1

Are Bilateral Are Bilateral Remittances Remittances

Countercyclical? Countercyclical? Implications for Dutch Disease and Implications for Dutch Disease and

Currency UnionsCurrency Unions

Jeffrey FrankelJeffrey FrankelHarpel Professor, Harvard Kennedy School, and CIDHarpel Professor, Harvard Kennedy School, and CID

Presented May 26, 2009, at a panel on Presented May 26, 2009, at a panel on “Macroeconomic Impacts of Migration and “Macroeconomic Impacts of Migration and

Remittances,”Remittances,” at conference on at conference on Immigration and Global Immigration and Global

Development: Research Lessons Development: Research Lessons on How Immigration and Remittances Affect on How Immigration and Remittances Affect

Prosperity Around the WorldProsperity Around the World,,co-hosted by Center for International Development at co-hosted by Center for International Development at

Harvard University Harvard University and the Center for Global Development in Washington DC.and the Center for Global Development in Washington DC.

2

Importance of Importance of remittancesremittances

• Total recorded workers’ remittances received Total recorded workers’ remittances received by developing countries increased 73% by developing countries increased 73% between 2001 and 2005, reaching a total of between 2001 and 2005, reaching a total of $167 billion.$167 billion.

• They have grown more rapidly than private They have grown more rapidly than private capital flows, or official development statistics. capital flows, or official development statistics.

• They constitute more than 15% of GDP in They constitute more than 15% of GDP in Tonga, Moldova, Lesotho, Haiti, Bosnia, Tonga, Moldova, Lesotho, Haiti, Bosnia, Jordan, Jamaica, Serbia, El Salvador and Jordan, Jamaica, Serbia, El Salvador and Honduras. Honduras.

• Until recently, macroeconomic aspects of Until recently, macroeconomic aspects of remittances have been even more neglected remittances have been even more neglected than the economic study of migration in than the economic study of migration in general.general.

3

Hypothesis: Remittances can Hypothesis: Remittances can play play

the stabilizing role that the stabilizing role that capital flowscapital flows

are in theory supposed to playare in theory supposed to play• In theory, In theory, capital flowscapital flows should should bring a variety of benefitsbring a variety of benefits: : – smoothing short-term income smoothing short-term income

disturbances,disturbances,– financing high-return investment financing high-return investment

opportunities in low K/L countriesopportunities in low K/L countries•and so substituting for labor flows to and so substituting for labor flows to

high K/L countries or factor-based trade, high K/L countries or factor-based trade, – and disciplining policies and and disciplining policies and

institutions in the recipient country.institutions in the recipient country.

4

•In practice, however, capital flows fail In practice, however, capital flows fail to deliver on this promise:to deliver on this promise:– Rather, private capital flows are often Rather, private capital flows are often

procyclicalprocyclical::

• pouring in during boom times and disappearing in pouring in during boom times and disappearing in recessions. recessions.

• Commodity-producer procyclicality: part of the Dutch Commodity-producer procyclicality: part of the Dutch Disease. Disease.

– Rather than flowing on average from high K/L Rather than flowing on average from high K/L countries to low, capital often “flows uphill.”countries to low, capital often “flows uphill.”

– Rather than rewarding countries that follow Rather than rewarding countries that follow sound economic policies, financial markets sound economic policies, financial markets often abet irresponsible budget deficits, often abet irresponsible budget deficits, • including among autocratic and kleptocratic rulers.including among autocratic and kleptocratic rulers.

5

3 cycles of net private capital flows

to emerging markets, by regionpeaking in 1982, 1997 and 2008

Source: Capital Flows to Emerging Market Economies, IIF, 1/27/09.

6

Brief summaryBrief summaryof remittances literatureof remittances literature

•(1) Theory(1) Theory

– Rapoport & Docquier (2005) review Rapoport & Docquier (2005) review the New Economics of Labor the New Economics of Labor Migration.Migration.

– In theory, emigrants’ decisions to In theory, emigrants’ decisions to send remittances should be based on send remittances should be based on intertemporal optimization, usually intertemporal optimization, usually with a household utility function.with a household utility function.

7

(2) Bilateral Data(2) Bilateral Data – Ratha & Shaw (2005), in the absence of hard Ratha & Shaw (2005), in the absence of hard

bilateral data, allocate the totals across bilateral data, allocate the totals across partners.partners.

– Schiopu & Siegfried (2006) create bilateral Schiopu & Siegfried (2006) create bilateral data set between some EU countries & data set between some EU countries & neighbors.neighbors.

– Jiménez-Martin, Jorgensen, and Labeaga Jiménez-Martin, Jorgensen, and Labeaga (2007) estimate bilateral workers’ remittance (2007) estimate bilateral workers’ remittance flows from all 27 members of the EU, to flows from all 27 members of the EU, to recipient countries. recipient countries.

– Lueth & Ruiz-Arranz of IMF (2006, 2008) the Lueth & Ruiz-Arranz of IMF (2006, 2008) the largest known bilateral data set to date.largest known bilateral data set to date.

– IDB has data on bilateral remittances from US IDB has data on bilateral remittances from US to countries, esp., in the Central American to countries, esp., in the Central American region.region.

8

(3) Evidence on cyclicality(3) Evidence on cyclicality– World Bank World Bank (2006)(2006): : p.c. remittances respond p.c. remittances respond

significantly to p.c. income in the home countrysignificantly to p.c. income in the home country..– Clarke & Wallstein Clarke & Wallstein (2004)(2004) and Yang and Yang (2007)(2007)::

remittance receipts rise in response to natural disasterremittance receipts rise in response to natural disaster. .

– Kapur Kapur (2003)(2003): : they rise in response to economic they rise in response to economic downturn.downturn.

– Lake Lake (2006)(2006): : remittances into Jamaica respond to the remittances into Jamaica respond to the difference between US and Jamaican incomedifference between US and Jamaican income..

– Yang & Choi Yang & Choi (2007)(2007): : they respond to rainfall-induced economic fluctuationsthey respond to rainfall-induced economic fluctuations..

– IMF finds less countercyclicality.IMF finds less countercyclicality.•SayanSayan (2006(2006) : 12-developing-country study finds none.) : 12-developing-country study finds none.•Lueth & Ruiz-ArranzLueth & Ruiz-Arranz (2006, 2008)(2006, 2008): similarly, : similarly,

proprocyclical.cyclical.

9

(4) Why does the question (4) Why does the question of remittance cyclicality of remittance cyclicality

matter?matter?• (i) It is especially important because (i) It is especially important because

governments in remittance-receiving governments in remittance-receiving countries often reflexively treat them as a countries often reflexively treat them as a source of foreign exchange to be source of foreign exchange to be “harnessed” for national development, “harnessed” for national development, – rather than letting recipients spend it on rather than letting recipients spend it on

“unproductive” uses such as imports of “unproductive” uses such as imports of consumer goods. consumer goods.

– This thinking is common even among This thinking is common even among benevolent governments, let alone the benevolent governments, let alone the rhetoric of kleptocracies. rhetoric of kleptocracies.

10

Applicability, Applicability, continuedcontinued

• (ii) The Dutch Disease.(ii) The Dutch Disease.– On the one hand, Martin (1990): On the one hand, Martin (1990):

steady flow of remittances can undermine the steady flow of remittances can undermine the incentive for governments to create a sound incentive for governments to create a sound institutional framework,institutional framework,– a sort of natural resource curse for – a sort of natural resource curse for remittances. remittances.

– Amuendo-Dorantes & Pozo (2004): Amuendo-Dorantes & Pozo (2004): a rise in remittances to LACA countries leads a rise in remittances to LACA countries leads to real appreciation, a prime symptom of Dutch to real appreciation, a prime symptom of Dutch Disease.Disease.

– On the other hand, Rajan & Subramanian On the other hand, Rajan & Subramanian (2005): although the Dutch Disease analogy (2005): although the Dutch Disease analogy does extend to foreign aid (leading to real does extend to foreign aid (leading to real appreciation & slow growth), it does appreciation & slow growth), it does notnot extend to remittances.extend to remittances.

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Applicability, Applicability, concludedconcluded• (iii) Optimum Currency Area criterion(iii) Optimum Currency Area criterion

– The OCA question:The OCA question:• For what countries do the benefits of adopting a For what countries do the benefits of adopting a

common currency outweigh the costs? common currency outweigh the costs? – e.g., facilitating trade & other international transactionse.g., facilitating trade & other international transactions– Vs. losing the freedom to run one’s own monetary policy.Vs. losing the freedom to run one’s own monetary policy.

– The textbook answer:The textbook answer:• A country with few asymmetric shocks, so it seldom A country with few asymmetric shocks, so it seldom

needs a monetary policy different from that of the needs a monetary policy different from that of the anchor country; oranchor country; or

• A country that has cushions against asymmetric A country that has cushions against asymmetric shocks: shocks: labor mobility, fiscal transfers, capital flows...labor mobility, fiscal transfers, capital flows...

– My claim: remittances belong on the list My claim: remittances belong on the list • assuming countercyclicality.assuming countercyclicality.

– Singer (2008): remittances are, and should be, Singer (2008): remittances are, and should be,

a determinant of the currency decision.a determinant of the currency decision.

12

Not all senders are Not all senders are industrialized countriesindustrialized countries

• Roughly 10 per cent come from developing Roughly 10 per cent come from developing countries. countries.

• South Africa, for example, receives many South Africa, for example, receives many immigrants from neighbors to work in its mines, immigrants from neighbors to work in its mines, farms, & factories, and sends remittances back to farms, & factories, and sends remittances back to the countries of origin. the countries of origin.

• In many Gulf countries, immigrants In many Gulf countries, immigrants (called ex-patriate (called ex-patriate

workers)workers) > than ½ of the private-sector labor > than ½ of the private-sector labor force. force. – For example, outward remittances from Saudi Arabia are For example, outward remittances from Saudi Arabia are

about 7% of all remittances globally .about 7% of all remittances globally .• (not included in the developing country statistic)(not included in the developing country statistic) . .

13

The hypothesis is that The hypothesis is that remittances respond not just remittances respond not just

inversely to income inversely to income in the receiving country, but in the receiving country, but

also positively to sending-also positively to sending-country income.country income.• One would need to control for sender-country One would need to control for sender-country

income even if only the coefficient of income even if only the coefficient of recipient-country income were of interest.recipient-country income were of interest.– It should be in the equation in theory.It should be in the equation in theory.– Omitting it in practice often produces the wrong Omitting it in practice often produces the wrong

sign.sign.

• But cyclicality with respect to sender-country But cyclicality with respect to sender-country income is also of interest in its own right:income is also of interest in its own right:

14

South Africa and the Gulf are South Africa and the Gulf are two places where the Dutch two places where the Dutch

Disease and OCA motivations Disease and OCA motivations are particularly relevant.are particularly relevant.

• When mineral proces are low, it is useful to When mineral proces are low, it is useful to South Africa to have the “unilateral South Africa to have the “unilateral transfers” deficit in the balance of transfers” deficit in the balance of payments automatically moderate.payments automatically moderate.

• When mineral prices are When mineral prices are high high (e.g. 2003-(e.g. 2003-

2008),2008), outward remittances provide a brake outward remittances provide a brake on reserve inflows and inflation – a on reserve inflows and inflation – a particularly important point in these two particularly important point in these two regions debating regional monetary unions.regions debating regional monetary unions.

15

My estimation of remittance My estimation of remittance cyclicality cyclicality

i) Table 1: The Lueth & Ruiz-Arranz i) Table 1: The Lueth & Ruiz-Arranz (IMF) bilateral data set(IMF) bilateral data set, , which includes 64 pairs of countries. which includes 64 pairs of countries. Cross-section covering 2005.Cross-section covering 2005.

ii) Table 2: LRA bilateral data setii) Table 2: LRA bilateral data set, ,

Panel study, covering 1979 to 2005 .Panel study, covering 1979 to 2005 .

iii) Table 3: Splicing of LRA data set with iii) Table 3: Splicing of LRA data set with the EU and Central American (IDB) the EU and Central American (IDB) data sets.data sets.

16

Country-pairs with high bilateral Country-pairs with high bilateral migration also, migration also,

of course, of course, tend to show high bilateral tend to show high bilateral remittancesremittances..

Remittances between included country pairs are around US$113.6 billion. Total of 540 observations: 266 for 2003 and 274 for 2004.

-10

-50

510

Re

mitta

nce

s

0 5 10 15Migration

ln_remittances Fitted values

Scatter Remittances Migration

17

Remittances per lagged migrant Remittances per lagged migrant are positively correlated with are positively correlated with

cyclical differentialcyclical differential0

.02

.04

.06

.08

Rem

itta

nces/M

igra

nts

20

00

-.15 -.1 -.05 0 .05Difference in cyclical position

remitt_migrants Fitted values

Remittances per Migrants and Difference in cyclical position

Sources: Western Hemisphere data: FOMIN & the Central Banks, data from 2003-2004;Jiménez-Martín, Jorgensen & Labeaga (2007). Data from 2003-2004;

Lueth & Ruiz-Arranz, IMF(2006); data from 2003-2004.

18

Table 1: Cross-section, Table 1: Cross-section, with LRA bilateral data setwith LRA bilateral data set

• Cross-section includes 64 pairs of countries, 2005.Cross-section includes 64 pairs of countries, 2005.• Lagged stock of migrants (in 2000) has highly significant Lagged stock of migrants (in 2000) has highly significant

effect on remittances, effect on remittances, as in Freund & Spataforaas in Freund & Spatafora (2005).(2005). • We also control for sender-country income per cap.We also control for sender-country income per cap.• The variable of interest is the difference in cyclical The variable of interest is the difference in cyclical

position between the sender country and the recipient position between the sender country and the recipient country. country. – In this table, cyclical position is computed as the (log) In this table, cyclical position is computed as the (log)

difference between GDP in 2005 and the long run trend value of difference between GDP in 2005 and the long run trend value of GDP. GDP.

– The estimated coefficient is positive and highly The estimated coefficient is positive and highly significant.significant. • The t-statistic is almost 4. The t-statistic is almost 4.

• Use of gravity IV for migrant stock makes little Use of gravity IV for migrant stock makes little difference.difference.

19

Table 1: Pure Cross-Section Data, 2005 Lueth & Ruiz-Arranz data set 64 observations

Dependent Variable:  Ln Remittances 2005 between Countries  (1) (2) (3)

Ln (Stock migrants 2000 ) 0.459*** 0.449*** 0.327**

(0.085) (0.0818) (0.126)

Cyclical Difference (Ln (Real GDP/ Trend GDP)) 57.585*** 67.909***

65.300***

sender country vs. recipient (15.875) (16.998) (17.335)

Sender GDP per capita 0.061*** 0.062**

(0.023) (0.024)Estimation Method OLS OLS 2SLS

R2 0.373 0.448 0.4259

20

Table 2: panel study with the Table 2: panel study with the LRA data LRA data

• 64 pairs of countries, 2005. 64 pairs of countries, 2005. 1979-2005 panel. • => 1200 or more observations=> 1200 or more observations

• Lagged stock of migrants replaced by its Lagged stock of migrants replaced by its determinants:determinants:

• geographical, historical, & cultural.geographical, historical, & cultural.

• Cyclical difference now captured by unemployment.Cyclical difference now captured by unemployment.

• 2(a) The estimated coefficient on 2(a) The estimated coefficient on uuss-u-urr is is negative, negative, as now hypothesized, and highly significant.as now hypothesized, and highly significant.

• The t-statistic is now 9.The t-statistic is now 9.

• 2(b) The same when applying fixed effects for 2(b) The same when applying fixed effects for countries or country-pairs.countries or country-pairs.

21

Table 2a: Panel Data, 1979-2005,  

with time effects & random effects Lueth & Ruiz-Arranz data

1200 observations R2=.414

Dependent variable: Ln Pair Remittances

Cyclical difference (unemployment rate) sender country relative to recipient -8.981*** (0.976)

Sender’s GDP per capita 0.026*** (0.007)

Colonial relationship? (0=never, ½ =post-1945, 1=always) 0.076 (1.007)

Islands ? (0 = neither, 1 = one of the pair, 2 = both) 0.570** (0.284)

Landlocked (0 = neither, 1 = one of the pair, 2 = both) -1.431*** (0.259)

Language (Dummy for common language) 0.575 (0.440)

Border (Dummy for land border) -0.547 (0.523)

Ln (Distance between I and j) -0.561*** (0.174)

Ln (Product Population i and j) 0.609*** (0.078)

22

Table 2b: Panel Data, 1979-2005, Lueth & Ruiz-Arranz data 1228 observations Dependent variable: Ln Remittances between country pairs

  (3) (4) (5)

Cyclical difference

(unemployment rate) -11.607*** -11.483*** -12.918*** sender country relative to recipient (1.125) (1.947) ( 1.976)

Sender’s GDP/cap 0.049*** 0.049*** 0.023

(0.006) (0.009) (0.017)

Ln (Product Population i and j) 2.963*** 3.017*** 1.209

(0.243) (0.400) (0.974)

Time Effects no no Yes

Random Effects no no No

Fixed Effects for Countries yes no No

Fixed Effects for Country Pair no yes Yes

R2 0.696 0.304 0.331

Constants not reported. Standard errors in parenthesis. Significance * 10% level, ** 5% level, & *** 1% level

23

Table 3: cross-section study Table 3: cross-section study (2003-04) with extended (2003-04) with extended

composite data set composite data set

• Approximately 330 bilateral observations.Approximately 330 bilateral observations.• Lagged stock of migrants (2000) .Lagged stock of migrants (2000) .• Cyclical difference again captured by GDP/trend.Cyclical difference again captured by GDP/trend.• The estimated coefficient >0 & highly The estimated coefficient >0 & highly

significant.significant.• So is the coefficient on currency union So is the coefficient on currency union

dummy.dummy.– under OLS, but not under IV.under OLS, but not under IV.– Causality is unclearCausality is unclear

Sources: Western Hemisphere data: FOMIN & the Central Banks;EU data: Jiménez-Martín, Jorgensen & Labeaga, EC (2007);

Lueth & Ruiz-Arranz, IMF(2006).

24

Table 3:  

Cross-Section, 2003-04; Composite data set

Dependent Variable: Ln Remittances between Countries

  (1) (2) (3)

Ln Stock migrants 2000 0.762*** 0.741*** 1.061***

(0.040) (0.041) (0.088)

Cyclical Difference Ln (Real GDP/ Trend) 16.199*** 16.099*** 14.723***

Sender relative to recipient (2.905) (2.765) (3.390)

Sender GDP per cap 0.039*** 0.028*

(0.015) (0.016)

Currency Union 1.345*** 0.087

(0.222) (0.389)

Estimation Method OLS OLS 2SLS

Instrumental variables

border/language/islands/colonial

Observations 331 328 328

R2 0.526 0.546 0.463

Statistical significance: * 10% level, ** 5% level, *** 1% levelThree sources of remittance data for 2003-04: Central America data; EU data; IMF data: Lueth & Ruiz-Arranz.

25

To summarize the findings,

• splicing together a larger bilateral data set from three data sets used by others,

• has allowed a moderately strong verdict on the question of cyclicality.

• It runs contrary to the analogy with capital flows /the Dutch Disease:

• Remittances respond positively to the cyclical position in the sending country and negatively to the cyclical position in the receiving country.

26

Policy implications• This counter-cyclical pattern is precisely what one

wants. – It suggests that emigrants’ remittances can play

some of the stabilizing role that capital flows often promise but seldom deliver.

• If the finding holds up under further investigation, it carries at least two specific policy implications. – First, it suggests governments should not try to

harness remittances in the name of national development, but rather should allow emigrants to transact freely.

– Second, it suggests that remittances belong on the list of Optimum Currency Area criteria, • along with trade, labor mobility, & transfers.

27

AcknowledgementsAcknowledgements

• I wish to thank Olga Romero for dedicated I wish to thank Olga Romero for dedicated research assistance; research assistance;

• Erik Lueth and Marta Ruiz-Arranz for Erik Lueth and Marta Ruiz-Arranz for generously making data available, generously making data available,

• Maurice Kugler & Hillel Rapoport for Maurice Kugler & Hillel Rapoport for comments; comments;

• and Robert Hildreth, and Robert Hildreth, the Center for International Development, the Center for International Development, and the MacArthur Foundation for support.and the MacArthur Foundation for support.

Jeffrey FrankelJames W. Harpel Professor of Capital Formation &

GrowthHarvard Kennedy School

http://ksghome.harvard.edu/~jfrankel/index.htm

Blog: http://content.ksg.harvard.edu/blog/jeff_frankels_weblog/

29

Appendix Figure 1a : Bilateral stock of migrants (normalized by populations),

versus remittances (normalized by GDPs)

02

.00e

-08

4.0

0e

-08

6.0

0e

-08

8.0

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-07

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itta

nces/(

GD

Pi*

GD

Pj)

0 .0005 .001Migration1990/(Popi*Popj)

Average Ratio Remittances/Income Fitted values

Migrants 1990 and Remittances

Sources: Central America data: FOMIN & the Central Banks. data from 2000-2007;Jiménez-Martín, Jorgensen, & Labeaga, (2007), data from 2000-2005;

Lueth. & Ruiz-Arranz (2006). Data from 1979-2005.

30

Appendix Figure 1b : Bilateral stock of migrants (normalized by populations),

versus remittances (normalized by GDPs)

Sources: Central America data: FOMIN & the Central Banks. data from 2000-2007;Jiménez-Martín, Jorgensen, & Labeaga, (2007), data from 2000-2005;

Lueth & Ruiz-Arranz (2006). Data from 1979-2005.

USABLZUSACRI

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0 .0005 .001Migration1990/(Popi*Popj)

Average Ratio Remittances/Income Fitted values

Migrants 1990 and Remittances

31

Appendix Table 2: IMF data setAppendix Table 2: IMF data set

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