III Remittances: Stylized Facts
  • 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

Given the findings of the previous chapter, the next logical step is to establish a new set of stylized facts about remittances derived from properly measured data. Because stylized facts identify the basic set of questions and issues to be explained, it is essential to begin with an accurate data set. Therefore, the chapter first undertakes a complete examination of the empirical characteristics of workers’ remittances,1 beginning with evidence on the growth of workers’ remittances over the past three decades and followed by regional and cross-country comparisons of remittance receipts. Then the chapter presents comparisons of workers’ remittances with other international balance of payments flows, with special emphasis on the volatilities of the various flows. Finally, the chapter examines evidence on the correlation of workers’ remittances with the most important macroeconomic variables. Wherever appropriate, the behavior of remittance flows to developing countries is emphasized.

Given the findings of the previous chapter, the next logical step is to establish a new set of stylized facts about remittances derived from properly measured data. Because stylized facts identify the basic set of questions and issues to be explained, it is essential to begin with an accurate data set. Therefore, the chapter first undertakes a complete examination of the empirical characteristics of workers’ remittances,1 beginning with evidence on the growth of workers’ remittances over the past three decades and followed by regional and cross-country comparisons of remittance receipts. Then the chapter presents comparisons of workers’ remittances with other international balance of payments flows, with special emphasis on the volatilities of the various flows. Finally, the chapter examines evidence on the correlation of workers’ remittances with the most important macroeconomic variables. Wherever appropriate, the behavior of remittance flows to developing countries is emphasized.

The chapter uses cross-country data as well as aggregate data to maximize the descriptive power of the stylized facts developed. Because the data aggregation process masks some important underlying heterogeneity of individual country data and variation across countries, a thorough examination of stylized facts using a cross-country database is necessary. For example, one of the chapter’s key findings is that macro-economic performance varies broadly across countries with different levels of exposure to remittance flows. The chapter’s first section, which presents stylized facts regarding growth of remittances and their comparison with other balance of payments flows, predominantly employs aggregate data, whereas the second section predominantly uses cross-country data.

Stylized Facts Using Aggregate Data on Workers’ Remittances

Global measured flows of workers’ remittances have increased rapidly for more than three decades, from about US$6 billion in the early 1970s, to US$50 billion in the mid-1990s, to US$114 billion in 2003 (Figure 3.1). The majority of remittance flows, as expected, go to developing countries. In 2003, for example, developing countries received US$104 billion in remittance flows, a sum that equates to 91 percent of global workers’ remittances in that year and 1.4 percent of total developing country GDP.

Figure 3.1.
Figure 3.1.

Worldwide Workers’ Remittances, 1970–2003

Source: World Bank (2006).Note: World workers’ remittances is the sum of the category workers’ remittances across all countries for which data are available for the year specified. Per country figures divide this amount by the number of countries reporting data in that year.

The increase over time in measured remittance flows is due, to a certain extent, to an expansion in the set of countries reporting remittances, which grew from an initial group of 4 countries to more than 70 by the mid-1990s and to 104 countries reporting in 2003. For this reason, it is also informative in terms of capturing an overall trend to look at the evolution of flows per reporting country. Viewing the data in this way does not change the broad conclusion that remittance flows have been increasing rapidly in importance over time, because average remittances per country have shown a similarly impressive upward trend, increasing roughly by a factor of eight (from US$150 million to US$1.2 billion) over the study period and almost doubling between 1994 and 2003. Data availability for remittances for 2004 and beyond is subject to reporting lags, which reduces the set of countries with available data to 92 in 2004 and 40 in 2005. However, the available data in these years suggest that the upward trend in remittance flows has continued, as the per country figures increased from US$1.1 billion in 2003 to US$1.3 billion in 2005. Extrapolating this average to the 104 countries that reported in 2003 would result in estimated global remittance flows of US$135 billion for 2005.

In terms of regional flows to developing countries, developing Asia and the western hemisphere receive the largest amounts of workers’ remittances, though the Middle East has seen recent strong growth, with a doubling of remittance flows between 2000 and 2003 (Figure 3.2). Mexico was the largest developing country recipient of workers’ remittances in 2004 with US$16.6 billion, followed by the Philippines, Lebanon, China, and Morocco (Figure 3.3). Taking a longer-term perspective, the five largest developing country recipients of workers’ remittances over the period 1990–2004 were, in order, India, Mexico, Lebanon, Egypt, and Turkey (Figure 3.4). For policy purposes, however, what matters is not the absolute level of remittance flows, but their magnitude as a percentage of recipient countries’ GDP. By this measure, the top 20 developing country recipients of workers’ remittances for 2004 received flows of between 9 and 24 percent of GDP (Figure 3.5), with the five largest recipients—Haiti, Lebanon, Guyana, Jordan, and Jamaica—receiving remittances equaling 17 percent of GDP or more. Figure 3.6 presents the largest recipients of workers’ remittances relative to GDP over the 1990–2004 period, with Samoa, Tonga, Bosnia and Herzegovina, the Republic of Yemen, and Jordan emerging as the top five.

Figure 3.2.
Figure 3.2.

Workers’ Remittances by Region: Developing Countries, 1980–2003

(In billions of U.S. dollars)

Source: World Bank (2006).Note: Regions and countries are categorized according to IMF WEO country groupings. Statistics reflect the sum of workers’ remittances across all countries for which data are available in the respective regional classification.
Figure 3.3.
Figure 3.3.

Top 20 Recipient Countries: Workers’ Remittances, 2004

(In billions of U.S. dollars)

Source: World Bank (2006).
Figure 3.4.
Figure 3.4.

Top 20 Recipient Countries: Average Workers’ Remittances, 1990–2004

(In billions of U.S. dollars)

Source: World Bank (2006).
Figure 3.5.
Figure 3.5.

Top 20 Recipient Countries: Ratio of Workers’ Remittances to GDP, 2004

(In percent of GDP)

Source: World Bank (2006).
Figure 3.6.
Figure 3.6.

Top 20 Recipient Countries: Average Ratio of Workers’ Remittances to GDP, 1990–2004

(In percent of GDP)

Source: World Bank (2006).Note: Combined statistics are reported for Serbia and Montenegro, reflecting the union of the two countries during the period covered by the figure.

In terms of their importance in the balance of payments, workers’ remittances exceed both official aid and non-FDI private capital inflows to developing countries and have generally done so consistently since 1998 (Figure 3.7). Moreover, workers’ remittances have displayed much less variability than other balance of payments flows. Using data from 1980–2003, Figure 3.8 displays the volatility of each category of flows based on the standard deviation of the detrended ratio of the corresponding variable to GDP.2 According to the data, official aid, normally considered a stable source of financing for developing countries, was three times as volatile as workers’ remittances over the time period covered in the figure. FDI, non-FDI private capital inflows, and exports were 17, 22, and 74 times as volatile, respectively, as workers’ remittances over that time period.

Figure 3.7.
Figure 3.7.

Workers’ Remittances and Other Inflows to Developing Countries

Sources: IMF (2005, 2006b).Note: Countries are grouped as in the World Economic Outlook. Upper panel reflects aggregate flows to developing countries, and lower panel reflects each series as a percentage of developing country GDP.
Figure 3.8.
Figure 3.8.

Volatility of Inflows to Developing Countries, 1980–2003

(Standard deviation in percent)

Sources: World Bank (2006) and IMF (2005).Note: Volatility is defined as the standard deviation of the detrended ratio of each variable to GDP, with detrending accomplished using the Hodrick-Prescott (1997) filter.

Overall, examination of the stylized facts based on the aggregate quantity of workers’ remittances reveals remittances’ relative global macroeconomic importance. Flows of workers’ remittances have been growing consistently over time and now represent the second-largest balance of payments inflow to developing countries. Their relative stability versus that of other inflows to developing countries may provide additional macroeconomic benefits in terms of reduced volatility of output and consumption, two issues that subsequent chapters examine. The next section examines whether these stylized facts hold when cross-country remittance data are used instead of an aggregate series.

Stylized Facts Using a Cross-Country Database of Workers’ Remittances

Measures of worldwide or regional remittance flows in relation to aggregate measures of GDP, though useful in identifying major trends over time, likely underestimate the impact these flows have on individual countries. For example, the ratio of workers’ remittances to aggregate GDP in developing countries stabilized in the 1990s at around 1 percent, before rising in recent years, to 1.4 percent in 2003 (see Figure 3.7). Aggregating workers’ remittances in this manner assigns greater weight to larger economies that may not be receiving a significant amount of remittances and may underestimate the impact that remittances have on the macro-economy in many countries.

An alternative approach to using aggregate figures is to construct an average ratio of workers’ remittances to GDP over a particular time period for each developing country in the sample and then compute the crosscountry average. Table 3.1 reports the results of such a cross-country procedure based on two time periods, 1970–2005 and 1995–2004, as well as for 2004. The average ratio of workers’ remittances to GDP from this cross-country sample was indeed noticeably larger than the GDP-weighted measure previously reported, registering 3.7 percent for the entire 1970–2005 study period and 3.6 percent for the more recent 1995–2004 period. The average ratio of workers’ remittances to GDP across countries increased to 4.2 percent in 2004, reflecting the upward trend that was observed in the GDP-weighted average figures. Adjusting the procedure to eliminate countries that report only periodically does not alter these results.3 Thus, aggregation of the data appears to lead to an underestimation of the importance of workers’ remittances in many countries.

Table 3.1.

Emerging Economies: Workers’ Remittances

(In percent of GDP)

article image
Note: The average ratio of workers’ remittances to GDP was computed for each country in the sample across the time period indicated. A cross-country average was then obtained and is reported as the mean ratio in the table.

The country-specific figures also reveal considerable variation across countries. For the entire study period from 1970 to 2005, the cross-country standard deviation of average remittances was equal to 4.9 percentage points of GDP, and 5.8 percentage points during 1995 through 2004. Closer examination of the distribution across countries during this 10-year period reveals a clustering of countries. First, 48 countries (44 percent of the observations) received an average of 1 percent of GDP or less per year in workers’ remittances (Figure 3.9). In other words, nearly half of the observations record little in the way of workers’ remittances. A second cluster of 25 countries (23 percent of the observations) recorded an average ratio of workers’ remittances to GDP in the 2–5 percent range, and 7 countries (6 percent of the observations) received average annual flows of 15 percent of GDP or more.

Figure 3.9.
Figure 3.9.

Emerging Economies: Workers’ Remittances, 1995–2004

(In percent of country GDP, period average)

Source: World Bank (2006).

Although the aggregate figures conclusively point to a large and growing presence of remittance flows in the developing world over the past decade or so, the heterogeneity of different countries’ exposure to this phenomenon is also a critical feature of the data. This heterogeneity proves beneficial in the empirical work presented in subsequent chapters, as it provides the variability needed to test whether remittances indeed affect macroeconomic performance. Furthermore, the clustering of countries at the low end of the distribution of remittance flows provides the sample with a group of control countries—those relatively unaffected by remittances—against which to compare the performance of recipient countries.

Workers’ Remittances and Other Foreign Exchange Inflows

This subsection compares remittance inflows in emerging economies with export earnings, official transfers, official capital flows, and private capital flows received by those economies.4 The importance of remittances to recipient countries’ balance of payments becomes apparent immediately. On average over the 10-year period from 1995 to 2004, remittances equaled about one-third of export earnings, more than twice private capital flows, almost 10 times official capital flows, and more than 12 times official transfers (Table 3.2). As in the previous subsection, there is considerable heterogeneity across countries. At the maximum, remittances can equal up to 4 times export earnings, almost 40 times the level of private capital flows, 371 times official capital flows, and 217 times official transfers. For a representative recipient country such as Senegal, workers’ remittances averaged 3.7 percent of GDP during this period, equal to about one-fifth of exports, 1.5 times private capital flows, more than three times official capital flows, and almost twice official transfers.

Table 3.2.

Developing Countries: Workers’ Remittances in Relation to Selected Balance of Payments Inflows

article image
Sources: World Bank (2006), IMF (2006a, 2006b), and authors’ calculations.

Thus, although workers’ remittances have not been uniformly important for all emerging economies, for the very large group of countries where they are important, they have been increasing rapidly since the early 1990s. Moreover, they have grown so much that remittance flows are now far larger than many other types of foreign exchange inflows that have traditionally received much more attention.

The Stability of Workers’ Remittances in Comparison to Other Foreign Exchange Inflows

In addition to highlighting the sheer magnitude of remittance flows in relation to other international flows studied extensively in the literature, Chapter 2 also discussed the hypothesis that remittances, because they are conceptually distinct from official flows and from purely profit-seeking private flows, also exhibit visibly different behavior from these other flows. If they do, then given the magnitude of these flows, it becomes even more important to understand their macroeconomic role.

A first pass using nondetrended data provides support for this hypothesis. Flows of workers’ remittances (scaled by GDP) appear to have been less volatile than other flows over the period 1970–2005: slightly less so than official transfers, but considerably less so than capital flows, both official and private (Table 3.3). The average annual standard deviation of workers’ remittances was 1.8 percentage points of GDP throughout the study period, in comparison to 2.9 for official transfers, 3.5 for official capital flows, and 6.6 for private capital flows. In the more recent 1995–2005 period, although the volatility of all flows analyzed fell considerably compared to the entire study period, the standard deviation of remittances (1.3 percentage points) remained below that of official transfers, just below half that of official capital flows, and under a quarter that of private capital flows.

Table 3.3.

Emerging Economies: Volatility of Workers’ Remittances in Comparison to Selected Balance of Payments Inflows

(Standard deviation in ratio to GDP, average across countries)

article image
Sources: World Bank (2006), IMF (2006a, 2006b), and authors’ calculations.

As might be expected given the conceptual differences outlined in Chapter 2, remittance flows have also proven to be uncorrelated with other international flows (Table 3.4). The average coefficient of the correlation between remittances and official transfers was slightly positive over the full study period (0.13) and for 1995–2005 (0.06) and slightly negative with respect to both types of capital flows over the full study period (−0.07 for private flows, −0.11 for official capital flows). Furthermore, for more than half of the countries in the sample, remittances were negatively correlated with both types of capital flows throughout the entire study period, as well as during the more recent 10-year period.

Table 3.4.

Emerging Economies: Correlations Between Workers’ Remittances and Other Selected Balance of Payments Inflows

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Sources: World Bank (2006), IMF (2006a, 2006b), and authors’ calculations.

Supporting the view that remittances merit unique attention, the evidence shows that remittances’ magnitudes are considerable, even dwarfing other international flows in some cases; that remittance flows are relatively stable over time; and that they tend to be uncorrelated or even negatively correlated with other international flows. Furthermore, whereas some studies5 have argued that remittances may behave similarly to investment-driven capital flows, the preliminary findings in this chapter should serve as a caution to researchers in this regard, particularly as among the flows examined here, private capital flows tended to be those with which the behavior of remittances over time had the least in common.

Workers’ Remittances and Macroeconomic Performance: A Preliminary Look

Econometric studies examining possible impacts of remittance inflows on recipient countries’ economic performance have proliferated in recent years. Most have addressed individual countries, but a few have focused on the implications for economic growth, using large sets of cross-country data.6 Among the other key issues being explored in the literature are whether remittances enhance money demand or financial development more generally, whether they affect the long-run equilibrium exchange rate, whether they smooth macroeconomic fluctuations and reduce the probability of current account reversals, and whether they affect the level of investment in general and expenditure on education more specifically. Chapters 5 and 6 present several theoretical models that show how remittances may have serious implications for short-term fluctuations and policies aimed at stabilizing them.

This subsection takes a preliminary look at these issues on an aggregate and purely descriptive level, leaving more rigorous analysis for subsequent chapters. The descriptive statistics in this subsection were developed based on a group of 100 countries during the 1995–2004 period.7 The countries are ranked according to their ratio of remittances to GDP, then compared in terms of several macroeconomic variables: real GDP growth rate, inflation, percentage change in the real exchange rate, liquid liabilities and the fiscal balance (both expressed as a percentage of GDP), and the level of per capita GDP. Table 3.5 summarizes the data, dividing the sample into quintiles and examining the averages of macroeconomic variables and remittances for each. The table also compares the average values of these macroeconomic variables for the bottom and top deciles, as well as for the 50th percentile, and shows the correlation between remittances (scaled by GDP) and the variables.

Table 3.5.

Emerging Economies: Selected Macroeconomic Variables Across Percentiles of Workers’ Remittances, 1995–2004

article image
Sources: World Bank (2006), IMF (2006a, 2006b), and authors’ calculations.

Real effective exchange rate, defined as a multilateral exchange rate deflated by the CPI of weighted trading partners.

As expected, poorer countries have been receiving relatively larger remittance flows. The data show a visible negative association between workers’ remittances and the countries’ level of income. Average per capita GDP in 1995–2004 descends from $6,907 among countries in the lowest quintile of remittance receipts to $2,620 among countries in the highest quintile, and average workers’ remittances increase from 0.1 to 11.1 percent of GDP, respectively. The coefficient of the cross-country correlation between the two is −0.24. However, there appears to be little correlation between a country’s average real GDP growth and the level of remittances in that country. The small positive correlation shown in the table is due largely to an outlier, Bosnia and Herzegovina, which generated a high rate of growth and was the top remittance recipient in the sample during the years studied. If this country is excluded, average real GDP growth for countries in the highest quintile of remittance receipts drops from 4.4 percent to 3.9 percent, more comparable to those of the third and fourth quintiles (3.7 percent), and the overall correlation across countries becomes negative. Like GDP growth, inflation shows little discernible relation to remittances, with a correlation coefficient very close to zero.

Liquid liabilities, a proxy for the size of a country’s domestic financial system, displays a positive correlation with the level of remittances. These liabilities tend to be much higher among countries in the first quintile (high income, low remittances) than among those in the second and third. This perhaps reflects the fact that higher-income countries, in the lowest remittance-receiving quintiles, also tend to have larger financial systems. Beyond the third quintile, however, liquid liabilities appear to increase once again, rising to 53 and 47 percent of GDP in the fourth and fifth quintiles, respectively.

Although countries’ average fiscal balance does not fall smoothly as one moves from lower toward higher levels of remittances, there appears to be a certain negative relationship between the two; countries receiving remittances that amount to 1 percent of GDP or more exhibited noticeably weaker fiscal outcomes over the study period. Finally, with the exception of the second quintile, countries receiving larger remittance flows tended to exhibit less currency appreciation, on average, than those receiving less. This result should be viewed with caution, however, as the country coverage for this variable in the sample was limited. Whereas nearly all 100 countries in the sample were represented in each of the other variables, only 48 countries had sufficient real exchange rate series during the period analyzed to be included in the data set for this variable. In particular, a real exchange rate series was not available for several countries among the highest remittance recipients, those for which a positive correlation between remittance flows and currency appreciation would be most likely.

Conclusion

By all measures, workers’ remittances have been growing rapidly worldwide—particularly since the early 1990s—and today represent a very sizable component of the balance of payments of recipient countries. According to comparisons to other types of international flows—foreign direct investment, official aid, and private capital flows—presented in this chapter, remittances are second only to FDI in size, but are several times larger in magnitude than remaining official and private flows. The evidence presented in this chapter also shows that remittances tend to be significantly more stable over time than other balance of payments flows, especially private capital flows and exports. Finally, remittances are found to be largely uncorrelated with other foreign exchange inflows, thus supporting the expectation that, given their nature as unrequited private transfers among family members, remittances should behave differently from other foreign exchange flows.

In addition to these overall trends, the examination of the data in this chapter also reveals considerable heterogeneity in remittance inflows among the different emerging economies. Nearly half of developing countries receive remittances of less than 1 percent of GDP, whereas for others, remittances have surpassed 15 percent of GDP and exceed the country’s total export earnings. The degree of heterogeneity in the data provides the variability and control groups necessary to test the effects of remittances on macroeconomic performance. Taking into consideration this cross-country heterogeneity, results of the chapter’s analysis of the relationship between remittances and macroeconomic variables of interest (level of income, real GDP growth, inflation, the fiscal balance, and the level of the real exchange rate) suggest that relationships between remittances and macroeconomic performance are likely to be complex, with many other conditioning variables at play, and perhaps nonlinearities as well. Subsequent chapters explore these interactions and econometric issues in more detail.

References

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1

Based on the findings in the previous chapter, this term is taken to refer specifically to data in the category workers’ remittances from the World Bank (2006) WDI database. Data in the categories of employee compensation and migrants’ transfers are not included.

2

Detrending before computing standard deviation and correlations is the accepted practice in the real business cycle literature. Ratios were detrended using the filter from Hodrick and Prescott (1997). Computing the standard deviation of the nondetrended ratio of the variable to GDP, however, results in a similar ordering.

3

To examine the effects that changes in the country sample may have over time, the statistics were recomputed for unchanging samples of emerging countries that reported remittances for all years within the following subperiods: 1980–2004 (20 countries), 1990–2004 (33 countries), and 1995–2004 (53 countries). Analysis of these stable samples results in the same conclusion regarding the evolution of the ratio of workers’ remittances to GDP over time: a slight downward trend from the mid-1980s to the mid-1990s, followed by a prolonged upward trend that reaches its peak in 2002–2003. However, the average ratio of workers’ remittances to GDP is even higher when computed for the stable subgroups of countries. Countries in the group reporting remittances for at least 25 years (i.e., 1980–2004) received an average of 6 percent of GDP in workers’ remittances in the last two years of the sample period, compared to just over 4 percent 10 years ago.

4

Note that the year 2005 is largely excluded from the discussion in this subsection because of the relatively small country coverage of the data for that year.

5

For example, Giuliano and Ruiz-Arranz (2005) and Lueth and Ruiz-Arranz (2006) argued that an investment rather than an altruistic motive pervades much of the behavior of remittances, in much the same way as it does foreign direct investment or portfolio flows.

6

Most notably, Chami, Fullenkamp, and Jahjah (2003), Giuliano and Ruiz-Arranz (2005), and Catrinescu and others (2006).

7

To be included in the data set, countries needed to have at least three years of data during the period.

Cited By

  • View in gallery

    Worldwide Workers’ Remittances, 1970–2003

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    Workers’ Remittances by Region: Developing Countries, 1980–2003

    (In billions of U.S. dollars)

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    Top 20 Recipient Countries: Workers’ Remittances, 2004

    (In billions of U.S. dollars)

  • View in gallery

    Top 20 Recipient Countries: Average Workers’ Remittances, 1990–2004

    (In billions of U.S. dollars)

  • View in gallery

    Top 20 Recipient Countries: Ratio of Workers’ Remittances to GDP, 2004

    (In percent of GDP)

  • View in gallery

    Top 20 Recipient Countries: Average Ratio of Workers’ Remittances to GDP, 1990–2004

    (In percent of GDP)

  • View in gallery

    Workers’ Remittances and Other Inflows to Developing Countries

  • View in gallery

    Volatility of Inflows to Developing Countries, 1980–2003

    (Standard deviation in percent)

  • View in gallery

    Emerging Economies: Workers’ Remittances, 1995–2004

    (In percent of country GDP, period average)