Ebook Emerging Market Business Cycles with Remittance Fluctuations
Officially recorded migrant remittances received by developing countries increased from $160.4 billion in 2004 to $166.9 billion in 2005, representing a 95 percent increase over 2000 by the World Bank estimates. Thanks to this fast growth, the total amount officially received by the developing world has almost tripled in nominal terms over the last decade. Perhaps more impressively, this growth has been visibly faster than the growth of private capital flows and official development assistance (ODA), enabling remittances to eventually surpass non-FDI (private debt and portfolio equity) and ODA flows, and to almost catch FDI receipts in magnitude as of 2004.
During the same year, remittance receipts exceeded combined public and private capital inflows in 36 developing countries and were larger than total merchandise exports in 12 others. In some countries such as Mexico, FDI receipts often fall short of remittances (World Bank, 2006a). As a result, remittances have become a more important source of foreign exchange than private capital flows, ODA and even FDI for many developing countries.
Popular stance in the policy circles and among many of the scholars studying remittances is to view this rapid growth as a generally positive development for developing economies on account of the following:
- 1. As differently from other private capital inflows, remittances do not create any liabilities such as debt servicing or profit transfers in the future.
2. Remittance flows are usually more stable than private capital flows including FDI (Ratha, 2003; Buch and Kuckulenz, 2004).
3. Remittances are likely to serve as macroeconomic stabilizers, since migrant workers are expected to increase the amounts transferred to help family members left behind compensate for the resulting drops in household income, whenever the economic activity back home slows down or falls (UNCTAD, 2006; World Bank, 2006a and b).
Yet, whether high remittance receipts are always a blessing depends on the nature of comovements, if any, between business cycles in the home countries of migrants and cyclical fluctuations in the remittance flows. The findings of Sayan (2004, 2006) indicate that remittance fluctuations may well be procyclical in individual countries and our results confirm that (see Figures 1 and 2, Table 1). How much to remit is a complex decision, as Sayan (2006) points out, involving many other factors than the migrants’ altruistic desire to help family members smooth their consumption, and different variables driving remittance behavior might be differently affected by the state of economic activity over home country business cycles. Returns to savings at home, for example, may converge to or diverge from those in the host countries, as home economies go through cyclical downturns and upturns, affecting the remittance behavior in turn (Sayan and Tekin-Koru, 2007).
Remittances could be a blessing indeed if they move counter to home country business cycles, as they will then serve as macroeconomic stabilizers that boost the recipient economy’s capacity to cope with recessions and Sudden Stops (see, for example, Bugamelli and Potern`o, 2005). If they are procyclical, on the other hand, they could be a setback as the drops in remittance receipts observed right before, during or shortly after cyclical contractions of economic activity or Sudden Stops would magnify the damage resulting from such contractions or stops. Answers to how effective countercyclical or procyclical remittance flows could be in lowering or inceasing the amplitude of macroeconomic fluctuations in the recipient economies depend on several factors and hence are less obvious.
In addition to the nature of co-movements between remittance fluctuations and business cycles, the response time of remittances to business cycle movements, and the share of remittances in GDP need to be taken into consideration while answering this question. Likewise, identifying the quantitative effects that remittance fluctuations could have on different macroeconomic variables during Sudden Stops experienced by the recipient economies need to be investigated quantitatively, using an appropriate model that captures general equilibrium interactions between key macroeconomic variables.
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