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

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

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

LAC is the top remittances recipient region in the World (US$ billion) (*) 2005 data.

Remittances are very large in comparison with other international financial flows (*) 2004 data.

Remittances above 10% of GDP in 7 LAC countries…

In several countries more than 1 in every 10 families receives remittances...

Large cross country heterogeneity in socio-economic status of recipients…

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 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…

…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

…Brain Drain… (Share of College Graduates who migrated)

And challenges, like reductions in labor force participation...

Exchange Rate Effects

Impact of remittances on Bank deposits and credit is lower in LAC

Fees have declined… (cost of sending US$300 to MX)

…but they are only one component of the cost…

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: The development impact of remittances in Latin America Pablo Fajnzylber and Humberto Lopez