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I would like to thank Maitland MacFarlan and Luca Bandiera for providing extensive comments on an earlier draft of this paper. The paper has benefited also from the comments of departmental colleagues, including Samuel Itam, Iyabo Masha, Sonia Muñoz, Elena Loukoianova, Charalambos Tsangarides, and Robert York. Any errors and omissions are solely mine.
Flows to rural areas with limited access to banks are not captured by ED. Their size is not known but it is likely to be rather small. This is quite an unfortunate circumstance, common to poor areas of those developing countries that are recipients of large remittance flows. While poverty is the major driving force of migration, which is a prerequisite for remitting, extreme poverty is also the greatest deterrent. In fact, the poorest strata of the society are most often cut out of remittance flows due to the fact that they do not dispose of the minimal financial wealth that would allow them or their relatives to emigrate. Moreover, where initial wealth is not a problem, the tightening of opportunities for migration (in particular in the United States and the European Union countries in the last quarter of the century) usually is. A recent paper on migration in Cape Verde (Carling, 2004) describes the Schengen visitors’ visa application process. Visas are issued restrictively with the aim of identifying potential overstayers. Carling shows that the socio-professional situation criteria for obtaining a visa brings about a social stratification of migration where the profile of a migrant worker tends to be that of an individual who disposes of some initial wealth, a permanent occupation, some education and most likely relatives abroad. Thus, although more than half of the population in Cape Verde receives some kind of remittances, only a small minority of transfers reaches the poor. (World Bank, 2004, Ch. 4).
As a share of imports of goods and services, ED have grown from 20 percent to over 40 percent over the last decade and have been consistently above 200 percent of gross international reserves (Figure 3). The sharp decrease in the ratio of ED to gross reserves in December 1999 stems from a significant inflow of foreign direct investment related to privatization and large disbursement of bilateral and multilateral credits that led to strong accumulation of reserves of more than 2 months of imports of goods and services.
Devaluation fears spread from the last quarter of 1997 throughout the first half of 1998. The currency of Cape Verde, the Cape Verde escudo, was pegged to the Portuguese escudo from mid-1998 to end-1998. From January 4, 1999 it has been pegged to the euro at a rate of CVEsc 110.27 per EUR 1.
U.S. dollar, French franc, German mark, and Dutch guilder. These deposits are now held in euros and U.S. dollars.
The foreign exchange accrues to the commercial bank that holds the account. However, due to domestic liquidity requirements, the local commercial bank often sells the foreign exchange to the BCV.
Decree Law 45/2003 repealed Ministerial Order 63/95, which granted 1 percent annual bonus to ED. Commercial banks withdrew the bonus as from the renewal date of domestic currency ED. However, they continued to pay higher interest on ED than on residents’ deposits.
Convertibility of time and demand deposits back into foreign currency is not guaranteed and has to be approved by the BCV. However, the few attempted conversions in the past were all approved.
Casual investigation in commercial banks supports this result according to which emigrants returning home on vacation withdraw significant amounts of the accumulated interest on ED accounts, which they spend during their stay in Cape Verde.
The outflow in the month corresponding to the introduction of the new foreign exchange law overlaps with devaluation fears.
In particular Bourdet and Falck (2003) report that half of the credits is granted to individuals for residential construction and thus has limited impact on financial capital accumulation.
As documented by the RED, only flows from Portugal, and to a small extent from the Netherlands, decreased sharply in that period until interest rate parity was restored.
Although the RED reveals the role of income differentials as determinants of remittances, it fails to detect the significance of interest rate differentials in the analyses, possibly due to a structural break introduced in the series by the introduction of the high interest rate policy which is unaccounted for in the estimation.
Cape Verdean emigration has been heavily male dominated in the beginning of the 20th century. The proportion of women who emigrated to join their husbands increased significantly in the 1960s and 1970s. A large part of emigration of the 1990s consisted of female domestic workers while the demand for unskilled male labor has fallen in Europe.
Exchange rate stability and the enhanced convertibility of ED is a new situation characteristic of the late 1990s that potentially blurs the distinction between permanent and temporary migrants’ inclination to remit as assumed in the RED paper. The latter paper presupposes that permanent migrants are not willing to bear the sunk cost stemming from the non-convertibility of ED back into original currency, thus choosing to save exclusively abroad.
Average time deposit rate on ED is used in the estimation given that interest rates on the different types emigrant deposits are correlated and that the share of time deposits in the total ED is the largest.
This tests the possibility that increases in fiscal spending might have deterred both altruistic driven flows, by signaling to emigrants the lowering of needs of Cape Verdean residents, as well as speculative flows, by raising concerns about the sustainability of the exchange rate peg due to the decrease in the level of reserves.
The correlation coefficient is -0.4.
Caused by the change in the euro-dollar exchange rate.
The U.S. Bureau of Statistics and the Organization of Economic Cooperation and Development both record inward migration. However, their methodologies differ substantially (Adams, 2003).
Logarithms are used in order to interpret the coefficients from the estimation as elasticities.
Normality tests for the two specifications indicate that the hypothesis of normality of the residuals is rejected. However, Paruolo (1997) shows that in instances where normality is rejected due to excess kurtosis rather than skewness, as in the present case, the Johansen cointegration results are not affected.
Possibly two vectors exist for the euro area.