Close to Home: The development impact of remittances in Latin America

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Close to Home The development impact of
remittances in Latin America
Pablo Fajnzylber and Humberto Lopez
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Close to Home The development impact of
remittances in Latin America

• Colaborative effort of a large team
• Pablo Acosta
• Cesar Calderon
• Massimo Cirasino
• Mario Guadamillas
• Yira Mascaro
• Maria Soledad Martinez
• Luis Molina
• Florencia Moizeszowicz
• Caglar Ozden
• Pedro Olinto
• Emmanuel Salinas

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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

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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)

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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.

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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

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I. Stylized Facts
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Remittances to LAC have increased dramatically
over the past 25 years
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LAC is the top remittances recipient region in
the World (US billion)

• () 2005 data.

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Remittances are very large in comparison with
other international financial flows

• () 2004 data.

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Remittances above 10 of GDP in 7 LAC countries
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In several countries more than 1 in
every 10 families receives remittances...
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Large cross country heterogeneity in
socio-economic status of recipients
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II. Development Impact
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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)

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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

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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

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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

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Remittances also raise school enrollment rates
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and improve health indicators.
Nicaragua (weight and height for age)
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III. Costs and Challenges
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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

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economic costs
Potential GDP loses associated to migration flows
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Brain Drain (Share of College Graduates who
migrated)
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And challenges, like reductions in labor force
participation...
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Exchange Rate Effects
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Impact of remittances on Bank deposits and credit
is lower in LAC
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Fees have declined (cost of sending US300 to
MX)
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but they are only one component of the cost
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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

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IV. Conclusions
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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

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Close to Home The development impact of
remittances in Latin America
Pablo Fajnzylber and Humberto Lopez