The impact of remittances on economic growth evidence from selected ASEAN developing countries

UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE IMPACT OF REMITTANCES ON ECONOMIC GROWTH: EVIDENCE FROM SELECTED ASEAN DEVELOPING COUNTRIES BY NGUYEN HAI TRA MI MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, SEPTEMBER 2014 UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIALSTUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE IMPACT OF REMITTANCES ON ECONOMIC GROWTH: EVIDENCE FROM SELECTED ASEAN DEVELOPING COUNTRIES A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By NGUYEN HAI TRA MI Academic Supervisor: Dr LE CONG TRU HO CHI MINH CITY, SEPTEMBER 2014 DECLARATION I declare that “The impact of remittances on economic growth: Evidence from selected Asean developing countries” is my own work It has not been submitted to any degree at other universities I confirm that I have made by effort and applied all knowledge for finishing this thesis in the best way Ho Chi Minh City, September 2014 NGUYEN HAI TRA MI i ACKNOWLEDGEMENTS First and foremost I would like to show my gratitude to my supervisor, Dr Le Cong Tru, for invaluable comments, remarks and engagement through the learning process of the thesis Then I would like to send my sincere thanks to Associate Prof Dr Nguyen Trong Hoai, Dr Pham Khanh Nam and Dr Luca Tasciotti for giving me helpful remarks on my TRD as well as keeping me on the right track Last but not least, I am deeply indebted to my parents, my brothers and sisters for understanding and giving me spiritual assistance I will wholeheartedly be grateful forever for your love ii ABSTRACT Over the last decades, remittances have been regarded as one of the important sources of financial flows to developing countries Nevertheless, whether remittance serves economic growth or not is so far still a key empirical question This paper attempts to examine this issue In particular, the investigation covers seven Asean developing countries over the period of 2000 to 2011 A logistic regression technique is employed to evaluate the impact of remittances on economic growth To account for the inherent endogeneities in the relationship between remittances and economic growth, a Generalized Method of Moments (GMM) approach is used The regression results of the study show that, at best, remittances should not be treated as a source of capital flows and have a negative impact on economic growth because they are used for bad economic performance of the recipients This suggests that policy makers should have the recipients to allocate large amount of remittances in investment as contribution to economic growth Key words: remittances, economic growth, Generalized Method of Moments, capital flows iii TABLE OF CONTENTS DECLARATION i ACKNOWLEDGEMENTS ii ABSTRACT iii TABLE OF CONTENTS iv LIST OF TABLES vi LIST OF FIGURES vi LIST OF ABBREVIATIONS vii Chapter INTRODUCTION 1.1 Background to the Study 1.2 Migration and Remittance flows in ASEAN countries 1.3 Research objectives 1.4 Research questions 1.5 Justification of the study 1.6 Organization of the study Chapter LITERATURE REVIEW 2.1 A definition of remittance 2.2 Determinants of remittances 10 2.2.1 Microeconomic determinants 10 2.2.2 Macroeconomic determinants 13 2.3 Contribution of remittances to growth 15 2.3.1 Capital accumulation .15 2.3.2 Labor force growth 17 2.3.3 TFP growth 17 2.4 Empirical Review 20 2.5 Chapter summary 23 2.5.1 Empirical literature summary 23 2.5.2 Conceptual framework 25 iv Chapter METHODOLOGY .30 3.1 Data collection 30 3.2 Control variables 31 3.3 Research Methodology 34 3.3.1 Descriptive analysis 34 3.3.2 Econometric model 34 3.4 Estimation techniques .36 Chapter DATA ANALYSIS AND RESULTS 39 4.1 Descriptive Analysis .39 4.1.1 Trends of economic growth .39 4.1.2 Trends of remittances flows to selected Asean countries 41 4.1.3 Trends in remittance inflows and economic growth indicator in Asean countries .44 4.1.4 Remittances and other capital inflows .45 4.1.5 Descriptive statistics analysis 46 4.1.6 Correlation matrix among independent variables 47 4.2 Regression Results 48 Chapter CONCLUSION AND POLICY IMPLICATIONS 53 5.1 Conclusion 53 5.2 Government Policy Recommendation 54 REFERENCES 56 APPENDIX 61 v LIST OF TABLES Table 1.1 Migrant Remittances in Asean Countries Table 2.1 Summary of variables 23 Table 2.2 Summary of variables (continued) 24 Table 4.1 GDP per capita growth rate in selected Asean countries 40 Table 4.2 Remittances (current US$ million, period 2000-2011) 41 Table 4.3 Remittances (% of GDP, period 2000-2011) 43 Table 4.4 Descriptive Statistics 47 Table 4.5 Correlation Matrix 48 Table 4.6 Static model results 49 Table 4.7 Dynamic GMM regression results 51 Table 0.1: Data definitions 61 Table 0.2: Remittances (% of GDP, period 2000-2011) - Descriptive statistics 62 Table 0.3: Ordinary Least Squares 63 Table 0.4: Fixed Effects Estimation 64 Table 0.5: Generalized Method of Moments 65 LIST OF FIGURES Figure 1.1 Remittances, FDI, private debt & portfolio equity and ODA Figure 1.2 Personal remittance inflows (% of GDP) in Asean countries, 2012 Figure 2.1 Remittances effect on economic growth 19 Figure 2.2 Conceptual Framework 26 Figure 4.1 GDP per capita growth rate in selected Asean countries 40 Figure 4.2 Remittances (current US$ million, period 2000-2011) 42 Figure 4.3 Remittances (% of GDP, period 2000-2011) 43 Figure 4.4 Trends in Remittance inflows and GPD in selected Asean countries 44 Figure 4.5 Remittances, Foreign direct investment and Net official development assistance and official aid (US$ billions) 46 vi LIST OF ABBREVIATIONS FDI Foreign direct investment GMM Generalized Method of Moments ODA Official development assistances vii Chapter - INTRODUCTION This chapter introduces the thesis topic and identifies the main issues which will be covered in the following sections The background and motivation to the study will be introduced first Then the research objectives and research questions will come later The chapter will ends with the contribution of the study and the thesis structure 1.1 Background to the Study Nowadays migration has been an increasingly crucial characteristic in the globalization world, especially for developing countries It has been a major issue to consider by policy makers towards economic development Under migration context, remittances, an evidence for the ties connecting migrants with their family members in the home country, have grown significantly over years The World Bank estimates that worldwide officially recorded remittance flows reached $550 billion in 2013, in which developing countries received biggest share of these flows ($414 billion) However, the figure does not reflect true size of remittance flows as it should be larger when there are unrecorded remittance flows through unofficial channels Over the past three decades, remittance flows speeded up and now are expected to continue to be in the increasing trend with over $700 billion worldwide by 2016 The fast increase in remittances may result from two factors Firstly, migration between developing and developed countries has risen significantly in the last 20 years (WorldBank, 2007) Secondly, transactions costs for international payment transfer between individuals have declined thanks to technological improvements (Giuliano and Ruiz-Arranz, 2006) Looking at Figure 1.1, we can see that remittance flows are now nearly three times the size of official development assistance (ODA), and larger than private debt and portfolio equity flows to developing countries (WorldBank, 2013) Remittances as a source of foreign Chapter - CONCLUSION AND POLICY IMPLICATIONS 5.1 Conclusion The remittances-economic growth nexus has become an increasing concern among economists and policy makers in recent years While beneficial impact of remittances on poverty is clearly recognized, the effect of remittances on economic growth is still in debate With the aim of making new contribution to existing empirical papers, I the research about the economic impact of remittances using panel data on remittance flows to Asean countries during the period 2000-2011 Asean countries have experienced sharp increase in remittance inflows in recent decades, which claim me the investigation of effectiveness of such flow on economic growth in this region Many estimation methods are employed to analyze model such as OLS, Fixed effects and GMM After using GMM to control for possible endogeneity problems, I can find the most suitable model Regression results show negative impact of remittances on economic growth, while the economic effect of foreign direct investment goes in positive trend The findings suggest that remittances should not be treated as capital flows and they should have a negative impact on economic growth due to their compensation purpose for bad economic performance of the recipients In other words, remittances differ from private capital flows in terms of their motivation They are only used as a substitute for labor income When remittances are used by recipients to reduce labor supply, the economy may be adversely affected The results of this study can reflect the recent criticisms about economic effect of remittances given by some authors such as Barajas et al (2009) Barajas et al., (2009) claimed that there is very little evidence that decades of remittance inflows have contributed to economic growth of receiving countries and may even retard growth in some The author gave out the most persuasive evidence to support this finding that is the lack of an example of a remittances success story: a country in which remittances-led-growth enhanced its economic development Although remittances account for over 10% of GDP for long periods of time in some 53 countries, we should expect to find at least an example of this phenomenon However, no country can claim that remittances have had beneficial contribution to it economic growth 5.2 Government Policy Recommendation From the point of policy makers, these results may not bring them much encouragement and lead them to reconsider their optimistic view of remittances As found in this study, the reason why remittances have not contributed positively to economic growth is partly that they are not devoted for investment but only for consumption by recipient countries Therefore, the paper suggests that government policy should aim at inducing the recipients to allocate remittances increasingly for investment to accelerate economic growth The government should take efforts to more research about the role of remittances in recipients’ live There should be more case studies and household statistics improvement At household level, policy makers can have a more understanding of remittances usage and seek methods to channel remittances into uses that can promote economic growth For example, the government of remittances receiving country can design programs to train remittances receiving households to make effective investment decisions One of the investment forms is that households use remittances to finance new business However, they may lack the understanding and expertise to start up Thus the governments can provide them with useful advice in this regard The success of household’s business will help to level up economic growth of the country As shown in estimation results, the human capital formation (secondary school enrollment) has positive contribution to the growth of economy To this aspect, investment in human capital needs taking more strongly Apart from consumption, household recipients should use more part of remittance income in financing their members’ education This would help to increase school enrollment rate, from which the invested family member will have more chance to become 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World Bank [Online] Worldbank 2013 Migration and Development Brief Migration and Remittances Team, Development Prospects Group [Online] Yang, D 2005 International migration, human capital, and entrepreneurship: Evidence from Philippine migrant’s exchange rate shocks World Bank Policy Research Working Paper No 3578 [Online] 60 APPENDIX Table 0.1: Data definitions Variable Source Definition Remittances World Bank Migration and Remittances are defined as the sum of workers’ remittances, compensation of Remittances Factbook employees, and migrants’ transfers from the balance of payments It is computed as a share of GDP GDP per capita (y) World Development Indicators GDP per capita is gross domestic product divided by midyear population GDP is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products Data are in current U.S dollars Trade World Development Indicators Trade is the sum of exports and imports of goods and services measured as a share of gross domestic product Investment World Development Indicators Investment is defined as gross fixed capital formation in constant dollars as a share of GDP Gross fixed capital formation includes land improvements, plant, machinery, and equipment purchases; and the construction of roads, railways, schools, offices, hospitals, private residential dwellings, and commercial and industrial buildings Foreign Direct World Development Indicators Foreign direct investment are the net inflows of investment which are the sum of equity capital, reinvestment of earnings, 61 Investment other long-term capital, and short-term capital as shown in the balance of payments It is expressed in a share of GDP Aid inflows Enrollment World Development Net official development assistance and Indicators official aid received It is expressed in a share of GDP World Development The secondary school enrollment rate is the Indicators ratio of total enrollment, regardless of age, expressed as a percentage of the population of official secondary education age Population World Development Indicators The annual population growth is the exponential rate of growth of midyear population from year t-1 to t, expressed as a percentage Table 0.2: Remittances (% of GDP, period 2000-2011) - Descriptive statistics Mean Maximum Minimum Std Dev Observations Cambodia 2.437205 3.329377 1.250583 0.826024 12 Indonesia 1.054594 1.895843 0.634107 0.428544 12 Laos 0.281613 1.336281 0.030341 0.397587 12 Malaysia 0.564309 0.839299 0.365038 0.167589 12 Philippines 11.39358 13.15759 8.591038 1.247002 12 Thailand 0.987868 1.382589 0.643721 0.258373 12 Vietnam 6.031685 8.702314 3.365438 1.525977 12 Source: World Bank Migration and Remittances Factbook, own calculations 62 Table 0.3: Ordinary Least Squares Dependent Variable: LOG(GDPPCit) Method: Panel Least Squares Date: 05/26/14 Time: 09:52 Sample (adjusted): 2001 2011 Periods included: 11 Cross-sections included: Total panel (balanced) observations: 77 Variable Coefficient C -0.030951 LOG(GDPPCit(-1)) 1.024119 REMit Std Error t-Statistic Prob 0.188245 -0.164420 0.8699 0.030291 33.80884 0.0000 -0.001397 0.003051 -0.457714 0.6486 TRAit -0.000574 0.000255 -2.249730 0.0277 INVit 0.001658 0.001816 0.913155 0.3644 FDIit 0.013475 0.004498 2.995850 0.0038 AIDit -0.002284 0.004185 -0.545821 0.5870 ENRit -0.001661 0.001814 -0.915508 0.3632 POPit -0.005037 0.025291 -0.199159 0.8427 R-squared 0.994237 Mean dependent var 7.253539 Adjusted R-squared 0.993559 S.D dependent var 0.920674 S.E of regression 0.073891 Akaike info criterion 63 -2.262988 Sum squared resid 0.371270 Schwarz criterion -1.989036 Log likelihood 96.12503 Hannan-Quinn criter -2.153410 F-statistic 1466.371 Durbin-Watson stat Prob(F-statistic) 0.000000 2.177223 Table 0.4: Fixed Effects Estimation Dependent Variable: LOG(GDPPCit) Method: Panel Least Squares Date: 05/26/14 Time: 19:36 Sample (adjusted): 2001 2011 Periods included: 11 Cross-sections included: Total panel (balanced) observations: 77 White cross-section standard errors & covariance (d.f corrected) Variable Coefficient Std Error t-Statistic Prob LOG(GDPPCit(-1)) 0.910884 0.050179 18.15256 0.0000 C 0.725528 0.370791 1.956704 0.0549 REMit -0.000687 0.022268 -0.030860 0.9755 TRAit 3.95E-05 0.001765 0.022375 0.9822 INVit 0.004805 0.003880 1.238261 0.2203 ENRit 0.002232 0.001453 1.536510 0.1295 64 FDIit 0.017226 0.006164 2.794414 0.0069 AIDit -0.011257 0.007560 -1.489050 0.1415 POPit -0.119931 0.076098 -1.576012 0.1201 Effects Specification Cross-section fixed (dummy variables) R-squarede 0.995073 Mean dependent var 7.253539 squared 0.993961 S.D dependent var 0.920674 S.E of regression 0.071549 Akaike info criterion -2.263923 Sum squared resid 0.317396 Schwarz criterion -1.807338 Log likelihood 102.1611 Hannan-Quinn criter -2.081293 F-statistic 894.4219 Durbin-Watson stat Prob(F-statistic) 0.000000 Adjusted R- Table 0.5: Generalized Method of Moments Dependent Variable: LOG(GDPPCit) Method: Panel Generalized Method of Moments Transformation: First Differences Date: 05/29/14 Time: 10:39 Sample (adjusted): 2002 2011 65 2.265853 Periods included: 10 Cross-sections included: Total panel (balanced) observations: 70 Cross-section weights instrument weighting matrix White period standard errors & covariance (d.f corrected) WARNING: estimated coefficient covariance matrix is of reduced rank Instrument list: @DYN(LOG(GDPPCit),-2) INVit(-1) FDIit(-1) REMit(-1) @LEV(ENRit) @LEV(POPit) @LEV(TRAit) @LEV(AIDit) Variable Coefficient Std Error t-Statistic Prob LOG(GDPPCit(-1)) 0.491685 0.078613 6.254467 0.0000 REMit -0.062373 0.015446 -4.038032 0.0002 TRAit 0.003008 0.000878 3.424536 0.0011 INVit -0.004402 0.002069 -2.128217 0.0373 ENRit 0.024573 0.004178 5.881690 0.0000 FDIit 0.022668 0.007491 3.026118 0.0036 AIDit -0.015500 0.011560 -1.340791 0.1849 POPit -0.254644 0.106472 -2.391662 0.0198 Effects Specification Cross-section fixed (first differences) 66 Mean dependent var 0.114667 S.D dependent var 0.070385 S.E of regression 0.086557 Sum squared resid 0.464514 J-statistic 56.70191 Instrument rank 67 56.000000 ... microeconomic determinants and macroeconomic determinants If the microeconomic ones are about the cases of migration and the migrant’s connection with family at home, the macroeconomic ones related... examine the impact of remittance on economic growth in Asean developing countries In specific, the paper aims to determine the contribution of remittances to output growth in these countries 1.4 Research... exists the potential impact of remittances on the economy of Asean developing countries The reason for my choosing Asean is that remittance income has emerged as one of largest sources of foreign