(Luận văn) remittances domestic investment in the east and southeast asia

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES THE HAGUE VIETNAM THE NETHERLANDS t to HO CHI MINH CITY ng hi ep w VIETNAM- THE NETHERLANDS n lo PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS ad y th ' ' ' , ju yi pl n ua al REMITTANCES- DOMESTIC INVESTMENT n va IN THE EAST AND SOUTHEAST ASIA ll fu A thesis submitted in partial fulfilment of the requirements for the degree of oi m MASTER OF ARTS IN DEVELOPMENT ECONOMICS at nh z z k jm ht NGUYEN THI HAl YEN vb By om l.c gm HO CHI MINH CITY, NOVEMBER 2011 n Dr NGUYEN HUU DUNG a Lu Academic Supervisor: CERTIFICATION t to ng hi "I certificate that the substance of the thesis has not already been submitted for any ep 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 w source~ ad ju y th • lo Signature used have been acknowledged in the thesis." n all yi pl n ua n va Date: al Nguyen Thi Hai Yen ll fu oi m at nh z z k jm ht vb om l.c gm n a Lu n va r ACKNOWLEDGMENTS t to ng hi My deepest gratitude to all persons and organizations for their support, provision of ep assistance and information that made this thesis possible; My dearest thanks to my supervisor, Dr Nguyen Huu Dung, for his continuous w n support, constructive follow-up, and insightful, helpful comments; lo ad Thanks to the lecturers and staff of the project, who helped improve my knowledge y th and fulfill the programme; ju My appreciation to Dr Cao Hao Thi & Mr Duy for their assistance in econometric yi " pl techniques; al n ua Finally, I am indebted to my parents and my elder brother for their love for and va support of me, keeping me in good condition for learning I would like to reserve the n pleasure of the graduate for them I am also grateful to my close friends for their warm ll fu encouragement oi m at nh z z k jm ht vb om l.c gm an Lu n va r 11 ABSTRACT t to ng hi Over the past decades, remittances have grown to become one of the largest ep 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 w n poverty-alleviating and consumption-smoothing effects on households in receiving lo ad economies, empirical questions are whether they directly impact investment and if not y th through which channels they have positive effects on investment This thesis goes in ju yi search of the answers to these questions by employing different methodologies pl including Ordinary Least Square, Fixed Effect and Generalized Method of Moments al n ua However, research scope is limited within some economies in East and South-east va regions The results show that remittances have no direct impact on investment but n when being combined other channels such as financial development and institution fu ll Remittances are complementary to financial development in stimulating investment m oi Meanwhile, relationship between remittances and institution quality is not clear Some nh z investment; whereas the others are substitutionary at indicators indicate remittances are complementary to institution quality in boosting z ht vb Key words: Remittances, Investment, East & Southeast Asia, Financial k jm Development, Institution Quality om l.c gm a Lu n n va re 111 CONTENT t to CERTIFICATION i ng hi ACKNOWLEDGMENTS ii ep ABSTRACT iii CONTENT iv w n LIST OF TABLES i lo ad LIST OF ABBREVIATIONS ii y th CHAPTER 1: INTRODUCTION ju yi 1.1 Problem Statement pl 1.2 Research objectives al n ua 1.3 Research Questions va 1.4 Research Methodology n 1.5 Structure of the thesis fu ll CHAPTER II: LITERATURE REVIEW m oi 2.1 The concepts of remittance nh 2.2 Motivation and economic effects of remittances at z 2.3 Relationship between remittances and investment 10 z ht vb 2.4 Empirical studies 14 jm CHAPTER III: RESEARCH METHODOLOGY 18 k 3.1 Data and variable description 18 gm 3.1.1 Data 18 l.c 3.1.2 Description of variables ofinterest 19 om 3.2 Model specification & analytical steps 23 3.3.1 Ordinary Least Squares (OLS) estimator 24 n va 3.3.2 Fixed Effect (FE) estimator 25 an Lu 3.3 Methods of parameter estimations 24 ~ r 3.3.3 Generalized Method of Moments (GMM) 27 3.3.4 Application of GMM estimator in the thesis corresponding to each specification 28 IV CHAPTER IV: EMPRICAL RESULTS 31 4.1 Descriptive statistics 31 t to 4.1.1 Remittances in East and Southeast Asia 31 ng 4.1.2 Investment and economic growth in East and Southeast Asia 32 hi ep 4.1.3 Financial development, openness and lending interest rate in East and Southeast Asia 32 w 4.1.4 Institution quality in East and Southeast Asia 33 n lo 4.2 Bivariate correlation of the variables of interest 34 ad 4.2.1 The relationship between remittances and variables of interest 34 y th 4.2.2 The relationship between investment and the other variables 34 ju 4.2.3 The relationship between financial development and other variables 36 yi • pl ua al 4.3 Empirical Results 37 n 4.3 Examining the impact of remittances on domestic investment using OLS estimation technique va n 4.3.2 Examining the impact of remittances on domestic investment using fixed effect (FE) estimation technique 50 ll fu m oi 4.3.3 Examining the impact of remittances on domestic investment using Generalized Method of Moment (GMM) estimation technique 61 at nh 4.4 Brief discussion about the best model 73 z z CHAPTER V: CONCLUSION, RECOMMENDATION & LIMITATION 75 vb jm ht 5.1 Conclusion 75 5.2 Policy recommendation 78 k gm 5.3 Limitation and suggestion for further study 80 l.c REFERENCE 82 om APPENDIX 88 an Lu n va r v LIST OF TABLES t to ng Table 1: Variable description, Expected sign & Data Source 22 hi ep Table 2: OLS- REM 37 Table 3: OLS- REM- FD 39 w Table 4: OLS - REM - FD (M2) - INST 43 n lo Table 5: OLS- REM- FD (BANCRE)- INST 45 ad Table 6: OLS- REM- FD (PRlCRE)- INST 47 y th ju Table 7: FE -REM 50 yi Table 8: FE - REM - FD 52 pl ua al Table 9: FE - REM - FD (M2) - INST 54 Table 10: FE - REM - FD (BANCRE) - INST 56 n n va Table 11: FE -REM - FD (PRJCRE) - INST 58 ll fu Table 12:.GMM- REM 61 oi m Table 13: GMM- REM- FD 63 Table 14: GMM- REM- FD (M2)- INST 66 nh at Table 15: GMM- REM- FD (BANCRE)- INST 69 z z Table 16: GMM- REM- FD (PRICRE)- INST 70 vb Table A: Descriptive statistics on interested variables without institution quality 88 ht k jm Table B: Descriptive statistics on institution quality indicators 88 om l.c gm Table C: Bivariate correlation of the variables of interest 89 an Lu n va re LIST OF ABBREVIATIONS t to Foreign Direct Investment hi Financial Development ep ng FD FDI FE Fixed Effect w Gross Domestic Product lo ad GLS n GOP Generalized Least Square y th Generalized Method of Moment IMF International Monetary Fund INST Institution ODA Official Development Assistance OLS Ordinary Least Square REM Remittances WB World Bank ju GMM yi pl n ua al n va ll fu oi m at nh z z k jm ht vb om l.c gm n a Lu n va r 11 - - - CHAPTER I: INTRODUCTION t to ng This chapter will explain the reason for carrying out the thesis, its objectives hi ep and research questions In addition, a brief of methodology is also mentioned in this part Finally, the structure of the thesis will be presented w n lo 1.1 Problem Statement: ad Rapid economic growth and sustained development are goals pursued by y th ju almost governments and policy-makers Investment is a crucial motive for growth yi and development process Investment, of course, requires capital Most of pl ua al developing countries, unfortunately, usually encounter shortage of capital Capital source from domestic savings is rather limited due to living standard of residents n n va generally is still low Therefore, attracting foreign capital flows is one of the leading ll fu national policies for development Regarding foreign capital flows, portfolio oi m investment is high volatile and may cause negative effects for the economy without appropriate and active management (Silva et al., 2009) Foreign Direct Investment nh at (FDI) with relatively stable characteristics compared to portfolio investment usually z z attracts lots of attention and interest thank to its big benefits such as capital supply, vb job creation, technology transfer, and managerial know-how FDI, however, ht k jm typically requires a physical investment as well as transparency, stability and gm soundness in political environment and macroeconomic policies in the country l.c A foreign capital flow which has recently received much interest from om economists is remittances Remittances, the amount of money transferred by an Lu migrants to their families in home countries, have steadily increased since the mid1980s Statistically, recorded remittances reached an estimated volume of US$206 Indicators for Asia and the Pacific 2009) The volume of them is nearly the same re US$328 billion, accounting for over 70% total global remittances in 2008 (see Key n latest available data shows that remittance flows to developing countries reach va billion in 2006, compared to US$19.6 billion in 1985 (Ambrosius et al., 2008) The with foreign direct investment and twice higher than official development aid that t to help them rank at the second position in term of external finance source for ng developing countries Moreover, out of non-trade foreign currency inflows, hi remittances are in general the most stable, least volatile (Chami et al., 2008; Global ep Development Finance 2003) Thanks to the characteristic of stability, these inflows w may counter negative effects caused by the falling in capital flows such as FDI, debt, n lo and equity flows in recipient countries during an economic downturn (Silva et al ad 2009) and hence consolidate macroeconomic stability (Bugamelli and Paterno, ju y th 2008) yi Furthermore, m developing countries, the financial system is commonly pl ua al 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 n typic~lly the small and micro enterprises of the informal sector find ll fu population and n va GDP (Ambrosius et al., 2008) The authors insist: "A large proportion of the oi m 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) nh at shows that remittances promote financial development; whereas the finding of z z Bettin and Zazzaro (2009) holds that these inflows play substitute for vb underdeveloped financial sector in developing countries in stimulating investment ht k jm and growth gm Remittances' impacts on poverty, education, inequality are extensively l.c exploited; whereas research on remittances-investment nexus is still limited, leaving om a big gap that needs further exploration This gap derives from a common perception that remittances mainly serve for consumption purposes, not for an Lu investment That is why this thesis would like to exploit this aspect The thesis among all developing regions in which some are in the top remittance-receiving r the thesis Firstly, they are one of the largest recipients of international remittances n Asian developing countries There are some reasons for choosing these regions in va seeks to find out the impact of remittances on investment in East and Southeast