UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM- THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS ' ' ' ,. REMITTANCES- DOMESTIC INVESTMENT IN THE EAST AND SOUTHEAST ASIA A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By NGUYEN THI HAl YEN Academic Supervisor: Dr. NGUYEN HUU DUNG HO CHI MINH CITY, NOVEMBER 2011 AN VAN CHAT LUONG download : add luanvanchat@agmail.c CERTIFICATION "I certificate that the substance of the thesis has not already been submitted for any degree and is not currently submitted for any other degree. I certify that to the best of my knowledge and help received in preparing the thesis and all source~ used have been acknowledged in the thesis." Signature • Nguyen Thi Hai Yen Date:.
UAN VAN CHAT LUONG download : add luanvanchat@agmail.co ACKNOWLEDGMENTS My deepest gratitude to all persons and organizations for their support, provision of assistance and information that made this thesis possible; My dearest thanks to my supervisor, Dr. Nguyen Huu Dung, for his continuous support, constructive follow-up, and insightful, helpful comments; Thanks to the lecturers and staff of the project, who helped improve my knowledge and fulfill the programme; " My appreciation to Dr. Cao Hao Thi & Mr. Duy for their assistance in econometric techniques; Finally, I am indebted to my parents and my elder brother for their love for and support of me, keeping me in good condition for learning.
I would like to reserve the pleasure of the graduate for them. I am also grateful to my close friends for their warm encouragement. 11 UAN VAN CHAT LUONG download : add luanvanchat@agmail.co ABSTRACT Over the past decades, remittances have grown to become one of the largest sources of external financial flows to developing countries, left ODA far behind and even exceeded FDI in some countries. While it is undeniable that remittances have poverty-alleviating and consumption-smoothing effects on households in receiving economies, empirical questions are whether they directly impact investment and if not through which channels they have positive effects on investment.
This thesis goes in search of the answers to these questions by employing different methodologies including Ordinary Least Square, Fixed Effect and Generalized Method of Moments. However, research scope is limited within some economies in East and South-east regions. The results show that remittances have no direct impact on investment but do when being combined other channels such as financial development and institution. Remittances are complementary to financial development in stimulating investment.
Meanwhile, relationship between remittances and institution quality is not clear. Some indicators indicate remittances are complementary to institution quality in boosting investment; whereas the others are substitutionary. Key words: Remittances, Investment, East & Southeast Asia, Financial Development, Institution Quality. 111 UAN VAN CHAT LUONG download : add luanvanchat@agmail.co CONTENT CERTIFICATION.
iv LIST OF TABLES. i LIST OF ABBREVIATIONS. ii CHAPTER 1: INTRODUCTION .5 Structure of the thesis. 5 CHAPTER II: LITERATURE REVIEW .1 The concepts of remittance .2 Motivation and economic effects of remittances .3 Relationship between remittances and investment.
14 CHAPTER III: RESEARCH METHODOLOGY .1 Data and variable description .2 Description of variables ofinterest.2 Model specification & analytical steps .3 Methods of parameter estimations .1 Ordinary Least Squares (OLS) estimator .2 Fixed Effect (FE) estimator .3 Generalized Method of Moments (GMM) .4 Application of GMM estimator in the thesis corresponding to each specification. 28 IV UAN VAN CHAT LUONG download : add luanvanchat@agmail.co CHAPTER IV: EMPRICAL RESULTS .1 Remittances in East and Southeast Asia .2 Investment and economic growth in East and Southeast Asia .3 Financial development, openness and lending interest rate in East and Southeast Asia .4 Institution quality in East and Southeast Asia .2 Bivariate correlation of the variables of interest.1 The relationship between remittances and variables of interest.2 The relationship between investment and the other variables .3 The relationship between financial development and other variables .1 Examining the impact of remittances on domestic investment using OLS estimation technique .2 Examining the impact of remittances on domestic investment using fixed effect (FE) estimation technique .3 Examining the impact of remittances on domestic investment using Generalized Method of Moment (GMM) estimation technique .4 Brief discussion about the best model. 73 CHAPTER V: CONCLUSION, RECOMMENDATION & LIMITATION .3 Limitation and suggestion for further study. 88 v UAN VAN CHAT LUONG download : add luanvanchat@agmail.co LIST OF TABLES Table 1: Variable description, Expected sign & Data Source.
22 Table 2: OLS- REM. 37 Table 3: OLS- REM- FD. 39 Table 4: OLS - REM - FD (M2) - INST. 43 Table 5: OLS- REM- FD (BANCRE)- INST.
45 Table 6: OLS- REM- FD (PRlCRE)- INST. 47 Table 7: FE -REM. 50 Table 8: FE - REM - FD. 52 Table 9: FE - REM - FD (M2) - INST.
54 Table 10: FE - REM - FD (BANCRE) - INST. 56 Table 11: FE -REM - FD (PRJCRE) - INST. 61 Table 13: GMM- REM- FD. 63 Table 14: GMM- REM- FD (M2)- INST.
66 Table 15: GMM- REM- FD (BANCRE)- INST. 69 Table 16: GMM- REM- FD (PRICRE)- INST. 70 Table A: Descriptive statistics on interested variables without institution quality. 88 Table B: Descriptive statistics on institution quality indicators.
88 Table C: Bivariate correlation of the variables of interest. 89 UAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF ABBREVIATIONS FD Financial Development FDI Foreign Direct Investment FE Fixed Effect GOP Gross Domestic Product GLS Generalized Least Square GMM Generalized Method of Moment IMF International Monetary Fund INST Institution ODA Official Development Assistance OLS Ordinary Least Square REM Remittances WB World Bank 11 UAN VAN CHAT LUONG download : add luanvanchat@agmail.co ------- - - - - - - - --------------------------- CHAPTER I: INTRODUCTION This chapter will explain the reason for carrying out the thesis, its objectives and research questions. In addition, a brief of methodology is also mentioned in this part. Finally, the structure of the thesis will be presented.1 Problem Statement: Rapid economic growth and sustained development are goals pursued by almost governments and policy-makers.
Investment is a crucial motive for growth and development process. Investment, of course, requires capital. Most of developing countries, unfortunately, usually encounter shortage of capital. Capital source from domestic savings is rather limited due to living standard of residents generally is still low.
Therefore, attracting foreign capital flows is one of the leading national policies for development. Regarding foreign capital flows, portfolio investment is high volatile and may cause negative effects for the economy without appropriate and active management (Silva et al. Foreign Direct Investment (FDI) with relatively stable characteristics compared to portfolio investment usually attracts lots of attention and interest thank to its big benefits such as capital supply, job creation, technology transfer, and managerial know-how. FDI, however, typically requires a physical investment as well as transparency, stability and soundness in political environment and macroeconomic policies in the country.
A foreign capital flow which has recently received much interest from economists is remittances. Remittances, the amount of money transferred by migrants to their families in home countries, have steadily increased since the mid- 1980s. Statistically, recorded remittances reached an estimated volume of US$206 billion in 2006, compared to US$19.6 billion in 1985 (Ambrosius et al. The latest available data shows that remittance flows to developing countries reach US$328 billion, accounting for over 70% total global remittances in 2008 (see Key Indicators for Asia and the Pacific 2009).
The volume of them is nearly the same 1 UAN VAN CHAT LUONG download : add luanvanchat@agmail.com with foreign direct investment and twice higher than official development aid that help them rank at the second position in term of external finance source for developing countries. Moreover, out of non-trade foreign currency inflows, remittances are in general the most stable, least volatile (Chami et al., 2008; Global Development Finance 2003). Thanks to the characteristic of stability, these inflows may counter negative effects caused by the falling in capital flows such as FDI, debt, and equity flows in recipient countries during an economic downturn (Silva et al. 2009) and hence consolidate macroeconomic stability (Bugamelli and Paterno, 2008).
Furthermore, m developing countries, the financial system is commonly underdeveloped and the economy has a low degree of monetization since they usually suffer a low ratio of credit to GDP and a low ratio of broad money supply to GDP (Ambrosius et al. The authors insist: "A large proportion of the population and typic~lly the small and micro enterprises of the informal sector find difficult to access bank credit and thus operate outside the financial sector, with low capital intensity and low productivity". A recent study by Aggarwal et al. (2005) shows that remittances promote financial development; whereas the finding of Bettin and Zazzaro (2009) holds that these inflows play substitute for underdeveloped financial sector in developing countries in stimulating investment and growth.
Remittances' impacts on poverty, education, inequality are extensively exploited; whereas research on remittances-investment nexus is still limited, leaving a big gap that needs further exploration. This gap derives from a common perception that remittances mainly serve for consumption purposes, not for investment. That is why this thesis would like to exploit this aspect. The thesis seeks to find out the impact of remittances on investment in East and Southeast Asian developing countries.
There are some reasons for choosing these regions in the thesis. Firstly, they are one of the largest recipients of international remittances among all developing regions in which some are in the top remittance-receiving 2 UAN VAN CHAT LUONG download : add luanvanchat@agmail.co countries in the world in absolute terms; namely, China, Philippines, Thailand and VietNam (see Key Indicators for Asia and the Pacific 2009). Next, research on the impact of remittances focus on other regions like Latin America (Ramirez et al., 2008), Africa (Anyanwu et al., 2010), Sub-Saharan Africa (Gupta et al., 2007; Singh et al., 2009), East and West Africa (Black et al. 2004), Europe and Central Asia (Black et al.
Finally, right after the financial crisis in 1997-1998 East & Southeast Asian saw a dramatic withdrawal of capital from the regions and limited decreased banking lending by banks in other regions; then flows have picked up gradually but not so high as in the period before crisis. Strengthening financial system with the aim of ensuring domestic funds are allocated efficiently while limiting economies' vulnerability to future fluctuations in capital flows, stimulating investment and hence economic growth is an important objective that governments of these countries have been making effort to obtain (see East Asian capital flows in Economic Roundup Spring 2003). However, once domestic financial system has not been developed completely yet, whether some factors, remittances for instance, could be a complementary or substitutionary element to financial sector in fostering investment in order to achieve the final objective: economic development. The answer will be founded in this thesis.2 Research objectives: The main objective of this thesis is to examine the impact of remittances on domestic investment in some developing countries in East and Southeast Asia.
It is to consider whether this impact is significant, if yes how and to what extent they are. Besides, the thesis also seeks for through what channels domestic investment can be fostered. The specific objectives are as follows: 1. To examine the impact of remittances on domestic investment.
3 UAN VAN CHAT LUONG download : add luanvanchat@agmail. To consider the interaction between remittances and vanous channels including financial development and institution quality in boosting investment 3. To submit recommendations to governments on the policies that might best promote the effective use of remittances in investment activities. Do international remittances significantly stimulate domestic investment in East and Southeast Asia developing countries? 2.
How do channels, inclusive of financial development and institution quality, affect remittance-investment nexus? 3.