II Remittances: Measurement Matters
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund
  • | 2 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund
  • | 3 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund

Abstract

The unique characteristics of remittances and their potential economic impact have attracted the attention of policymakers and researchers in recent years, as evidenced by a growing literature aimed at analyzing remittances and their consequences for individual countries. Three main features of remittances provide the impetus for embarking on a study of their macroeconomic impacts: the size of these flows relative to the size of the recipient economies, the likelihood that these flows will continue unabated into the future through continued globalization trends, and the fact that these flows are quite distinct from those of official aid or private capital, which are much better understood in the literature. These features suggest that remittances’ macroeconomic effects are likely to be substantial and sustained over time and may have unique implications for policymakers in recipient countries.

Why Study the Macro Effects of Remittances?

The unique characteristics of remittances and their potential economic impact have attracted the attention of policymakers and researchers in recent years, as evidenced by a growing literature aimed at analyzing remittances and their consequences for individual countries. Three main features of remittances provide the impetus for embarking on a study of their macroeconomic impacts: the size of these flows relative to the size of the recipient economies, the likelihood that these flows will continue unabated into the future through continued globalization trends, and the fact that these flows are quite distinct from those of official aid or private capital, which are much better understood in the literature. These features suggest that remittances’ macroeconomic effects are likely to be substantial and sustained over time and may have unique implications for policymakers in recipient countries.

First, regarding the size of remittance flows, the literature offers ample documentation on how large they have become in recent years. We present our own findings using the most recent data available on remittance flows in Chapter 3. The level of remittances, using the item workersremittances from the World Development Indicators (WDI) database (World Bank, 2006), rose from US$48 billion in 1994 to US$114 billion in 2003.1 Efforts to examine both official and unofficial remittance flows (World Bank, 2005) suggest that this level could be substantially higher. For many developing countries, the level of remittances received is equal to or exceeds the amount of foreign direct investment, portfolio flows from financial markets, and official development assistance. Since remittance flows are large in size and permeate a significant number of households in the recipient economies, they undoubtedly have effects at the macro level, influencing market prices and the interactions among households, firms, financial intermediaries, and the government.

Second, the forces behind the substantial growth of remittance flows do not appear to be subsiding. As part of an effort to improve growth prospects, many countries have, over the past several decades, initiated a series of policies to liberalize their economic systems. During this time policymakers have primarily focused on understanding the effects of globalization, trade openness, and capital account liberalization on the direction and magnitude of private capital flows, foreign direct investment, and economic growth. However, the trend toward deeper economic integration through regional arrangements such as the Association of Southeast Asian Nations (ASEAN) and the European Union (EU), along with the proliferation of trade agreements like the North American Free Trade Agreement (NAFTA), has also continued to underpin increased flexibility in labor migration. Consequently, the growth and permanence of remittance flows can be viewed as an additional implication of globalization, an implication that has yet to receive as much scrutiny as the economic impacts of trade and capital account liberalization.

Third, there are key distinctions between remittances and other international flows, and while it may be convenient to view remittance flows through the same lens as official aid and private capital flows, there are good reasons to believe that remittances behave differently and, in turn, have different economic impacts. The widely accepted definition that prevails in the literature is that remittances are unrequited, nonmarket personal transfers between households across countries. Remittances differ significantly from official aid flows, since the latter are government-to-government transfers, whereas remittances are composed of numerous small transfers between private individuals. Furthermore, one crucial element sets remittances apart from both official aid and private capital flows: the presence of familial relationships. This element introduces well-known economic issues concerning interactions among family members and fuels the uniqueness of remittance behavior. As Chapter 4 discusses in greater depth, the appropriate foundation for understanding remittances originates with Becker’s (1974) economics of the family, which, indeed, underlies much of the research on the microeconomic implications of remittances found in the literature today. The relationship between the remitter and his or her family can generally be characterized in two ways: as altruism, in which remittances may compensate for poor economic performance at home, or as exchange, in which the family secures non-pecuniary services on behalf of the remitter. Either motivation, as well as the unique relationships among family members, implies that the characteristics of remittance flows will differ from those of profit-driven private capital flows, and the impact of these two types of flows on recipient households’ economic behavior and the macroeconomy at large will differ as well. Policymakers and researchers should therefore not ignore the distinction between nonmarket remittance flows, private capital flows, and official aid flows, since their respective effects on the macroeconomy will differ. These macro effects, in particular, are examined in depth through formal economic modeling in Chapters 5 and 6, and empirically in Chapter 7, and summary policy conclusions are presented in Chapter 8.

Measuring Remittances

Given the magnitude of remittances in the aggregate and the likelihood that their uniqueness implies different macroeconomic effects, researchers must take care to define remittances properly from a measurement point of view and to compile the appropriate data when conducting analysis. The literature has highlighted three components of the balance of payments in regard to compiling statistics on remittances. The first component, workersremittances, records current transfers by migrants who are employed in, and considered a resident of, the countries that host them. A migrant in this case is a person who stays or is expected to stay in his or her host country for a year or more. Workers’ remittances normally involve persons related to one another and are recorded under current transfers, according to the fifth edition of the Balance of Payments Manual (IMF, 1993; hereafter BPM5). The second component, employee compensation, is composed of wages, salaries, and other benefits earned by individuals in countries other than those in which they are residents for work performed for and paid for by residents of those countries (typical examples include earnings of seasonal workers and embassy employees). According to BPM5, compensation of employees is included under income in the current account. Finally, the third component, migrantstransfers, are contra-entries to the flow of goods and changes in financial items that arise from individuals’ change of residence from one country to another. In BPM5, migrants’ transfers are recorded in the capital account of the balance of payments under capital transfers of nongovernment sectors.

Of these three categories, workersremittances most closely conforms to the notion that researchers and policymakers have in mind when discussing remittance flows: periodic, unrequited, nonmarket transfers between residents of different countries. A common practice in the literature, however, has been to sum the three categories when compiling statistics on remittances. Recent examples can be found in the World Bank’s Global Economic Prospects (World Bank, 2005), the World Economic Outlook of the International Monetary Fund (IMF, 2005), and recent working papers, including those by Aggarwal, Demirgüç-Kunt, and Martinez Peria (2006) and Giuliano and Ruiz-Arranz (2005), among others. The inclusion of migrants’ transfers and employee compensation in remittance statistics is likely to pose problems, however, since these series are not conceptually representative of remittance behavior.

Inclusion of migrants’ transfers is perhaps the more egregious misspecification. Migrants’ transfers generally include two types of transactions. First, a migrant who has spent time as a resident employed in a host and later decides to return to his or her home country may transfer accumulated assets in the process. Although his or her stay in the host country may have resulted in small, periodic transfers to family members in his or her home country (i.e., remittances), the final transfer of accumulated assets is conceptually equivalent to a capital transfer and not a remittance and is likely to have different behavioral characteristics. As such, the BPM5 records this item as a capital transfer. The second type of migrant transfer is related to an individual’s change of residence from one country to another and may not involve any real financial flows. Consider, for example, a case in which Bill Gates, the chairman of Microsoft Corporation and a resident of the United States, was allowed to change his residency to Barbados. Viewing the reclassification of his significant wealth, estimated by Forbes recently at $56 billion (Kroll and Fass, 2007), as a remittance flow would necessarily lead to the conclusion that actual transfers to Barbados had risen dramatically, when in fact no such transfers had taken place. Given that the GDP of Barbados in 2005 was estimated at just under US$3 billion, such a reclassification would also incorrectly suggest that Gates’s change in residency would result in improved standards of living and substantially higher income per capita in Barbados. Both of these transactions, the transfer of accumulated assets by migrant residents and the reclassification of assets as a result of a change in residency status, are fundamentally different from remittances and may not involve actual flows. Finally, unlike what has taken place with remittance flows, which have steadily grown over time as a result of past outward migration from the developing world, there appears to be no corresponding wave of reverse migration supporting a worldwide increase in migrant transfers. Thus, there is little conceptual justification for including migrant transfers in the measure to be studied.

Researchers and data users should also be wary of viewing employee compensation as equivalent to a remittance transfer. Employee compensation records the remuneration for work earned by nonresident individuals and paid by resident companies, and the remuneration received by residents from nonresident employers. For example, the wages, salaries, and benefits of IMF and World Bank staff are classified as employee compensation, since balance of payments accounting attributes these income flows to the staff members’ official countries of residence. There is little economic reasoning to justify including compensation of this form as a remittance, since it represents earned income, not a formal transfer, and in particular, not a transfer between residents and nonresidents of different countries.

Although researchers may have the seasonal agricultural worker in mind in deciding to include employee compensation as part of remittances, the evidence suggests that the income of more traditional nonresident employees dominates that of border or seasonal workers. This is especially the case when the recent trends in outsourcing and migration of highly skilled workers in information technology industries are considered. In 2004, for example, half of the top 10 recipients of the item workers’ remittances and employee compensation in the WDI database were developed countries in Europe: France (US$12.7 billion), Spain (US$6.9 billion), Belgium (US$6.8 billion), Germany (US$6.5 billion), and the United Kingdom (US$6.4 billion). Employee compensation accounts for the majority of these flows. Simply excluding developed countries from the sample, however, does not eliminate the problem. Lesotho, for example, is one of the largest recipients of employee compensation because of its economic relationship with South Africa, taking in approximately US$341 million in employee compensation in 2004 against workers’ remittances of only US$14 million.2 The country received on average around 70 percent of its GDP in the form of employee compensation between 1970 and 2005. Even if there was a compelling reason to warrant inclusion of employee compensation in remittance statistics, researchers would need to compile a net compensation figure by subtracting from employee compensation that portion of earnings that are spent in the host country and do not accrue to the home country. The BPM5 presently nets out such expenditures in the aggregate balance of payments by recording them under travel. Separating this line item from the remaining categories in travel (i.e., expenditures by business and personal travelers) in order to derive all the offsetting items required to compute net compensation of employees, however, is not practicable, since the data are not available at the level of detail required to do this.

In sum, there is no clear economic justification for treating migrants’ transfers and employee compensation as equivalent to workers’ remittances. The flows assigned to these three categories are capturing different economic effects, or in the case of migrants’ transfers and employee compensation, may be capturing something other than actual transfers. Consequently, researchers lumping the three together may sufficiently pollute the database with nonremittance behavioral characteristics to render any conclusions from such an exercise suspect. In the next section, we attempt to ascertain whether the behavioral characteristics of the data in these three categories are indeed different.

Examining the Data: Measurement Matters

Countries in the WDI database provide data on an aggregate category of workers’ remittances and employee compensation, and the individual components of workers’ remittances, employee compensation, and migrants’ transfers. Not all countries, however, provide data on all categories. Many provide data only on the aggregate category of workers’ remittances and employee compensation, and others report only workers’ remittances. A smaller subset of countries report both workers’ remittances and employee compensation as separate items; the least-reported item is migrants’ transfers. In 2003, for example, the most recent year for which a full data set on each variable is available given various reporting lags, 154 countries provided data on workers’ remittances and employee compensation (totaling US$199 billion), 104 provided data on workers’ remittances (totaling US$114 billion), 107 reported data on employee compensation (US$14 billion), and only 49 reported data on migrants’ transfers (worth US$4 billion). Each of the four series was extracted from the WDI data set for all available countries between the years 1970 and 2005 for the analysis in this section.

Table 2.1 reports the summary business cycle correlations between real GDP per capita and the series on workers’ remittances, that on workers’ remittances and employee compensation, and a third series that sums all three measures. In accordance with standard practice in the business cycle literature (Stock and Watson, 1999), the variables are first transformed by taking logarithms of their ratio to GDP, and their correlation with real GDP per capita is computed from the filtered values using the procedure of Hodrick and Prescott (1997). Applying the Hodrick-Prescott filter reduces the number of usable country observations, because a minimum number of time periods must be present to apply the filtering technique. The average correlation between workers’ remittances and real GDP per capita in Table 2.1 is −0.080 for the full country sample and −0.084 when only emerging economy3 observations are included. The negative correlation—that is, countercy-clicality on average—supports the altruistic motivation of remittance behavior, whereby declines (increases) in a recipient country’s economic activity are associated with increases (declines) in remittance flows to that country. This result is consistent with the recent empirical support in the literature (e.g., World Bank, 2005; Chami, Fullenkamp, and Jahjah, 2003; IMF, 2005; and Mishra, forthcoming) and our own findings, which we present in Chapter 6.

Table 2.1.

Summary Business Cycle Correlations

article image
Note: The statistics are computed by taking the log of each series in percent of GDP and the log of real GDP per capita, detrending each using the Hodrick-Prescott (1997) filter, and then computing relevant correlations for each country in the sample.

If employee compensation and migrants’ transfers were capturing remittance behavior, then one would expect to see similar behavioral characteristics in the data for the three categories. However, the series on workers’ remittances and employee compensation has an average correlation with real GDP per capita of only −0.026, or less than half the countercyclicality of the workers’ remittances series alone, for the full country sample. A similar result is obtained when only emerging economy data are examined. Finally, inclusion of migrants’ transfers yields a positive correlation of 0.029 under the full country sample and 0.024 for emerging economies. This exercise reveals that employee compensation and migrants’ transfers are procyclical on average, a finding that is more consistent with the behavior of private capital flows than remittances as compensatory income transfers.

As a further test of the data, we isolated those countries that report workers’ remittances and employee compensation as separate categories to examine the hypothesis that these flows incorporate the same behavior. This could also be viewed as a test of whether country data compilers are able to distinguish adequately between these flows in the data-reporting process. If the two flows are similar, or if data compilers categorize them in a haphazard fashion, then the correlation between the logged, filtered value of each variable’s ratio to GDP will be near unity. Table 2.2 reports the correlations for the 34 countries in this subsample. Though it contains a much smaller number of countries than the aggregate samples included in Table 2.1, the subsample in Table 2.2 accounts for 51 percent of total reported workers’ remittances and 17 percent of total reported employee compensation in 2003. The subsample also includes large remittance-receiving economies: Colombia, India, Brazil, Mexico, and the Philippines, among others. When the countries in this subsample that report the items separately are examined, the average correlation between workers’ remittances and employee compensation is only 0.034, and the median correlation is −0.004. Figure 2.1 presents a histogram of individual country correlations. The vast majority of the 34 observations are clustered around zero, with only five observations at 0.5 or greater. Rather than showing a positive correlation near unity, the data indicate that the series are uncorrelated.

Table 2.2.

Business Cycle Correlations: Subsample

article image
Note: The countries included in this sample are those that report both workers’ remittances and employee compensation data between 1980 and 2005. The statistics are computed by taking the log of each series in percent of GDP, detrending each using the Hodrick-Prescott (1997) filter, and then computing the relevant correlation for each country in the sample. Countries without a sufficient amount of data to implement the filter have been removed.
Figure 2.1.
Figure 2.1.

Correlation of Workers’ Remittances and Employee Compensation

Sources: World Bank (2006) and authors’ calculations.

The results of this exercise show that data in the categories of workers’ remittances, employee compensation, and migrants’ transfers capture different behavioral characteristics and that data compilers are more proficient at separating these flows in the balance of payments framework than researchers give them credit for. In particular, workers’ remittances have a negative average correlation with real GDP per capita in the home country, a finding consistent with the microeconomic underpinnings of remittances as unrequited person-to-person transfers. In contrast, both employee compensation and migrants’ transfers on average display a procyclical relationship with output in the recipient economy. This procyclical behavior is more consistent with private capital flows and generally inconsistent with the micro foundations from Becker’s (1974) economics of the family. Researchers who use all three series when compiling a cross-country panel of remittance data may be making a serious error, because the inclusion of employee compensation and migrants’ transfers in data on remittances incorporates different behavioral relationships with respect to economic variables of interest and behavior that appears to be uncorrelated with remittance behavior. In turn, statistical analysis of remittance behavior with such a data set may lead to erroneous results. In the chapters that follow, we use the data series workers’ remittances when conducting any econometric or statistical analysis and drawing conclusions regarding remittance behavior. Our omission of employee compensation and migrants’ transfers from our measure of remittances is, therefore, intentional, with the view that the category workers’ remittances in the WDI database best reflects the behavioral aspects we are trying to capture.

New Balance of Payments Methodology

The lack of an official definition of remittances and the lack of clarity surrounding statistical compilation of a corresponding data series in the balance of payments has been noted for some time and led to a call by the G-8, during their 2004 meetings on Sea Island, to clarify the meaning of remittances and improve the accuracy of measuring remittance flows. This in turn led to the creation of a working group composed of the World Bank, IMF, and other international financial institutions that was tasked with clarifying the definition of remittances, offering guidance on how to collect and estimate remittance statistics, and providing assistance on how to develop an inflow-outflow matrix for tracking remittance flows. A technical subgroup of the United Nations reported its findings to the IMF Committee on Balance of Payments Statistics and the Advisory Expert Group on National Accounts. According to Reinke (2007), the results of this process will be included in the revision of the BPM5 and the update of System of National Accounts, 1993, both of which are scheduled for completion in 2008.

The proposed changes will include the introduction of four new categories related to remittances, conceptual changes to the use of migration and residence status, and the elimination of the use of migrants’ transfers in the reporting of balance of payments flows. As discussed in Reinke (2007), the changes include several items of importance:4

  • Personal transfers to replace workers’ remittances. The item personal transfers will include all current transfers in cash or in kind between resident households and nonresident households, independent of employment and migration status.

  • Creation of a new item, personal remittances. This category will include personal transfers plus net compensation of employees. This category, however, is designated as a supplementary item, meaning that the new balance of payments manual provides a definition and guidance on compilation, but the line item will not be part of official databases of the IMF or World Bank.

  • Removal of migrants’ transfers from the balance of payments framework. Changes in assets and liabilities resulting from individuals’ moving their residence from one country to another will be recorded under other changes of assets and liabilities.

  • Elimination of the concept of migrant in the balance of payments. Since the concept of personal transfers is based on residency rather than migration status, the concept of migrant is no longer relevant. This change makes this part of the framework consistent with criteria elsewhere in the balance of payments and national accounts frameworks.

The proposed changes to the balance of payments and system of national accounts frameworks are welcome and are consistent with the arguments put forth in this and subsequent chapters regarding the true specification of remittances. The new category personal transfers will capture periodic, recurring, unrequited current transfers between residents of different countries. Any prior confusion arising from the distinction between transfers out of wage income and those out of other income, or from the concept of migrant status, which led to grey areas between the previous definitions of workers’ remittances and employee compensation, will be eliminated. The main focus from a balance of payments perspective will be to capture and record transfers between persons in different countries, which coincides with the generally accepted definition of remittances. The elimination of the concept of migrants’ transfers and the inclusion of employee compensation in a supplementary item are also welcome. As evidenced by the data, migrants’ transfers and employee compensation have characteristics more closely akin to those of private capital flows than to those of personal transfers and as such should be classified as items separate from workers’ remittances.

Conclusion

The unique characteristics of remittance flows have attracted the interest of researchers and policymakers, and the magnitude of these flows requires that we understand their characteristics and influence on the macroeconomy. Although there has generally been consensus surrounding the concept of remittances, the accepted practice of aggregating the current categories workers’ remittances, employee compensation, and migrants’ transfers into one series is problematic at best and could result, at worst, in serious misspecifica-tion and faulty conclusions. A preliminary examination of the data on and definitions of employee compensation and migrants’ transfers reveals that these flows are conceptually different from and behave differently than workers’ remittances. In short, measurement matters. Researchers and policymakers who have previously relied on such an aggregated series of data to draw conclusions and make inferences about the nature of remittances and their impact on economic activity and the decisions of households should reexamine their positions using the more precisely defined category workers’ remittances alone. This classification most closely captures the generally accepted definition of remittances and matches what the official community has stated will be the accepted classification. We welcome the proposed changes that the IMF Committee on Balance of Payments Statistics and the Advisory Expert Group on National Accounts have proposed regarding the classification of remittances as personal transfers, and we hope that the changes do indeed result in much-needed clarity in this regard.

References

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1

The WDI database includes data through 2005, but because of various reporting lags, 2003 is the most recent year for which a full data set on this series is available.

2

Of course, the sheer size of employee compensation in Lesotho suggests that it is worthy of economic study, but one should be careful not to simply lump these flows together as a measure of remittances in the process.

3

The emerging economy sample was obtained by excluding Western European countries, Japan, Canada, the United States, New Zealand, and Australia.

4

The changes also include introduction of two additional categories, total remittances and total remittances and transfers to nonprofit institutions serving households. The former includes the new category personal remittances plus social benefits. The latter is based on the new category total remittances plus current and capital transfers to nonprofit institutions serving households. Both items will also be regarded as supplementary items. See Reinke (2007) for additional discussion.

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