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Remittances , Financial D evelopment and G rowth. Filipe Serralheiro and Luis Bação Paola Giuliano , Marta Ruiz-Arranz. Content :. Introduction ; Motivations ; Macroeconomic terms ; Data (Description) ; Empirical Analysis ; Remittances and growth ( closer look at investment)
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Remittances, Financial DevelopmentandGrowth Filipe Serralheiro andLuisBação Paola Giuliano , Marta Ruiz-Arranz
Content : • Introduction ; • Motivations ; • Macroeconomic terms ; • Data (Description) ; • Empirical Analysis ; • Remittances and growth ( closer look at investment) • Conclusion ;
Introduction: • Remittances by international migrants constitute the largest source of external finance for developing countries after foreign direct investment (FDI). • In 2004 the remittance inflows amounted to 125€ billion, exceeding total developed aid by 50%. • The remittances had a great increasing in total international capital flows. • Relationship between remittances ,financial development and growth is a-priori ambiguous.
Motivations: • The main motivation of the author with this paper is to be explained in two ways: • If there exists literature of macroeconomic impact on remittances, contributing to the debate of impact on remittances on growth; • To explore how local financial sector development influences a country´s capacity to take advantage of remittances
In macroeconomic terms : • The author reefer two literatures: • The development impact of transactions (most transactions are spent on consumption) ; • The determinants remittances and the financial sector infrastructure and costs of particular transactions, influence the propensity to remit; This second part examines the role of evidence of complementarity / substitutability between transactions and financial development in promoting growth.
(use transactions / remittances ) Lack of development of financial markets Agents Promote economic growth • Then to evaluate the methods of the assumptions, the author analyzide the interaction of transactions / remittances and development, comparing / using a sample of about 100 developing countries.
1ºconstruct a new measure for remittances (100 countries), what substantially improve data limitations on remittances flows. 2º analyze the importance of remittances in promoting economic growth, looking specifically to the interaction between remittances and the financial growth.
Data: • Considers a sample of over 100 countries (1972-2002) • It´s composed by 3 items according to IFM´S Balance of Payment Statistics Yearbook (BOPSE) : Migrant transfers Worker´s remittances Compensation of employers
Descriptionof Data: Variety of measure to proxy for financial development: • Liquid liabilities of the financial system (M2/GDP) ; • The sum square of demand, time, saving and foreign currency deposits to GDP (DEP/GDP) ; • Claims on the private sector divide by GDP (Loan/GDP) ; • Credit provide by the baking sector to GDP (Credit/GDP) ; First set of regressions, the depend variable is the growth rate of output. The set controls include : • Inflation; • Openness; • Human Capital; • Government fiscal balance and investment ratio; • Population growth ;
Empiricalanalysis • Thegoalis to Explore therelationshipbetween financial developmentandgrowth. • Westartbyestimatingtheimpactofremittancesoneconomicgrowthby OLS. • (1) GDPit = β0 + β1GDPi;t−1 + β2Remit + β3Xit + μt + ηi + Eit • GDPi,t-1 - initial level of GDP per capita • Remit - remittances over GDP • Xit - matrix of control variables • μt– time specific effect • ηi - unobserved country-specific fixed effect • Εit - is the error term.
The Hypothesys to be tested is weather or not the level of financial depth affects the impact of remittences on growth (2) GDPit = β0 + β1GDPi;t−1 + β2Remit + β3FinDevit + β4 (Remit · FinDevit)+ β5Xit + μt + ηi + Eitwhere FinDev works as an indicator of financial depth
(1) GDPit = β0 + β1GDPi;t−1 + β2Remit + β3Xit + μt + ηi + Eit (2) GDPit = β0 + β1GDPi;t−1 + β2Remit + β3FinDevit + β4 (Remit · FinDevit)+ β5Xit + μt + ηi + Eit Is the impact of remittences homogeneous?
Does Financial development infuence the recipient’s country’s use of remittences and therefore it’s capability to influence growth?
Remittances and growth: a closer look at the investment channel • remittances boost investment, especially in countries with a less developed financial sector.
INVGDPit = β0 + β1INVGDPi;t−1 + β2Remit + β3FinDevit + (β4 Remit · FinDevit ) + β5Zit + μt + ηi + eit • β1INVGDPi;t−1 -> total investment to GDP • Z -> matrix of controls, which include per capita real GDP growth
The Results suggest that the impact of remittances on investment is positive across largely all levels of financial development
Conclusions • Remittances promote growth in less financially developed countries by providinganalternative way to finance investment. • By becoming a substitute for inefficientor inexistent credit markets, remittances help alleviate credit constraints contributing to improve thealocationof capital and to boosteconomic growth. • There is also a suggestion that there isaninvestment channel from which remittances can promote growth, where the financial sector does not meet the credit needs of the population. • Altho it’s possible that factors other than the degree of financial development may explain why remittances can have an impact on growth.
