizArranz(2005) examine19752002,usingaveragesoverfiveyearperiods.Thisstudyfocusesonmore recentdatabecausethereliabilityofthedataonremittanceshasincreasedinrecent yearsasmoremoneyissentthroughformalsystemsandascountrieshavebecome moreadeptattrackingtheflowofremittances.

AnalyticMethodology
Thisresearchusestwomainstatisticalmethods.Fivemodelsofordinaryleast squares(OLS)regression arerun.Thefirstusesonlyremittancesasanindependent variabletounderstandthedegreeof correlationpresent. Thenlinearandquadratic modelsarerun,bothwithandwithoutregionaldummyvariables. Next,fixedeffectsregressionsareusedtodealwiththeissueofautocorrelation of themacroeconomicdata. Threemodelsareemployed,thefirstusingonly remittancesasanindependentvariable,then thelinearandquadraticmodels. 18

Finally,theOLSandfixedeffectsregressionsarerepeatedwiththesample brokenapartbyregion toseeifanyregionspecificpatternsemerge. ThesemodelsarecomparedtoselectedmodelsemployedbyChamietal. (2005)andGiulianoandRuizArranz(2005).Chamietal.performedOLSregressions ofremittances(asapercentageofGDP)againstgrowth.TheyincludedlaggedGDP percapita,investmenttoGDPratio(logged),andnetprivatecapitalformation(asa percentageofGDP). Inonespecification,theyincludedremittancessquaredaswell.In subsequentOLSandfixedeffectsregressionsintheirpaper,they consideredthe impactofthechangeinremittancesongrowth,whichisbeyondthescopeofthis thesis,whichconsiderstheimpactof theoveralllevelofremittancesongrowth. GiulianoandRuizArranz(2005)regressasimilarmodelwiththedependent variablebeinggrowthinrealGDPpercapitaandtheindependentvariablesbeing laggedrealGDPpercapita(logged),populationgrowth(logged),fiscalbalance, investmenttoGDPratio(logged),yearsofeducation(logged),importsplusexports(as apercentageofGDP),inflation,andremittances(asapercentageofGDP). Theyuse OLSandfixedeffects,alongwithgeneralizedmethodofmoments(GMM), toestimate thesemodels.TheythenestimateanothermodelusingOLS(andthenGMM),adding creditandaninteractiontermforremittancesandcredit(andthenthreeothermeasures offinancialdevelopment,whichthisthesisdoesnotaddress).

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Chapter5. Findings DescriptiveStatistics

Thedatasetusedcontainsinformationfor152low andmiddleincomecountries (asclassifiedbytheWorldBank)from1990to2005,with 1,409complete observations.Tables1through4presentanoverviewofthevariablesthatareincluded inthemodels.Tables1and2presentthemeansofcountryquintilesrankedbyreal GDPpercapitain1990and2000tables3and4presentthemeansofcountryquintiles rankedbyremittancesasapercentofGDPin1990and2000.Moreobservationsare availablefor2000thanfor1990andforGDPpercapitathanforremittances,asseen in thenumberofcountriesineachtable.FromTables3and4oneseesthatthe differencebetweenthefirstandfifthquintilesinremittancesasapercentageofGDPis muchlargerin1990thanin2000,sovariationisdecreasingovertime.No straightforwardrelationshipbetweenremittancesandrealGDPpercapitaemerges. Table1:MeansofvariablesbyquintilesofrealGDPpercapita(lowtohigh) 1990,132countries
Variable RealGDPpercapita (US$,2000) Remittances (asapercentageofGDP) Credit (asapercentageofGDP) Grosscapitalformation (asapercentageofGDP) Inflation(annualgrowthin consumerprices) Populationgrowth (annualpercentage) 1st quintile
216.51 0.02 25.02 16.84 23.54 2.48

2nd quintile
486.99 0.08 60.40 25.49 430.32 2.39

3rd quintile
1066.57 0.09 38.62 24.39 15.28 2.05

4th quintile
2038.00 0.03 46.48 26.47 412.34 1.73

5th quintile
4309.71 0.07 46.60 25.48 326.00 1.00

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Table2:MeansofvariablesbyquintilesofrealGDPpercapita(lowtohigh) 2000,141countries
Variable RealGDPpercapita (US$,2000) Remittances (asapercentageofGDP) Credit (asapercentageofGDP) Grosscapitalformation (asapercentageofGDP) Inflation(annualgrowthin consumerprices) Populationgrowth (annualpercentage) 1st quintile
216.27 0.02 32.67 17.88 30.98 2.72

2nd quintile
491.66 0.06 20.46 24.65 8.44 1.57

3rd quintile
1091.75 0.07 45.37 21.52 26.82 0.60

4th quintile
2245.10 0.04 34.76 21.22 11.36 1.36

5th quintile
5227.11 0.01 66.39 24.93 4.51 1.03

Table3:MeansofvariablesbyquintilesofremittancesasapercentageofGDP (lowtohigh), 1990,82countries

Variable RealGDPpercapita (US$,2000) Remittances (asapercentageofGDP) Credit (asapercentageofGDP) Grosscapitalformation (asapercentageofGDP) Inflation(annualgrowthin consumerprices) Populationgrowth (annualpercentage)

1st quintile
1682.98 0.00 46.09 19.22 197.89 2.11

2nd quintile
1830.81 0.01 44.48 22.84 516.26 2.55

3rd quintile
1768.69 0.02 32.40 20.80 18.16 2.12

4th quintile
1072.10 0.04 31.03 22.90 14.61 2.35

5th quintile
1771.25 0.22 44.59 33.50 14.60 1.62

21

Table4:MeansofvariablesbyquintilesofremittancesasapercentageofGDP (lowtohigh), 2000,120countries

Variable RealGDPpercapita (US$,2000) Remittances (asapercentageofGDP) Credit (asapercentageofGDP) Grosscapitalformation (asapercentageofGDP) Inflation(annualgrowthin consumerprices) Populationgrowth (annualpercentage)

1st quintile
3021.13 0.00 36.00 21.32 10.21 1.61

2nd quintile
2086.25 0.01 39.33 22.51 6.69 1.46

3rd quintile
1946.64 0.01 44.03 22.72 12.53 1.71

4th quintile
1264.13 0.04 37.54 21.80 3.83 1.67

5th quintile
1335.45 0.14 50.98 23.59 11.07 0.40

Charts1and2presentscatterplotsofremittancesasapercentageofGDP versusrealGDPpercapita onlogscalesfortheyears1990and2000. Thisformof presentation demonstrateswherecountriesandregionsstandrelativetooneanother. Somecountrieschangepositionsignificantlyduringthistenyearperiod.China experiencesagrowthinbothGDPpercapitaandremittances(asapercentageof GDP),whileEgyptandLebanonhaveanincreaseinGDPpercapitabutadecreasein remittances(asapercentageofGDP).Othercountries,suchasMexicoandEl Salvador,remaininessentiallythesameposition.However,fromthisrepresentation nostraightforwardrelationshipbetweenthetwomainvariablesofinterestisobserved.

22

Chart1:Remittances/GDPvs.realGDPpercapita,1990
1
Lesotho Lebanon Samoa Yemen,Rep. Tonga Kiribati CapeVerde Swaziland Jordan Egypt,ArabRep. Morocco ElSalvador Benin BurkinaFaso Mali Mozambique Pakistan SriLanka Vanuatu Philippines SyrianArabRepublic Haiti Togo LaoPDR Mauritania Kenya Honduras St.KittsandNevis Dominica Grenada St.VincentandtheGrenadines

0.1 Remittances/GDP(Logscale)

Comoros Gambia,The Bangladesh Senegal

DominicanRepublic Jamaica Belize Tunisia St.Lucia Botswana Panama Seychelles

0.01
India Niger GuineaBissau Sudan Coted'Ivoire

Turkey Guatemala Thailand Colombia Paraguay Algeria Namibia Ecuador Peru

Mexico

Malaysia

Oman CostaRica Brazil SouthAfrica

Madagascar Cameroon PapuaNewGuinea Indonesia

Suriname

0.001

Rwanda Ghana China Ethiopia Nigeria

Bolivia

TrinidadandTobago

0.0001 $100

Zimbabwe

$1,000 RealGDPpercapita(Logscale)

$10,000

Chart2:Remittances/GDPvs.realGDPpercapita,2000
1

BosniaandHerzegovina W estBankandGaza Jordan Sam oa Albania Moldova Vanuatu ElSalvador SerbiaandMontenegro Jamaic a NicaraguaPhilippines Lebanon DominicanRepublic Ecuador G eorgia Honduras Morocco Sudan Comoros SriLanka Benin Grenada Senegal Swaziland Uganda Bangladesh Armenia Kenya T unis ia Mauritius Paraguay Gambia,The Guyana G uatem ala Nigeria Croatia Mali India Egypt,ArabRep. Cam bodia Belize T ogo BurkinaFaso T urkey Macedonia,FYR Nepal Colom bia AlgeriaFiji Bolivia Pakistan Mexico Peru Dominica Mongolia Coted'Ivoire Malaysia Thailand SierraLeone Belarus Azerbaijan Poland Mozam bique St.Kitts andNevis Latvia CostaRica SyrianArabRepublic GuineaBissau St.VincentandtheG renadines Kazakhstan Indonesia Ethiopia Niger Ghana Hungary Solom onIslands Iran,IslamicRep. Botswana CzechRepublic China RussianFederation Eritrea Bulgaria Lithuania St.Lucia TrinidadandTobago Rwanda Maldives Congo,Rep. Madagascar Brazil Nam ibia SouthAfr ica Rom ania PapuaNewG uinea Oman Mauritania CapeVerde Haiti Kiribati Yem en,Rep. Panam a Gabon SlovakRepublic Estonia Argentina Libya Chile Venezuela,RB Lesotho

0.1 Remittances/GDP(Logscale)

0.01

0.001
Malawi

T anzania LaoPDR

Cameroon Ukraine

G uinea

0.0001 $100

$1,000 RealGDPpercapita(Logscale)

$10,000

23

RegressionResults
OrdinaryLeastSquares Table5presentstheresultsof OLSregression ofgrowthinrealGDPpercapita againstvariousindependentvariablesusingfivemodelsthatreplicate,tosomedegree, thoseusedby Chamietal.(2005)andGiulianoandRuizArranz(2005).Theinclusion ofthequadratictermforremittancesinModelsIIIandVmirrorsasimilarterminone ofthemodelsofChamietal.(2005). Thefirstmodelusesonly remittances(asa percentageofGDP)asanindependentvariableandfindsthempositivelyand significantlycorrelatedwithgrowth.ModelIIincludesotherindependentvariables domesticcreditprovidedbythebankingsectorandgrosscapitalformation(both expressedaspercentagesofGDP)aswellasinflationandpopulationgrowth.Inthis model,remittancesarenolongersignificantwhereastheothervariablesare.ModelIII usesallofthevariablesinModelIIandaddsaquadratictermforremittancesand interactiontermsforremittanceswith credit,grosscapitalformation,andinflation.In thisspecification,bothremittancesandremittancessquaredaresignificant. ModelsIV andVrepeatModelsIIandIII respectively withregionaldummies,usingtheregional categoriesemployedby theWorldBank:EastAsiaandPacific,EuropeandCentral Asia,LatinAmerica,MiddleEastandNorthAfrica,SouthAsia,andSubSaharan Africa.

24

Table5:Remittancesandgrowth:OLScrosssectional estimation (19902005,152countries) I II III IV V

with interaction termsand regional dummies 1.866*** 0.774* 0.659 0.071 1.534*** Constant (12.71) (1.82) (1.44) (0.14) (2.85) 4.633*** 2.832 29.935*** 2.616 29.805*** Remittances (2.69) (1.51) (5.28) (1.37) (5.26) (asapercentageofGDP) 2 59.408*** 56.213*** Remittances (4.82) (4.59) 0.014*** 0.013*** 0.016*** 0.011** Credit (3.86) (3.07) (3.91) (2.42) (asapercentageofGDP) 0.132** 0.175*** Credit*remittances (2.10) (2.73) 0.140*** 0.202*** 0.134*** 0.190*** Grosscapitalformation (8.55) (11.24) (8.20) (10.49) (asapercentageofGDP) 1.20*** 1.112*** Grosscapitalformation* (8.37) (7.70) remittances 0.0012*** 0.0006 0.001*** 0.0004 Inflation(annualgrowthin (2.88) (1.25) (2.70) (0.92) consumerprices) 0.197** 0.229*** Inflation*remittances (2.48) (2.87) 0.751*** 0.698*** 0.539*** 0.483*** Populationgrowth (8.92) (8.46) (4.94) (4.47) (annualpercentage) 1.607*** 1.250*** EastAsiaandPacific (3.87) (3.06) 1.813*** 1.861*** EuropeandCentralAsia (4.48) (4.66) 1.285*** 1.127*** MiddleEastand North (2.93) (2.58) Africa 1.781*** 1.763*** SouthAsia (3.41) (3.46) 0.041 0.206 SubSaharanAfrica (0.13) (0.64) 1,621 1,409 1,409 1,409 1,409 numberofobservations 2 0.0044 0.1330 0.1789 0.1598 0.2002 R 2 0.0038 0.1299 0.1736 0.1537 0.1922 Adjusted R Note:Valueof tstatisticsinparentheses*significantat10percent**significantat5percent ***significantat1percent. LatinAmericaistheexcludedregionaldummyvariable.

Dependentvariable: Annualgrowthinreal GDPpercapita

with interaction terms

with regional dummies

25

ComparingModelsIIandIII(orIVandV),oneseesthattheadditionof remittancessquaredandthevariousinteractiontermswithremittancesdoesnothavea greatimpactonthesign,magnitude,orsignificanceofmostofthecoefficients.The bigexceptiontothisisthecoefficientonremittances,whichchangesbothin significanceandmagnitude. ComparingModelsIIandIII toModelsIVandVwithregionaldummy variables,onealsoseesthattheregionaldummiesreducethemagnitudeofthe coefficients,butonlyslightly.Theregionaldummy coefficientsthemselvesare interestingtoexamine.WithLatinAmericaasthebasecategory,alloftheother regionsexperiencesignificantlyhighergrowth,rangingbetween1and2percentage points,withtheexceptionofSubSaharanAfrica.ThefactthatLatinAmericajoins Africainlowerthanaveragegrowthisprobablyduetotheyearsselectedforthe sample.ThedebtcrisisandslowgrowthwerecharacteristicofLatinAmericain 1990s. ModelsIIIandVfindbothremittancesandthesquareofremittancestobe significantandtopositivelycontributetogrowth. Thisimpliesthatasremittances increase,theyhaveanincreasinglylargepositiveimpactongrowth,i.e.,thatthereis somesortofmultipliereffectatwork. Thisresultreinforcesthework ofGlytsos(2005) whohypothesizesandcalculatesaKeynesianmultiplierfortheeffectofremittanceson growth,throughvariouspathwaysconsumption,investment,imports,andincome. Thecoefficientofcredit(thatis,domesticcreditsuppliedbythebanking sector)isnegativeandsignificant,meaningthatgrowthishigherincountriesthathave 26

lessaccesstocredit. Thisappearstobecounterintuitiveandisinconsistentwiththe resultsofGiulianoandRuizArranz(2005)whofindthatdomesticcreditavailableisa goodproxyforfinancialdevelopmentandcontributestogrowth.Ifthecoefficientfor credithadswitchedsignsfromModelIItoModelIII,thenitcouldpossiblyreflecta crowdingouteffectofremittancesoncredit.However,becausethecoefficientofcredit remainsnearconstantinbothmagnitudeandsignificance,thisdoesnotappeartobe thecase.Thenegativecorrelationbetweencreditandgrowthisexploredingreater detailintheAppendix,whereitisbrokenapartbyyearandregion.Itappearstobe anotherartifactofthe1990sdebtcrisis. Grosscapitalformationhastheexpectedpositivesign,underliningthat countrieswithmorecapitalwillexperiencegreatergrowth.Inflationandpopulation growtharebothalsofoundtocontributenegativelytogrowth,whichisalsoas expected. Lookingattheinteractiontermsofremittancesandtheothervariablesin ModelsIIIandVsuggestsinterestingfeaturesofhowremittanceswork. The coefficientoncredittimesremittancesisnegativeandsignificant. Thiswouldsuggest thatremittanceshaveamorepositiveimpactongrowthincountrieswithlessaccessto credit.Remittancesmayserveasasubstituteforcreditwhenitisnotavailable.Thisis consistentwiththefindingsofGiulianoandRuizArranz(2005)although,as mentionedabove,thecoefficientoncreditaloneisnot. Thecoefficientongrosscapital formationtimesremittancesisalsonegativeandsignificant,suggestingthat 27

remittanceshaveamorepositiveimpactongrowthincountrieswithlowerlevelsof capital.Thisresultshowsthatremittancesplayadifferentroleincountrieswithgreater capital.Incountrieswithhighercapitallevels,remittancesarenotusedforinvestment inthewaythattheyappeartobein countrieswithlowercapitallevels.Finally,the interactiontermofinflationandremittancesisalsonegativeandsignificant,suggesting thatremittanceshavealargerimpactongrowthincountrieswithlowinflation.This couldbeduetothefactthatcountrieswithlowerinflationratesenjoyabetter investmentclimateandremittancesaremorelikelytobeinvestedinthatsetting.The dollarizationordualcurrencyeconomyinhighinflationeconomiesmayalsoimpact theeffectofremittancesongrowth,butlittleresearchhasbeendoneinthisarea. Theseresultsdifferquitesignificantlyfromotherstudiesofremittancesand development,namely Chamietal.(2005)andGiulianoandRuizArranz(2005).Inthe OLSregressionsof Chamietal.(2005), remittanceswerefoundtobeinsignificant, bothwithandwithoutregionaldummies.Including thequadratictermof remittances aswell,theyfoundthesquaredtermtobesignificantatthe10%levelwithanegative coefficient. Thelinearterm,whileinsignificant,hadapositivecoefficient. In subsequentOLSregressions,Chamietal.includeadifferencedtermforremittances (dlog)andfindittobesignificantandnegative. IntheOLSmodelof GiulianoandRuizArranz(2005),theyfindremittancesto beinsignificantincontributingtogrowth.Intheirnextsetofmodel,whichaddvarious measuresoffinancialdevelopment(creditbeingone)andaninteractiontermfor 28

remittancesandfinancialdevelopment, theyfindremittancestobesignificantandto positivelycontributetogrowth. Theyalsofindthat thecoefficientoncredit(alongwith theotherthreemeasuresoffinancialdevelopment)issignificantandpositive,whichis adeparturefromthenegativecoefficientoncredithere.(Forfurtherexplanationon thisissue,seetheAppendix.)Finally,theyfindthattheinteractiontermofremittances andcreditissignificantandnegative,indicatingthatremittanceshaveagreater contributiontogrowthincountrieswithlowlevelsoffinancialdevelopment.Their resultsareconsistentwiththefindingsofthispaper.
2 ThemodelspresentedherehaverelativelylowR values,reachingonlyabout 2 0.20.Theselowlevelsof R areconsistentwithotherliteratureinthefield,forChami 2 etal.(2005), R reached0.27andforGiulianoandRuizArranz(2005),itreached

0.36.HighervalueswouldbeobtainedwiththeinclusionofalaggedGDPvariable, butaddinglaggedGDPcreatesproblemswithautocorrelation. Theproblemofautocorrelationbiasarisesherewithmacroeconomicdataused incrosscountryanalysis.Becauseofthehighdegreeofserialcorrelationof macroeconomicdata,theerrortermsforeachcountryarelikelycorrelatedovertime. Todealwiththisproblem,fixedeffectsregressionsarerunbelow.Otherpossible sourcesofbiasarementionedbelowafterthefixedeffectsresultsarepresented.

29

Fixedeffectsestimation Table6presentstheresultsoffixedeffectsestimationofthesamedataset. The threemodelsconsideredcorrespondtothefirstthreemodelsinTable5andtheresults areconsistentinsignandsignificance,thoughgenerallythecoefficientsaresmaller. Table6:Remittancesandgrowth:Fixedeffectscrosssectional estimation (19902005,152countries) I II III withinteraction Dependentvariable: terms Annualgrowthinreal GDPpercapita 0.714 0.286 1.127 Constant Remittances (asapercentageofGDP) 2 Remittances Credit (asapercentageofGDP) Credit*remittances Grosscapitalformation (asapercentageofGDP) Grosscapitalformation* remittances Inflation(annualgrowth inconsumerprices) Inflation*remittances Populationgrowth (annualpercentage) numberofobservations 2 R 2 AdjustedR DurbinWatsonstatistic
(1.26) 19.550*** (5.43) (0.33) 5.583 (1.33) (1.22) 21.867** (2.42) 49.027*** (3.30) 0.044*** (5.13) 0.173* (1.91) 0.250*** (8.80) 0.853*** (4.04) 0.0015*** (3.45) 0.00088* (1.65) 0.191** (2.27) 0.393*** (2.92)

0.052*** (6.29)

0.202*** (7.72)

0.462*** (3.42)

1,621 1,409 1,409 0.2466 0.3441 0.3604 0.1720 0.2729 0.2886 1.933 1.899 2.099 Note:Valueof tstatisticsinparentheses*significantat10percent**significantat5percent ***significantat1percent.

30

TheoneexceptiontothecoefficientsbeingsmallerisinModelI,whichregressesonly remittancesagainstgrowth. Thecoefficientissignificant,positive,andaboutfour timeslargerinthefixedeffectsregression,comparedtotheOLSregression. AsintheOLSregression,remittancesarenotfoundtobesignificantinthe linearmodel.Thesigns,significance,andmagnitudeofthecoefficientssuggestthe sameinterpretationspresentedwiththeOLSregressionsabove.Thefixedeffects regression,byconsideringeachcountryseparately,doesaddresspossible autocorrelationproblems.TheDurbinWatsonstatisticspresentedinTable6indicate thatthereisnoautocorrelationpresentintheseregressions. ComparingthesemodelstothefixedeffectsmodelsofChamietal.(2005)and GiulianoandRuizArranz(2005),severalnotabledifferencesagainarise.Chamietal. includeonlythedifferencedremittancestermintheirfixedeffectsregressionsandfind ittobenegativeandsignificant,thoughsmallerinmagnitudethanintheOLS regressions.AsintheirOLSregression,GiulianoandRuizArranzfindtheremittance termintheirfixedeffectsregressiontobepositivebutinsignificant.Theydonot performthesubsequentregressionincludingtheinteractionofremittancesandcredit withthefixedeffectmodel.
2 AsintheOLSmodelsabove,thefixedeffectsregressionsalsoexhibitlowR

values.Forthesefixedeffectsregressions,theyrangeupto0.36. Forcomparison,the
2 highestR valuesobtainedinthefixedeffectsregressionsby Chami etal.(2005)and

31

2 GiulianoandRuizArranz(2005)were0.39and0.68respectively.HigherR couldbe

obtainedwiththeinclusionofothervariablesdiscussedbelow.

Severalvariablesweretestedintheseregressions,bothOLSandfixedeffects, butfoundtobeinsignificantandexcluded.Theseincludethepercentageofarableland andpopulationdensity,asindicatorsoffactorsofproductionimportsplusexports (bothasapercentages ofGDP),asusedinthemodelsof GiulianoandRuizArranz (2005) andforeigndirectinvestment(asapercentageofGDP),anotherinternational capitalflowandpossibledriverofgrowth.Othervariablesofinterest,butwithlimited availability forasufficientlylargeportionofthesampleonanannualbasis,included fiscalbalance(i.e.,governmentsurplus)andhumancapital.Studiesintheliterature (GiulianoandRuizArranz,2005AdamsandPage,2005)usethesevariablesas indictorsofthebasicmacroeconomicrelationshipandtheeffectofeducationon investment.Theexclusionofthesevariablesraisesthepossibilityofomittedvariable bias.Inthecaseofhumancapital,thislikelyleadstoapositivebiasinthecoefficient onremittancesbecausehighlevelsofhumancapitalareassociatedbothwithhigher levelsofgrowthandwithhigherlevelsofmigrationandremittancesending.Thebias causedbytheomissionoffiscalbalanceislikelytobedownward,understatingthe impactofremittancesongrowth. Thereisgenerallyapositivecorrelationbetween fiscalbalanceandgrowth,butassuming,asChamietal.(2005)do,thatremittancesare countercyclical,theywillbelowerwhenfiscalbalanceishigher. 32

Anotherpotentialsourceofbiasintheresultsistheendogeneityofremittances. Remittancesareverystableovertime,and,asmentionedabove,oftenassumedtobe countercyclical.AsseeninTable9intheAppendix,thereisanegativecorrelation betweenremittancesandrealGDPpercapita.Becauseofthisendogeneity,thepositive impactofremittancesestimatedhereislikelyunderstated.

Regionalbreakdown(usingOLSandfixedeffects) AlthoughtheresultsinTables5and6presentapositiveandconvincingview ofremittances,thecaseisweakerwhentheregionsareconsideredseparately.Tables7 and8presenttheresultsofOLSandfixedeffectregressionsrespectivelywhereeach regionisconsideredinitsownmodel.ThemodelestimatedcorrespondstoModelIII inTables5and6,containingremittancessquaredandallinteractionterms.IntheOLS estimationsin Table7,remittancesandremittancessquared,alongwithmostofthe interactionterms,losealloftheirsignificance.Thevariationingrowthisexplained mostlybygrosscapitalformation,alongwithcredit,inflation,andpopulationgrowth toalesserdegree. Althoughboththelinearandquadratictermsofremittancesarelargely insignificantinthesemodels,itisinterestingtonotethevariationsinsignacrossthe regions.InEastAsiaandthePacificandtheMiddleEastandNorthAfrica,bothterms havepositivesigns,suggestingthatthepositiveimpactofremittancesongrowth increasesasremittancesrise.InEuropeandCentralAsia,LatinAmerica,andSouth 33

Asia,despitethelackofsignificance,thelineartermofremittanceshasapositivesign andthequadratictermhasanegativesign,suggestingthatthereisanoptimallevelof remittances,abovewhichtheynolongercontributetogrowth.Finally,inSubSaharan Africa,bothremittancesandremittancessquaredhavenegativecoefficients, suggestingthatremittancesaredetrimentaltogrowthinthisregion. Table7:Remittancesandgrowth:OLScrosssectional estimationbyregion (19902005)

Dependentvariable: Annualgrowthinreal GDPpercapita Constant
EastAsia and Pacific Europe and Central Asia
0.321 (0.19) 62.996 (1.45) 9.702 (0.11) 0.048*** (2.67) 0.217 (0.47) 0.268*** (3.99) 1.960 (1.16) 0.019*** (5.18) 0.639*** (3.00) 0.725** (2..30)

Latin America

Middle SouthAsia Sub Eastand Saharan North Africa Africa

2.043 (0.98) 41.841* (1.68) 21.077 (0.58) 0.003 (0.14) 0.240 (1.64) 0.070 (0.94) 0.818 (1.02) 0.048 (1.04) 0.027 (0.11) 0.731** (2.33) 3.262 (0.96) 37.373 (0.36) 756.713 (1.54) 0.063 (1.21) 1.579 (0.93) 0.345*** (4.09) 1.188 (0.43) 0.038 (0.53) 0.811 (0.39) 0.145 (0.41) 0.478 (0.47) 8.607 (0.64) 8.569 (0.32) 0.026*** (2.84) 0.337** (1.96) 0.164*** (4.17) 0.033 (0.08) 0.001 (1.09) 0.210 (0.56) 0.422*** (2.41)

0.289 (0.15) 13.589 Remittances(asa (0.32) percentageofGDP) 2 0.452 Remittances (0.01) Credit(asapercentageof 0.020 (1.51) GDP) 0.096 Credit*remittances (0.17) 0.291*** Grosscapitalformation (asapercentageofGDP) (5.04) Grosscapitalformation* 1.390 (0.97) remittances 0.221*** Inflation(annualgrowth (3.13) inconsumerprices) 0.560 Inflation*remittances (0.23) 1.043** Populationgrowth (1.90) (annualpercentage)

0.239 (0.25) 10.777 (0.51) 53.558 (0.74) 0.012 (1.60) 0.060 (0.27) 0.111*** (3.36) 0.378 (0.56) 0.000 (0.44) 0.248 (1.15) 0.388* (1.78)

numberofcountries 14 22 29 11 6 37 numberofobservations 144 237 397 135 79 417 2 R 0.2989 0.2993 0.0844 0.3974 0.3865 0.1028 2 AdjustedR 0.2518 0.2715 0.0631 0.3540 0.3065 0.0830 Note:Valueof tstatisticsinparentheses*significantat10percent**significantat5percent ***significantat1percent.

34

Anoteofcautionisnecessaryfortheseregressions.Breakingthedataapartby regioninthiswayleadstoverysmallsamplesizes,rangingfrom79observationsin SouthAsiato417inSubSaharanAfrica.Althoughtheyformaninterestingpointof comparison,theydonotofferasmuchstatisticalsignificanceastheworldwidecross countryregressionspresentedabove. InthefixedeffectsestimationsinTable8,remittancesaresignificantinEurope andCentralAsia,LatinAmerica,andtheMiddleEastandNorthAfrica.Allofthese regionsfindapositiveimpactofremittancesongrowth.Remittancessquaredare significantinEastAsiaandthePacificandEuropeandCentralAsia,althoughtheyare negativeintheformerandpositiveinthelatter. Theimpactofremittancesongrowthbyregionismarkedlydifferentforthese fixedeffectsregressionsthanfortheOLSregressionsabove.Again,puttingasidethe issueofstatisticalsignificance,theregionof EuropeandCentralAsiaistheonly one thathasbothcoefficientspositive,leadingtothemultipliereffectofremittanceson growth seenintheworldwideanalysis.LatinAmericaandtheMiddleEastandNorth Africahavepositivecoefficientsonthelinearterm,butnegativecoefficientsonthe quadraticterm,which showsthatremittancesinitiallycontributetogrowth,butat higherlevelsinhibitgrowth.EastAsiaandthePacificandSouthAsia,havenegative coefficientsonbothterms,meaningthatremittancesinhibitgrowthinallcases. Finally,SubSaharanAfricahasanegativecoefficientonthelineartermandapositive

35

coefficientonthequadraticterm,asituationwhereremittancesaredetrimentalto growthatlowlevelsandcontributetogrowthathigherlevels. Table8:Remittancesandgrowth:Fixedeffectscrosssectional estimationby region(19902005) Dependentvariable: Annualgrowthinreal GDPpercapita

Constant EastAsia and Pacific Europe and Central Asia Latin America Middle SouthAsia Sub Eastand Saharan North Africa Africa

1.646 3.979 1.227 1.184 4.137 0.176 (0.22) (0.89) (0.76) (0.23) (1.00) (0.10) 44.069 93.909* 63.481* 128.024** 81.516 33.045 Remittances(asa (0.68) (1.90) (1.80) (2.03) (0.61) (1.54) percentageofGDP) 2 224.653** 375.730*** 134.939 93.623 913.565 47.416 Remittances (2.39) (2.79) (1.58) (0.93) (1.17) (1.18) 0.015 0.020 0.153** 0.078*** Credit(asapercentageof 0.088*** 0.031 (2.93) (1.03) (1.33) (0.45) (2.28) (3.57) GDP) 1.858** 2.366** 0.532* 0.518 3.680 0.113 Credit*remittances (2.25) (2.11) (1.76) (1.49) (1.80) (0.34) 0.241*** 0.262*** 0.263*** 0.147 0.245* 0.206*** Grosscapitalformation (3.16) (3.12) (5.08) (1.11) (1.71) (3.26) (asapercentageof GDP) 0.050 4.312** 0.467 1.970* 0.504 0.143 Grosscapitalformation* (0.03) (2.52) (0.51) (1.69) (0.12) (0.29) remittances 0.245*** 0.020*** 0.001 0.112 0.001 0.018 Inflation(annualgrowth (3.66) (5.47) (1.10) (1.09) (0.01) (0.75) inconsumerprices) 4.329* 0.586*** 0.162 0.015 0.325 0.042 Inflation*remittances (1.76) (2.63) (0.77) (0.04) (0.09) (0.09) 0.372 0.135 1.056*** 0.929* 0.076 0.330* Populationgrowth (0.12) (0.27) (2.80) (1.84) (0.15) (1.77) (annualpercentage) numberofcountries 14 22 29 11 6 37 numberofobservations 144 237 397 135 79 417 2 R 0.6723 0.5348 0.3352 0.5147 0.5923 0.2707 2 AdjustedR 0.5579 0.4253 0.2347 0.3562 0.3640 0.1478 Note:Valueof tstatisticsinparentheses*significantat10percent**significantat5percent ***significantat1percent.

Soalthoughremittancesarefoundtopositivelycontributetogrowthatan increasingrate,thisresultisnotrobusttoconsiderationoftheregionsseparately. However,theworldwideOLSandfixedeffectsregressionsontheirownpainta strongandconsistentpictureofhowremittancesinteractwiththenationaleconomy. 36

Theyaddtogrowthinanabsolutesensewitheverincreasingreturns.Theirimpactis strongestincountrieswithlowlevelsofdomesticcreditavailable,lowlevelsofcapital formation,andlowlevelsofinflation. Thisstudydrawsfromandbuildsonpreviousstudies,butprovidesamore robustanalysisforseveral reasons.Byemployingrecentdata,goingbackonlyasfaras 1990, theremittancefiguresaremoreaccurate.Asremittancesendingfeeshavebeen fallingovertime,moremoneyisbeingsentthroughofficialchannelsandglobal financialtrackingprogramsaregettingbetteratdeterminingthecapitalflowsaround theworld.Othermajoradvantagesofthemodelspresentedherearetheinclusionof numerousinteractionterms,which allowagreaterunderstandingofhowremittances andgrowthinteractindifferingeconomicsituations,andtheinclusionofthequadratic termforremittances,whichallowstheimpactofremittancestovarywiththeirrelative sizeintheeconomy.

37

Chapter6. ConclusionsandPolicyRecommendations
Thisstudyhascontributedtotheliteratureonremittancesanddevelopment withamodelthataccountsfortheincreasingreliabilityofremittancedatainrecent yearsandthatallowsforvariationintheimpactofremittancesbyseveral macroeconomicfactors. Theresultssuggestthatremittanceshaveapositiveimpacton growthandthatthisimpactbecomesevenstrongerathigherlevelsofremittances relativetoGDP.Additionally,remittancesarefoundtohaveamorepositiveimpactin countrieswithcertaincharacteristics:lowdomesticcreditavailable,lowcapital formation,andlowinflation.Furtherstudybothonthemicroandmacrolevelsshould investigatethepathwaysthroughwhichremittancespromoteeconomicgrowth,e.g.,by fundingimportsthatcanpromoteefficiencyandmakeinvestmentmoreprofitable (Glytsos,2005). Theconclusionsofthisresearchprojectcan helptoinformseverallevelsof policythatcouldencourageeconomicgrowthindevelopingcountries.Sincehigher levelsof remittancesarefoundtoleadtoacceleratedeconomicgrowth,thestudy providesjustificationforthepolicyrecommendationsmentionedintheliterature (Kapur,2004Sriskandarajah,2005Terry&Wilson,2005Brown,2006 Orozco& Fedewa,2006),whichincludepoliciestoencouragemigrationandremittances (loweringthecostsofsendingremittances,makinginternationallabormarketsmore flexible,promotingcircularmigration,andencouragingcollectiveremittances)and 38

policiestohelpthoseremittancesbecomemoreeconomicallyproductive(providing bankingservicesforunbankedremittancesendersandreceiversandproviding investmentandmicroenterpriseopportunitiesfortheremittancemonies). Butthepolicyimplicationsofthisstudygoevenfurther,sinceinformationis obtainedonthebehaviorofremittancesinvariousmacroeconomiccontexts. Remittancesappeartofosterthemostgrowthincountriesthathavelowerlevelsof creditavailable,lowerlevelsofcapitalformation,andlowerlevelsofinflation.This informationcouldbeusedbyinternationalorganizationsordonoragenciesto concentratetheirremittanceanddevelopmentprojects on countriesfittingthisprofile, inordertoproducethelargestpositiveeffecton growth,ortocoupletheirworkon remittanceswitheffortstocontrolinflation.Onacountrylevel,theseresultscanbe usedtohelpformamacroeconomiccontextthatwillbethemostreceptiveto remittancesfosteringeconomicgrowth.Althoughcountrieswouldunderstandably be hesitanttolimitingcreditorrestrictcapitalformation, thecentralbanksrolein controllinginflationbecomesobviouslyimportant,knowingthatdoingsocanhelp remittancestobecomemoreeconomicallyproductiveinthatenvironment.Intimethe economicgrowthstimulatedbytheseremittancesmayhelpcreateasituationwhere familiesnolongerneedtobedividedbycontinentsornationalbordersinordertofind productiveworkandsupportoneanother.Thisgrowthstimulatingaspectof remittancesandmigrationshouldnotbeignoredinthecurrentpoliticaldebatesabout 39

immigrationindevelopedcountries.Thepotentialforeconomicgrowthandpoverty reductionindevelopingcountriesmustbeconsideredamongthecomplexsetofissues involvedintheformulationofimmigrationpolicy.

40

Appendix:Correlationsbetweenvariables
Thisappendix examinescorrelationsbetweenthedependentandindependent variablesofinterest,concentratingonremittances(themainvariableofinterest)and credit. Thefocusoncreditarisesbecausethereisanegativecoefficientoncreditin boththeOLSandfixedeffectsmodels,contraryto thetheorythatcreditconstraints canrestrictgrowthandcontraryto thefindingsof GiulianoandRuizArranz(2005). Table9:Correlationsbetweenremittances,credit,andothervariables
remittances (asapercentageofGDP) correlation probabilityof coefficient significance credit (asapercentageofGDP) correlation probabilityof coefficient significance

Variable Annualgrowthinreal GDPpercapita Credit (asapercentage ofGDP) Remittances (asapercentageofGDP) Grosscapitalformation (asapercentageofGDP) Inflation(annualgrowthin consumerprices) Populationgrowth (annualpercentage)

0.06661 0.02671 1.0000 0.26013 0.03695 0.00608

0.0073 0.2748

0.04761 1.0000 0.02671

0.0331

0.2748 <0.0001 0.4958 0.3895

<0.0001 0.1426 0.8006

0.10765 0.01551 0.01853

Table9showscorrelationsbetweenremittancesandcreditandalloftheother variablesinthemodel.Tables10and11breakapartthiscorrelationbyyearandregion respectively.Consideredinthismanner,thenegativecorrelationbetweencreditand growthappearsonlyinsomeyears(19901995and20002005)andonly insome regions(EuropeandCentralAsia,theMiddleEastandNorthAfrica,andSubSaharan 41

Africa).Thus,thedifferencebetweentheseresultsandthoseof GiulianoandRuiz Arranzlikelyresultfromthedifferencesincountriesandyearsconsidered.

Table10:Correlationbetween credit(asapercentageofGDP) and annualgrowth inrealGDPpercapita,byyear correlation coefficient 0.09548 0.33082 0.24093 0.21914 0.16586 0.12343 0.07875 0.59327 0.04536 0.01855 0.02463 0.15533 0.12685 0.31574 0.05798 0.14607 probabilityof significance 0.3472 0.0002 0.0129 0.0208 0.0656 0.1618 0.3713 <0.0001 0.6041 0.8335 0.7775 0.0731 0.1457 0.0002 0.5123 0.1114 numberof observations 99 122 106 111 124 130 131 132 133 131 134 134 133 133 130 120

Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Table11:Correlationbetween credit(asapercentageofGDP) and annualgrowth inrealGDPpercapita,byregion correlation coefficient 0.20186 0.12557 0.00841 0.12947 0.01330 0.07420 probabilityof significance 0.0017 0.0238 0.8566 0.0841 0.8955 0.0501 numberof observations 238 324 464 179 100 698

region EastAsiaandPacific EuropeandCentralAsia LatinAmerica MiddleEastandNorthAfrica SouthAsia SubSaharanAfrica

42

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