This chapter is based on work by K. Beaton, S. Cerovic, M. Gladamez, M. Hadzi-Vaskov, F. Loyola, Z. Koczan, B. Lissovolik, J.K. Martijn, Y. Ustyuogova, and J. Wong. For further details, see Beaton and others (2017).


Outward migration has been an important phenomenon for Central American economies. Emigrants account for almost 10 percent of the population for the seven nations in the CAPDR region. That compares with an average of 2 percent for emerging market and developing economies and 5 percent for countries in the wider Latin America and the Caribbean overall. Emigrants remit substantial funds, averaging about 8 percent of CAPDR’s GDP, to support family members back home. Remittances are now the most important external flow for Central America. Foreign direct investment and official aid pale in comparison (Figure 4.1). Given the importance of migration and remittances, this chapter examines their recent trends and costs and benefits to the countries in CAPDR. It focuses on three questions: Does the loss in population associated with emigration hurt economic growth? Do remittances compensate for this and function as engines of growth? Are remittances macroeconomic stabilizers? The analysis, largely based on the work of Beaton and others (2017), offers three key messages:

  • CAPDR emigrants are quite different from other Latin American emigrants in that their emigration has been almost exclusively in a South-North direction, primarily to the United States and historically fueled by civil wars and political instability, besides the search for better economic opportunities abroad.

  • The negative effect of emigration on CAPDR’s economic growth through the reduction in labor supply has been offset by the gains from remittances (through investment, education, and other commercial links).

  • Remittances have played an important role in stabilizing CAPDR’s macro-economic development. As the region’s most important source of external financing, remittances have provided resources to help adjust to economic shocks (such as natural disasters) and have boosted the fiscal space and financial sector soundness.

Figure 4.1.
Figure 4.1.

Central America: Remittances and Other Inflows

(Percent of GDP)

Sources: World Bank World Development Indicators, IMF Balance of Payments (BOP) Statistics and World Economic Outlook.Note: For convenience, references to Central America refer to the IMF subregion Central America, Panama, and the Dominican Republic (CAPDR). The Central American countries in this group are: Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. FDI = foreign direct investment.

Migration and Remittances at a Glance

The Emigration Experience

Emigration has been very important for CAPDR countries over the past decades. In the 1980s, civil wars, political instability, and the search for better economic opportunities abroad propelled a wave of emigration, particularly from the Northern Triangle. While conflicts subsided in the early 1990s, the deterioration in the security situation, prolonged political and economic instability, family reunification, and natural disasters drove another emigration wave in the 1990s and early 2000s.1 When Nicaragua, Honduras, and El Salvador suffered natural disasters in the late 1990s and early 2000s, immigrants from these countries in the United States were granted temporary protected status, contributing substantially to the flow.2 By 2005, the stock of CAPDR emigrants was equivalent to about 8 percent of the region’s population and had risen to just under 10 percent by 2015. While the stock of emigrants from the whole Latin American and the Caribbean (LAC) region is among the highest of world regions, at about 5 percent of the population, it is still much lower than that for CAPDR (Figure 4.2). Across CAPDR countries, there are important differences in the stock of emigrants: the number of Salvadoran emigrants, estimated at 24 percent of El Salvador’s population in 2015, dwarfs that of other CAPDR countries.

Figure 4.2.
Figure 4.2.

Central America Emigrants

Sources: United Nations Population Division; and IMF staff calculations.Note: CIS = Commonwealth of Independent States; LAC = Latin America and the Caribbean. Data labels in figure use International Organization for Standardization (ISO) country codes. For convenience, references to Central America refer to the IMF subregion Central America, Panama, and the Dominican Republic (CAPDR). The Central American countries in this group are: Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua.

Emigration from CAPDR has predominantly featured South-North migration to the United States. For the region as a whole about four-fifths of emigrants settle in the United States (compared to nearly all Mexican and about half of Caribbean emigrants). Intraregional migration is also prominent (Figure 4.3). For example, just under half of emigrants from Nicaragua reside in Costa Rica. Within CAPDR, Panama and the Dominican Republic have also received important inward migrant flows.

Figure 4.3.
Figure 4.3.

Latin American Countries with Significant Immigration and Emigration

Sources: United Nations Population Division and IMF staff calculations.

Who are these emigrants? Data from the American Community Survey provide a profile of CAPDR emigrants to the United States (Figure 4.4). Immigrants in the United States from CAPDR tend to have had less education than immigrants from the Caribbean and South America: about a quarter of CAPDR immigrants have a college education versus about two-thirds of Caribbean immigrants and one-half of South American immigrants. These differences are reflected in the occupations of CAPDR immigrants. Whereas immigrants from the Caribbean and South America tend to be employed in higher-skilled occupations (office and administration, sales, management, and health), those from CAPDR tend to work in lower-skilled jobs (construction, maintenance, transportation, production, and food preparation). CAPDR immigrants also earn less: their hourly wages average about two-thirds of those of immigrants from the Caribbean and South America (Figure 4.4, panel d). Immigrants from CAPDR, like those from Mexico, are also more likely to be undocumented, and much less likely to become US citizens than those from the Caribbean and South America.3

Figure 4.4.
Figure 4.4.

Central American Emigrants’ Educational Attainment, Occupations, and Wages

Sources: 2008 American Community Survey; Beaton and others (2017).Note: For convenience, references to Central America refer to the IMF subregion Central America, Panama, and the Dominican Republic (CAPDR). The Central American countries in this group are: Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. CAPDR = Central America, Panama, and the Dominican Republic; HS = high school.

Sizable Remittances

CAPDR emigrants have maintained strong connections with their home countries, sending home sizable remittances. Remittances reached 8 percent of regional output in 2016 (Figure 4.5). As a share of GDP, remittance flows to CAPDR countries are much larger than those to most other regions. In El Salvador and Honduras, remittances exceed 17 percent of GDP.

Figure 4.5.
Figure 4.5.

Remittances to Central America

Sources: World Bank and IMF World Economic Outlook.Note: For convenience, references to Central America refer to the IMF subregion Central America, Panama, and the Dominican Republic (CAPDR). The Central American countries in this group are: Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. CAPDR = Central America, Panama, and the Dominican Republic; CIS = Commonwealth of Independent States; LAC = Latin America and the Caribbean.

Remittances to CAPDR grew rapidly from the mid-1990s and peaked at 10 percent of regional output before the 2008 global financial crisis. With CAPDR emigrants primarily in the epicenter of the crisis—the United States— remittances fell dramatically during and in the years after. The slump was more precipitous than in other parts of the world and in other parts of LAC with more diversified emigrant destinations like the Caribbean. Why? It was because the industries in which CAPDR emigrants have traditionally been employed in the United States, such as construction and building maintenance, were those in which the output loss was concentrated. Emigrants were affected through job loss and lower wages, which limited the funds they were able to send to their families. Remittances have risen gradually in the decade since. However, despite a recent acceleration that may be linked to developments in immigration policy in the United States, they remain below the peak reached before the crisis.

CAPDR emigrants to the United States tend to remit more than other Latin American emigrants (Figure 4.6). More than 40 percent of CAPDR households remit, compared to only one-quarter of Caribbean households. CAPDR immigrants also remit more of their income on average, regardless of the size of their incomes, than Caribbean and South American immigrants. A potential driver for these differences is the fact that CAPDR immigrants tend to leave behind families at home when they emigrate, while Caribbean and South American emigrants tend to migrate with their families. For instance, Honduran emigrants may be sending relatively more remittances than Salvadoran emigrants because, on average, they have spent less time in the host country and maintain stronger connections with families at home.

Figure 4.6.
Figure 4.6.

Remittance Senders in the United States

Sources: 2008 American Community Survey and IMF staff estimates.Note: CAPDR = Central America, Panama and the Dominican Republic; CAR = Caribbean; MEX = Mexico; SOU = South America.

CAPDR benefits from a lower cost of transferring remittances than the rest of LAC, particularly the Caribbean (Figure 4.7). The cost of sending remittances to CAPDR is, on average, 5 percent, significantly lower than for the LAC region (5.8 percent) and the global average (7.2 percent). Countries within CAPDR that receive the most remittances, like dollarized economies, tend to benefit from a lower cost of remittances.4 Costs have declined significantly over the past few decades—for example, by about 40 percent for flows to El Salvador and Guatemala over 2001–15 (Orozco, Porras, and Yansura 2016). However, the decline has been less impressive than in sub-Saharan Africa, where the use of mobile money has lowered the cost dramatically. Banks are the most expensive channel for sending remittances, at 11 percent, followed by money transfer operators at 6.1 percent; mobile remittance service providers are a low-cost option, at about 5.2 percent, although they are not as widely available as traditional channels. The cost of remitting has recently come under upward pressure from the global withdrawal of correspondent banking relationships, even though some of these effects have been dampened by new technologies in regions such as Africa.5 The withdrawal of global banks from correspondent banking has disproportionately affected money transfer operators, given their greater challenges in meeting stringent standards for anti–money laundering and combating the financing of terrorism. According to a World Bank survey, global banks have closed correspondent bank accounts of money transfer operators, particularly smaller ones, on a widespread basis, curtailing their ability to send remittances (World Bank 2015). Local banks in some countries and regions have also faced challenges in maintaining their correspondent banking relationships. To date, these pressures appear to have been contained in CAPDR, with banks in these countries maintaining stable correspondent banking relationships. However, 60 percent of Asociación de Supervisores Bancarios de las Américas (Association of Supervisors of Banks in the Americas) members have reported that remittances to LAC have been affected by global trends in correspondent banking relationships.

Figure 4.7.
Figure 4.7.

Cost of Sending $200 in Remittances

Source: World Bank, Remittances Prices Worldwide.Note: CAPDR = Central America, Panama, and the Dominican Republic; JAM = Jamaica; GUY = Guyana; HTI = Haiti; BRA = Brazil; DOM = Dominican Republic; CRI = Costa Rica; PRY = Paraguay; COL = Colombia; SUR = Suriname; GTM = Guatemala; PAN = Panama; PER = Peru; MEX = Mexico; ECU = Ecuador; HND = Honduras; NIC = Nicaragua; BOL = Bolivia; SLV = El Salvador.

Estimating Impacts on Growth

Given the prevalence of outward migration from and high remittance inflows to CAPDR, a key question is whether the net effects benefit the home country. In theory, emigration and remittances can have opposite effects on growth. On the one hand, outward migration is likely to lower growth in migrants’ origin countries as the departure of working-age people reduces the labor force.6 This could be amplified if emigration is concentrated in highly skilled workers, leading to “brain drain” that reduces average productivity and limits the scope for innovation. Remittances may also restrict economic growth because they generate higher reservation wages as workers substitute labor income with the remittances they receive, leading to a decline in labor supply. On the other hand, remittances could fuel economic activity by providing financing for expenditure not easily funded by alternative sources. For example, remittances could facilitate physical and human capital accumulation by relaxing the tight financing constraints on investment and education that households and firms in emerging and developing countries commonly face.

Empirical analysis confirms the mixed results. Figure 4.8 presents the potential range of the estimated net cumulative joint impact of outward migration and remittances on growth for LAC groups over 2003–13.7 In line with the theoretical arguments highlighted above, the empirical analysis implies that the joint impact on growth is highly uncertain. In general, outward migration has a negative effect on growth, which is offset a little by the positive impact of remittances.8 While the joint impact for most groups is more likely to be negative, it seems more likely to be positive for the CAPDR region. Two factors likely contribute: (1) the relatively higher level of remittances received in CAPDR (Figure 4.5), and (2) the concentration of CAPDR migrants in low-skilled work compared to other regions (Figure 4.4), which suggests that brain drain is likely to be more limited for CAPDR. In contrast, the more noticeable negative joint effect in the Caribbean likely reflects the deeper brain drain experienced by many Caribbean islands. In sum, the results suggest that the CAPDR region could have gained as much 2 percent of GDP in cumulative growth over a decade because of the joint effect of remittance inflows and outward migration.

Figure 4.8.
Figure 4.8.

Net Effect of Migration and Remittances on GDP Growth, 2003–13 (Percent of GDP)

Source: Beaton and others (2017).Note: CAPDR = Central America, Panama, and the Dominican Republic; LAC = Latin America and the Caribbean.

The Stabilizing Role of Remittances

Over and above their stimulus to economic growth, remittances could stabilize macroeconomic conditions given that these flows have been the largest and most reliable source of external financing for CAPDR. Empirical analysis suggests that remittances have helped the region to cushion shocks by increasing fiscal revenues and supporting financial sector stability with little evidence of possible “Dutch disease effects” (Table 4.1). In a region vulnerable to natural disasters, remittances also appear to respond to them, increasing when a natural disaster hits as seen in Figure 4.9.

Table 4.1.

Macrostabilizing Effect of Remittances

article image
Source: IMF staff calculations.Note: CAPDR 5 Central America, Panama, and the Dominican Republic.
Figure 4.9.
Figure 4.9.

Remittances and Natural Disasters


Sources: Emergency Events Database and IMF staff calculations.Note: EMDE = emerging market and developing economies; LAC = Latin America and the Caribbean; SA = South America; CAPDR = Central America, Panama, and the Dominican Republic.

Remittances can help smooth consumption in the home country as emigrants send more money home to cushion economic shocks. For example, remittances increase when a natural disaster hits the remittance-recipient country, helping cushion the negative impact on its population (Figure 4.9). For CAPDR this effect is more pronounced than for South America or emerging markets in general, though somewhat less important than for the Caribbean, likely reflecting the magnitude of damage such events cause in the islands.

Remittances can also support stabilization through the fiscal accounts by raising revenue. While remittances typically are not taxed directly, remittances-supported consumption is part of the base for indirect taxation.9 Furthermore, remittances tend to support short-term output growth (at least in CAPDR) and, therefore, fiscal revenues. The associated increase in fiscal space, in turn, enhances the scope for stabilization through countercyclical fiscal policy. Empirical estimates suggest these effects are particularly relevant for CAPDR countries given their remittance inflows are large in relation to the size of their economies.10 For CAPDR, a 1 percentage point increase in the remittance-to-GDP ratio is associated with a 0.4 percentage point increase in the revenue-to-GDP ratio. Country-by-country regressions also confirm this positive relationship, with the impact of a 1 percentage point increase in the remittance-to-GDP ratio ranging from 0.2 to 0.8 percentage point.11,12 By contrast, remittances are not estimated to have a significant effect on revenue in most other regions of the world (particularly those that receive smaller remittance inflows). These estimates imply that, for example, the increase in the remittance-to-GDP ratio since 2000 in CAPDR accounted for a cumulative increase in fiscal revenue of 1 percent of GDP. Country regressions for CAPDR also suggest that the short-term effect of remittances on fiscal revenue is somewhat larger than the long-term effect, which is consistent with findings in Beaton and others (2017). In CAPDR higher remittances have also been associated with higher expenditures and insignificant effects on fiscal balances. This suggests that the revenue generated by remittances has helped create scope for the region’s additional spending.13

The robust growth of remittances in recent years has occurred alongside significant financial deepening. In this regard, remittances and financial sector development have interacted in a complex way. On one hand, financial sector advances have helped lower costs and facilitated an increase in remittances, and their transmission through formal channels. On the other hand, remittances have profoundly affected the financial sector, by altering bank business models in many countries and helping boost credit to the private sector.14

Remittances may also affect credit quality and financial stability. In theory, their impact on credit quality is ambiguous. While they can fuel excessive private credit growth, which can worsen credit quality, remittances can strengthen borrowers’ balance sheets and incomes—and hence their capacity to repay loans. Since remittances are relatively stable and can serve as collateral, other things equal, this decreases the riskiness of loans. Remittances can also help banks better know and discriminate among their clients, as banks often observe some of the remittance flows. Empirical estimates indicate that the positive effect of remittances on credit quality dominates, and is significant for CAPDR countries.15 Higher remittances are associated with lower nonperforming loans (NPLs). Based on the results in this chapter, a 1 percentage point increase in the remittances-to-GDP ratio for CAPDR would cause the NPL ratio to drop by almost 0.5 percentage point.16 It follows that the increase in the remittances-to-GDP ratio since 2000 has contributed to the area’s NPL ratio falling by 1 percentage point.

Although remittances support stability through the above channels, the benefits may be counteracted by risks to competitiveness. Remittance inflows boost household spending, which in turn puts pressure on nontradables prices and interest rates, leading to real exchange rate appreciation.17 The existing economic literature typically finds that remittances tend to appreciate the real exchange rate, though some studies do not detect such an effect or find it to be very small (Amuedo-Dorantes and Pozo 2004; Fajnzylber and Lopez 2008; Hassan and Holmes 2013; Izquierdo and Montiel 2006; Barajas and others 2010). The empirical analysis of Beaton and others (2017) points to a small but significant decline in the impact of remittances on the real effective exchange rate (REER) in CAPDR.18,19 A 1 percentage point increase in the remittances-to-GDP ratio is associated with a 6 percent appreciation of the REER based on estimates over 1980–2015 and 3.6 percent appreciation over 1995–2015. Incidentally, the effect of remittances on REER is insignificant in other LAC subgroupings. This reflects large leakages of remittance inflows through imports given the small size and relatively high openness of many countries.

An inflationary effect of remittances is one of the theoretical priors in the literature. This conclusion partly derives from the Dutch-disease effects, whereby the remittance-induced appreciation of the real exchange rate occurs by way of rising domestic prices. The extent of the effect would however depend on the exchange rate regime, with inflation effects in the fixed exchange-rate regimes likely to be particularly pronounced, because of an absence of a shock absorber that could adjust the relative prices between tradables and nontradables sectors more quickly.20 Results from Beaton and others (2017) confirm the existence of some remittance-induced inflation pressures for CAPDR countries as the lagged change in the remittances-to-GDP ratio is found to be associated with somewhat higher inflation.21 The results may be consistent with the prevalence of fixed or stabilized exchange rate regimes and limited credibility of monetary frameworks in many countries in these regions. That said, Beaton and others (2017) do not find a clear effect of a fixed exchange rate regime influencing the results.

The Perils of Dependence on Remittances

Extensive reliance on remittances can be risky, especially when most migrants reside in a single country—like CAPDR’s migrants concentrated in the United States. If a negative economic shock hits a host country and propels unemployment among migrant workers, a drop in remittances will amplify the negative spillovers to the home countries. Thus, for CAPDR emigrants, large shifts in the US economic cycle and policies could have far-reaching repercussions for the region.

Such repercussions occurred during the global financial crisis of 2007–09, when a 5 ½ percentage point rise in Hispanic unemployment in the United States was followed by a decline in remittances, with detrimental effects on incomes, external positions, and fiscal revenues in some CAPDR countries, particularly the Northern Triangle economies (Figure 4.10). CAPDR remittances as a share of GDP declined by more than 1 percentage point over the global financial crisis. Econometric estimates attribute most of this drop to the rise in Hispanic unemployment in the United States (Beaton and others 2017). The ratio of fiscal revenue to GDP also fell by more than 1 percentage point in 2008–10 compared with 2007, with about half of this decline explained by the contraction in remittance flows (Beaton and others 2017).

Shocks of a noneconomic nature, including major shifts in immigration, can also have important economic consequences for the recipient countries. There are three main channels through which shifts in US immigration policy affect CAPDR countries. First, a tighter deportation policy may have a particularly important effect on CAPDR, from which about two-thirds of US immigrants were estimated to be unauthorized in 2015.22 Second, the end of temporary protected status (TPS) for Salvadorans, Hondurans, and Nicaraguans will affect an estimated 200,000 Salvadorans, 90,000 Hondurans, and about 5,000 Nicaraguans and their families in the United States, contributing to an anticipated surge in return migration. Revocations have set terminations of TPS at January 5, 2019, for Nicaragua, September 9, 2019, for El Salvador, and January 5, 2020, for Honduras.23 Third, a continued political stalemate on the future of the Deferred Action for Childhood Arrivals (DACA) program, which was rescinded by President Trump in September 2017 but reinstated for existing beneficiaries in February 2018 following federal court orders would leave in flux the status of almost 70,000 undocumented immigrants from the Northern Triangle who entered the United States as children.24

Figure 4.10.
Figure 4.10.

US Hispanic Unemployment and Impact on Remittances, 2007–10


Quantifying the impact on home countries of a surge in return migration is subject to much uncertainty. Intensification of recent trends in deportations would likely reduce per capita GDP of CAPDR countries. The magnitude would depend on the skills composition of returning migrants and their integration into labor markets, the degree of average wage differentials with the United States, and effects on confidence and country risk premiums. For example, if return migrants are predominantly low-skilled, the impact on growth would likely be negative, but the return of high-skilled workers would be positive. On balance, the empirical estimates presented above suggest that the impact on CAPDR would be unequivocally negative. Using estimates from the empirical work to quantify the potential effect implicitly assumes that the effects of past migration apply in a symmetric manner to abrupt return migration and hence, that a significant share of the returning migrants would be employed in their home countries. The actual effects could be more negative, given the disruptive nature of a sudden increase in return migration, if economic conditions do not facilitate the absorption of these migrants into the labor force. Any increase in deportations, driven by any of the three factors mentioned above, would also propagate existing social challenges (for example, poverty and crime—see Chapter 6), particularly in the Northern Triangle.

Conclusions and Policy Priorities

Policies should aim to tilt the balance of the range of adverse and beneficial effects of emigration and remittances on CAPDR in a favorable direction. Remittances merit policy support given their key financing and stabilizing role for the region.

Policy measures should focus on reducing the cost of remittances and facilitating formal intermediation. Given recent challenges to correspondent banking relationships, strengthening anti–money laundering/combating the financing of terrorism frameworks can help improve the regulatory environment and keep formal financial channels open. Development and enhancement of payments systems (including through new solutions like mobile money) would help to foster competition for remittances service providers and lower the cost of remittances.

At the same time, policy support should help control risks arising from the region’s large dependence on remittances, including through measures that enhance financial sector resilience to volatility and potential sudden stops of remittances. Improvements in the business environment and strong institutions can help raise productivity and limit incentives for outward migration. Effective policies to improve the security situation, particularly in the Northern Triangle, will also be critical.


  • Amuedo-Dorantes, C., and S. Pozo. 2004. “Workers’ Remittances and the Real Exchange Rate: A Paradox of Gifts.” World Development 32(8): 1,40717.

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  • Barajas, A., R. Chami, D. Hakura, and P. Montiel. 2010. “Workers’ Remittances and the Equilibrium Real Exchange Rate: Theory and Evidence.” IMF Working Paper 10/287. International Monetary Fund, Washington, DC.

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  • Beaton K., S. Cerovic, M. Galdamez, M. Hadzi-Vaskov, F. Loyola, Z. Koczan, B. Lissovolik, J. Martijn, Y. Ustyugova, and J. Wong. “Migration and Remittances in Latin America and the Caribbean: Engines of Growth or Macroeconomic Stabilizers?IMF Working Paper 17/144. International Monetary Fund, Washington, DC.

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  • Ebeke, C., B. Loko, and A. Viseth. 2014. “Credit Quality in Developing Economies: Remittances to the Rescue?IMF Working Paper 14/144. International Monetary Fund, Washington, DC.

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  • Fajnzylber, P., and J.H. Lopez. 2008. Remittances and Development: Lessons from Latin America. Washington, DC: World Bank.

  • Hassan, G. M., and M.J. Holmes. 2013. “Remittances and the Real Effective Exchange Rate.” Applied Economics 45 (45), 495970.

  • Izquierdo, A., and P. Montiel. 2006. “Remittances and Equilibrium Real Exchange Rates in Six Central American Countries.” Williams College. Unpublished.

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  • Narayan, P., S. Narayan, and S. Mishra. 2011. “Do Remittances Induce Inflation? Fresh Evidence from Developing Countries.” Southern Economic Journal 77(4):914933, April 2011.

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  • Orozco, M., L. Porras, and J. Yansura. 2016. “The Costs of Sending Money to Latin America and the Caribbean.” Inter-American Dialogue, Washington.

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  • Ratha, D. 2017. “Why Taxing Remittances Is a Bad Idea.” https://blogs.worldbank.org/peoplemove/why-taxing-remittancse-bad-idea.

  • World Bank. 2015. Report on the G20 Survey on De-Risking in the Remittance Market. Washington, DC: World Bank.


There is evidence of family reunification for emigrants into the United States from CAPDR. Calculations based on data on LAC immigrants in the United States from the 2008 American Community Survey suggest that the proportion of households in which the head is married but the head’s spouse is absent declines with the age of the head of household. See Beaton and others (2017).


Honduras and Nicaragua first received TPS designation on January 5, 1999 on environmental disaster grounds, while El Salvador was granted TPS on March 9, 2001.


For more detail, see Beaton and others (2017).


The cost of sending remittances includes a transaction fee and a currency conversion fee. Dollarization eliminates the currency conversion portion of the cost.


A correspondent banking relationship is a bilateral arrangement between banks with one bank (the correspondent) providing services to another bank (the respondent). These arrangements are normally cross-border in nature involving multiple currencies.


While this is likely to be true on an aggregate level, it is not necessarily true for per capita growth as it depends on the relative productivity of migrants.


The range of estimates is based on coefficient estimates from country-specific fixed effects and instrumental variables regressions to mitigate estimation challenges posed by two-way causality between migration or remittances and economic performance. See Beaton and others (2017) for a detailed explanation.


Beaton and others (2017) presents detailed results about the impact of both migration and remittances on growth for the various country groups. Joint estimates in Figure 4.8 are based on these results.


The few countries that put taxes on remittances directly later repealed them. Examples include Vietnam, Tajikistan, and the Philippines. See Ratha (2017).


The main equation estimated with instrumental variables is yit = αi + βX + γZit where the dependent variable, yit, is the revenue/GDP ratio, αi, are country fixed effects, Xit, a vector of exogenous variables that includes the level of real GDP per capita, US real GDP growth, FDI as a share of GDP, the stock of emigrants as a share of the home population, and the share of the rural population, and Zit, is a vector of endogenous variables that includes remittances as a share of GDP and real per capita GDP growth, instrumented using regional averages, unemployment in the destination countries, and terms-of-trade changes. See Beaton and others (2017) for further details.


Country-by-country regressions were estimated with higher-frequency monthly and quarterly data to better pick up the nuances of specific countries, important given the heterogeneity across CAPDR in the extent of remittances received (for example, Panama and Costa Rica receive smaller remittance inflows than other countries of the region). Country-by-country regressions were not estimated for Panama and Costa Rica given data gaps.


Strictly speaking, elasticities are not computed the same way in the regional panel and individual country time series regressions due to the different unit measurement of the two sets of regressions (and the different time periods). In this respect, the two measures of elasticities would be equivalent when revenue/GDP ratios are the same as remittance/GDP ratios. Incidentally, these ratios are very similar in El Salvador and Guatemala, indicating that the estimated “time series” coefficients of 0.4–0.5 for these two countries are comparable to the 0.4 elasticity under the panel regression for CAPDR.


See Beaton and others (2017) for further details.


For example, securitization of remittance inflows is a common feature of bank business models in countries receiving significant remittances, and in LAC countries was used in practice in Brazil, El Salvador, and Mexico among others (see World Bank 2015).


The main equation estimated with instrumental variables is yit = αi + βX + γZit where the dependent is the NPL ratio, exogenous determinants, Xit, include the level of real GDP per capita, real GDP growth in the United States, foreign direct investment as a share of GDP, the stock of emigrants as a share of the home population, and the share of the rural population, endogenous determinants, Zit, include remittances as a share of GDP, real per capita GDP growth, export growth, and a measure of country risk. Endogenous variables are instrumented using their regional averages, unemployment in the destination countries, and terms-of-trade percentage changes. For additional details see Beaton and others (2017).


The magnitude of the latter effect is similar to that found by Ebeke and others (2014) for a larger cross-country grouping.


However, Barajas and others (2012) explain how such an effect on the equilibrium REER depends critically on degree of openness, factor mobility between domestic sectors, the cyclicality of remittances, the share of consumption in tradables, and the sensitivity of a country’s risk premium to remittance flows.


Remittances may affect external competitiveness through their impact on wages in the recipient economies, as noted in IMF (2016). However, the lack of cross-country wage data prevents us from investigating this complementary channel, and limits our analysis of external competitiveness to the CPI-based REER only.


The main equation estimated with fixed effects is yit = α i + βXit where the dependent is the REER (in log form). In addition to the remittances-to-GDP ratio, the set of controls includes: the external terms of trade; exports of goods and services (in percent of GDP); foreign direct investments (in percent of GDP), real GDP growth; government spending (in percent of GDP); and the US interest rate. See Beaton and others (2017) for additional details.


Several other theoretical frameworks (cost-based pressures, consumption-induced excess demand, and monetary expansion) are consistent with the inflationary effects of remittances (Narayan and others 2011).


The main equation estimated with instrumental variables is yit = αi + βX + γZit where the dependent variable is inflation, measured as the CPI-based inflation rate. The vector of exogenous variables, Xit, includes the level of real GDP per capita, US real GDP growth, foreign direct investment as a share of GDP, the stock of emigrants as a share of the home population, and share of the rural population (and the endogenous variables, Zit, include remittances as a share of GDP (or a lagged change in remittance/GDP ratio), real per capita GDP growth, export growth, and a measure of country risk. Endogenous variables are instrumented using their regional averages, unemployment in the destination countries, and terms-of-trade percentage changes. See Beaton and others (2017) for details.


The United States has significantly scaled up deportations over the past decade—totaling 3.7 million over 2005–15. Deportations peaked at 434,000 in 2013 and have declined since as prosecutorial guidelines refocused on those deemed to pose threats to national security, border security, and public safety. However, the Trump administration has taken a tougher stance on deportations, and the recent decline is expected to reverse.


The chapter was drafted in 2018:H1 and may not fully reflect recent developments in US immigration policy.


US immigrants from other CAPDR countries also benefit from DACA, but the number of DACA recipients from other CAPDR countries is significantly smaller than those from the Northern Triangle.

Contributor Notes

This chapter is based on work by K. Beaton, S. Cerovic, M. Gladamez, M. Hadzi-Vaskov, F. Loyola, Z. Koczan, B. Lissovolik, J.K. Martijn, Y. Ustyuogova, and J. Wong. For further details, see Beaton and others (2017).