UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS REMITTANCES AND ECONOMIC GROWTH IN DEVELOPING ASIA AND THE PACIFIC COUNTRIES A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By PHAM THI HANG Academic Supervisor: Dr. PHAM KHANH NAM HO CHI MINH CITY, December 2014 1 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Table of Contents List of Figures. 7 CHAPTER II: LITERATURE REVIEW. Remittance in Growth model.
Consequence of remittances .1 Remittances and capital accumulation .2 Remittance and labor force growth .3 Remittance and total factor productivity growth. Factors effect economic growth .7 Human capital formation. 32 CHAPTER III: METHODOLOGY. 41 CHAPTER IV: EMPIRICAL RESULTS.
Overview of remittances in developing Asia and the Pacific countries. Remittances and growth.1 Non-parametric analysis. 66 2 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com List of Tables Table 1: Data description .37 Table 2: Remittances to developing countries, 2010 -2013 (US$ billion) .42 Table 3: Summary statistics of variables .46 Table 4: Correlation matrix .46 Table 5: Estimation results .52 Table 6: List of countries and remittances (share of GDP, 2000-2012) .66 List of Figures Figure 1: Remittances and other resource flows to developing countries .5 Figure 2: Share of remittances by region in Asia and the Pacific countries, 2013 .43 Figure 3: Growth rate of remittances by region in Asia and the Pacific countries .43 Figure 4: Top 10 remittance-receiving developing countries in Asia and the Pacific, 2013 .44 Figure 5: Scatter plot of growth and remittances .47 3 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ABSTRACT Over the past three decades, remittance inflows have increasing dramatically and become the main source of foreign exchange both in absolute terms and as a percentage of GDP in many developing countries. However, the growth effect of remittance is still not well understood.
This study attempts to investigate the impact of remittance inflows on economic growth in developing Asia and the Pacific countries. Moreover, it examines whether remittances can effect on the impact of labor and capital on growth in remittance-receiving countries. The study uses a balanced panel data on remittance flows to 25 developing countries in Asia and the Pacific for the period 2000-2012. Endogeneity problem is controlled by system GMM estimator.
The results find no evidence suggesting the significant relationship between remittances and growth when remittance is considered as an explanatory variable in a standard growth regression. Taking into account interaction terms, this paper comes to conclusion while population growth and remittances is complementary, human capital development and remittances are used as substitutes to promote growth. 4 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CHAPTER I: INTRODUCTION 1. Introduction Remittance is one of the most crucial parts of total international capital flows.
It is transferred through official and unofficial channels. For instance, in 2013, official recorded worldwide remittance flows reached nearly $550 billion (World Bank, 2013). The unrecorded remittance flows is believed to be as large as 20 to 200 percent of total official remittance flows (Aggarwal et al. International remittance inflows to developing countries are expected to increase to 8.4 percent in 2014-2016 and can reach to $516 billion in 2016 (World Bank, 2013).
This forecast is calculated according to the outlook for GDP growth rate in key remittance-sending countries and remittance growth rate in the past. In other words, the outlook for remittances remains optimistically. Moreover, these flows are expected to get three times larger than official development assistance and become more stable than private debt and portfolio equity. Figure 1: Remittances and other resource flows to developing countries Sources: Migration and Development Brief 22, World Bank 5 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Because of the dramatic increase in size, remittance flow has attracted scrupulous attention of academics and policy makers.
They have believed that the money the migrants send back to their relatives and friends in home country may impact that country macroeconomics conditions in many aspects. For example, on the one hand, the migrants of skilled and educated labor raise serious doubts about the brain drain and effect on sustained economic growth of migrant-sending countries (Docquire & Schiff, 2009). On the other hand, the academic and policy circles believe that remittances can be seen not only as the main income for the low and middle-income households in developing countries but also as the crucial financial supply for domestic investment. Another advantage of remittances is that it is sent directly to family and friends without government intervention, thus, it seems to be less volatile than other nontrade foreign currency inflows.
Moreover, remittances also expected to promote consumption and reduce cost of capital in recipients’ country. Therefore, remittance inflows can have important implications for economic growth of recipient’s countries. While there is vast literature on the effect of remittances on the development prospect in migrant-sending countries, empirical studies on this issue have been done at the worldwide level or for developing countries as a whole with mixed result. For example, the study was done by Vargas-Silva, Jha and Sugiyarto (2009) pointed out that a 10 percent higher in remittances as a share of GDP leaded to a 0.2 percent higher in GDP growth.
Some other researchers argued that even though the impact of remittances on growth of receiving countries still depended on how this money was spent, and even when the households do not use remittances for investment, remittances may have an important multiplier effect. Lowell and De La Garza (2000) investigated that each one remittance dollar spent on additional consumption could encourage retail sales and further goods and services demand, and then helped to greatly stimulate growth and employment. However, Straibhaar and Wolburg (1999) discovered that strongly dependence on remittance can encourage continuing migration of the working-age population, especially high- 6 LUAN VAN CHAT LUONG download : add luanvanchat@agmail. Then, the welfare loss due to emigration cannot be compensated by.
Besides, if remittances provoke goods and services demand higher than the economy’s capacity, especially on non-tradable goods, remittances may cause inflation. In Egypt, because of the massive rise in remittances, agriculture land price had increased by 600% between 1980 and 1986 (Adams, 1991). Finally, remittances may create negative impact on growth by existing significant moral hazard problems. In particular, with additional income by remittances, people tends to work less and to diminish labor supply (Chami, Fullenkamp & Jashjah, 2003).
This study addresses the question whether remittance inflows promote economic growth in developing countries in Asia and the Pacific. It differs from previous studies in that it examines whether remittances can effect on the impact of labor and capital on growth in developing Asia and the Pacific countries. The study uses a balanced panel data on remittance flows to 25 countries in Asia and the Pacific for the period 2000-2012. The results show that while population growth and remittances is complementary, human capital development and remittances are used as substitutes to promote growth.
The structure of the paper is as follows. Chapter 2 provides an overview of existing theories and previous empirical studies. Chapter 3 presents the analytical framework, estimation technique and data descriptive. Empirical results are described in chapter 4.
The last chapter will conclude and provides some policy recommendations. Research objectives To evaluate the impact of remittances inflows on economic growth in developing Asia and the Pacific countries. To examine how remittances affect the impact of investment, population growth and human capital formation on growth in developing Asia and the Pacific countries. 7 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CHAPTER II: LITERATURE REVIEW Remittance flows are expected to have potential effect on economic growth due to its considerable increase.
This chapter provides theoretical framework along with empirical studies of the impact of remittances on growth. First, remittance definition and remittance in growth model are discussed. Then, section 3 examines the channel through which remittances may effect on economic growth. In the last section, empirical studies on the factors effect economic growth including remittances, investment, fiscal balance, trade openness, inflation, population growth and human capital formation are reviewed, respectively.
Remittance definition Remittances take place when one or more family members live and work abroad send money back to their remaining family in the home country (Chami, Cosimano & Gapen, 2006). IMF defined remittances in the fifth edition of Balance of Payments Manual (BPM5) as the sum of three items including worker’s remittances, compensation of employees and migrants’ transfer. Worker’s remittance is the current transfer by a migrant worker, a resident of another country or a worker who stays or expects to stay abroad for more than one year to their home country. According to BPM5, it is recorded under current transfer.
Compensation of employees is gross earnings of nonresident workers who live abroad for less than one year like border, seasonal worker or local embassy staff…. It is included under income in the current account (BPM5). Migrants’ transfer represents the capital transfer of financial assets by individuals who have a change of residence from one country to another country. According to BPM5, it is documented in the capital account of the balance of payments.
8 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com However, it has been argued that the inclusion of migrants’ transfers on remittance calculation is misspecification because of two underlying reasons. Firstly, since remittance refers to change in wealth transfer, migrants’ transfers involve assets remain in the same hands of people who have moved their accumulated assets from one country to another country. Secondly, there is no special need for any actual flows because of a change in residence status. The certain transaction is reclassification of assets.
Therefore, in the third annual meeting in July 2005, the UN Advisory Experts Group in National Accounts particularly recommended to remove migrants’ transfers from capital account because of no change on ownership. Because of the demand on the accuracy of measuring remittance flows, a working group composed of the World Bank, IMF and other international financial institutions was established in order to clarify remittance definition as well as provide guidance for collecting and estimating remittance statistics. This technical group made recommendations to the IMF Committee on Balance of Payments Statistics and the Advisory Experts Group in National Accounts with the following items: Replacing workers’ remittances by personal transfers which focus on household transfer. A new item, personal remittances, is created.
They will be measured as the sum of personal transfers and net compensation of employees. Migrants’ transfer is removed from the balance of payments framework. The assets’ transactions related to changes in individual’s residence will be recorded under other changes of assets and liabilities. The concept of migrant is eliminated in the balance of payments because personal transfers’ definition is based on the residency rather than migration status.
9 LUAN VAN CHAT LUONG download : add luanvanchat@agmail. Remittance in Growth model Economic growth is defined as an increasing not only in actual output over time but also the capacity of the economy to produce goods and services. The economists have devoted special attention on the importance of economic growth centuries ago in the attempt to find the way nations become healthier and how to increase the standard of living. There are numerous macroeconomists who have contributed significantly to the development of the study of economic growth both in theoretical and empirical.
However, this part will concentrate on the model that closely relevant to the study. The direct and permanent growth effects of enhancing variables like remittances, reforms or globalizations have been captured by using production function. However, empirical studies found that in annual data or even with short panel, these effects could not be estimated by regressing the growth rate of output on these enhance variables.