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Are Bilateral Remittances Countercyclical?

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Abstract

By putting together a relatively large data set on bilateral remittances of emigrants, this paper is able to shed light on the important hypothesis of smoothing. The smoothing hypothesis is that remittances are countercyclical with respect to income in the worker’s country of origin (the recipient of the remittance), while procyclical with respect to income in the migrant’s host country (the sender of the remittance). The econometric results confirm the hypothesis. This affirmation of smoothing is important for two reasons. First, it suggests that remittances should be placed on the list of criteria for an optimum currency area. Second, it brings into doubt plans by governments in some developing countries to harness remittances for their own use, in that government spending in these countries generally fails the test of countercyclicality which remittances pass.

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Notes

  1. Among trade economists, the subject goes back at least to Bhagwati and Hamada (1974).

  2. Rapoport and Docquier (2006) review the theory that has been developed as part of the New Economics of Labor Migration. Recent contributions include Özden and Schiff (2006) and Kugler and Rapoport (2007).

  3. Statistics cited here come from “Economic Implications of Remittances and Migration” in Global Economic Prospects 2006, World Bank, pp. 86–92.

  4. Sanket Mohapatra and Dilip Ratha, “Impact of the Global Financial Crisis on Migration and Remittances,” Economic Premise, World Bank Feb. 2010, 2.

  5. Prasad et al. (2003), Prasad et al. (2004), Prasad and Rajan (2008).

  6. Kaminsky et al. (2005), Reinhart and Reinhart (2009), Perry (2009), Gavin et al. (1996), and Mendoza and Terrones(2008).

  7. Lucas (1990), Alfaro et al. (2005), Gourinchas and Jeanne (2007), Prasad et al. (2007), Kalemli-Ozcan et al. (2009).

  8. E.g., Lane and Tornell (1998).

  9. Chami et al. (2005).

  10. Chami et al. (2008a) see macroeconomic advantages of remittances of the sort considered here. Martin (1990), on the other hand, points out that a steady flow of remittances can undermine the incentive for governments to create a sound institutional framework—a sort of natural resource curse for remittances.

  11. Talvi and Végh (2005), Gavin and Perotti (1997), Alesina et al. (2008).

  12. Jiménez-Martin et al. (2007) estimate bilateral workers’ remittance flows from the 27 members of the EU, to all recipient countries. Ratha and Shaw (2005), in the absence of hard data on bilateral flows, allocate the totals across partners.

  13. Roughly 10% come from developing countries. South Africa, for example, receives many immigrants from neighboring countries to work in its mines, farms, and factories, and sends remittances back to the home countries. In many Gulf countries, immigrants (called ex-patriate workers) constitute more than half of the private-sector labor force, both skilled and unskilled. For example, outward remittances from Saudi Arabia (not included in the developing country statistic) are about 7% of all remittances globally.

  14. There were problems in the Gulf countries in 2006–2008, for example.

  15. Singer (2008) makes the argument that remittances should be and are a determinant of the currency decision. His equation uses the level of remittances, but he cites earlier authors’ evidence of countercyclicality.

  16. Mundell (1961).

  17. There are also examples of inflows of remittances from emigrants apparently sustaining violent conflict—Northern Ireland, Eritrea/Ethiopia, Israel/Palestine—which again resemble effects of mineral wealth.

  18. World Bank (2006, Tables 4A.2.1 and 4A.2.3).

  19. Sayan (2006).

  20. Clarke and Wallstein (2004) and Yang (2007) find that remittance receipts go up in response to a natural disaster. Kapur (2005) finds that they go up in response to an economic downturn. Yang and Choi (2007) find that they respond to rainfall-induced economic fluctuations.

  21. Ghosh (2006) and Jiménez-Martin et al. (2007, p. 8, 14).

  22. The working paper version of this paper estimated regression equations for remittances that are received by four of the smaller countries of southern Africa. In this case it is a safe bet that the majority of emigrants reside in South Africa, and so we can use South African income as foreign income. The results suggested countercyclicality for most of these countries, especially when the coefficients on domestic and foreign (i.e., South African) income are constrained to be equal in magnitude and of opposite signs.

  23. In a study of remittances into Jamaica, Lake (2006) finds that they do respond to the difference between US and Jamaican income. She also argues against Jamaican government taxes or regulation on remittances.

  24. The other variables in their equation are per capita income in both countries, a measure of the transaction cost, and the exchange rate spread, and a dummy variable for dual exchange rates. Faini (2006) argues that the skill level of the migrant has a negative effect on remittances.

  25. The data point representing remittances from Portugal to Moldova looks like an outlier. But investigation reveals that this is a real phenomenon, not a data error or artifact.

  26. One might ask, if the cyclical behavior of migration flows is of equal interest to the cyclical behavior of remittances per migrant, why not also the stock of migrants? Two answers. First, in most cases the stock of migrants has been determined over a long history (by geographic, political, cultural and other factors), during which cyclical considerations are not relevant; we should get a better-specified equation and better estimates when controlling for it. It is only over a horizon of a few years that the cyclical question arises. Second, it is important to control for some sort of scale variable. It would not do to treat the absolute dollar level of US-Mexico remittances on a par with the absolute dollar level of Luxembourg-Lesotho remittances.

  27. Japan, for example, was essentially in recession throughout the 1990s; 10 years of stagnation continued to reduce the stock of immigrants.

  28. The countercyclicality does not show well, however, if the income measure is used in the panel data set or if the unemployment measure is used in the pure cross-section. I am indebted to Maurice Kugler for suggesting one possible explanation of this puzzle: the relative variation of detrended unemployment across countries may be limited, and the same with the variation over time of detrended income.

  29. Jiménez-Martin et al. (2007). Inspection of country pairs that appear in more than one data set show that the Lueth-Ruiz numbers are much higher, presumably because of a more expansive definition of remittances. In this light, an important next step would be to allow each remittance data set have its own intercept term (in logs).

  30. Singer (2008) finds that remittances as a share of GDP are a statistically significant predictor of the probability that a country will choose a fixed over a floating exchange rate.

  31. Chami et al. (2008b).

  32. Transactions costs for sending remittances have in the past been surprisingly high, due to lack of competition in such services. Ratha and Riedberg (2005).

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Acknowledgements

The author wishes to thank Olga Romero for dedicated research assistance; Erik Lueth and Marta Ruiz-Arranz for generously making data available; Maurice Kugler, Hillel Rapoport and conference participants for comments; and Robert Hildreth, Harvard’s Center for International Development, and the MacArthur Foundation for support.

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    Jeffrey Frankel

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Frankel, J. Are Bilateral Remittances Countercyclical?. Open Econ Rev 22, 1–16 (2011). https://doi.org/10.1007/s11079-010-9184-y

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