15

OCCASIONAL PAPERS
Knowledge for development effectiveness
Enabling poor rural people to overcome poverty
Remittances, growth
and poverty
New evidence from
Asian countries
Remittances, growth and poverty.
New evidence from Asian countries
by
Katsushi S. Imai
Economics Department
School of Social Sciences,
University of Manchester
United Kingdom
Raghav Gaiha
Department of Urban Studies and Planning
Massachusetts Institute of Technology (MIT)
United States
Abdilahi Ali
Economics Department
School of Social Sciences,
University of Manchester
United Kingdom
and
Nidhi Kaicker
Faculty of Management Studies
University of Delhi
India
The fifteenth in a series of discussion papers
produced by the Asia and the Pacific Division, IFAD
15
OCCASIONAL PAPERS
Knowledge for development effectiveness
Enabling poor rural people to overcome poverty
2012 by the International Fund for Agricultural Development (IFAD)
The opinions expressed in this publication are those of the authors and do not necessarily
represent those of the International Fund for Agricultural Development (IFAD).
The designations employed and the presentation of material in this publication do not imply
the expression of any opinion whatsoever on the part of IFAD concerning the legal status of any
country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers
or boundaries. The designations developed and developing countries are intended for
statistical convenience and do not necessarily express a judgement about the stage reached by
a particular country or area in the development process.
All rights reserved
ISBN 978-92-9072-346-2
Printed October 2012
3
Table of contents
Acknowledgements 4
Acronyms 5
Foreword 6
Abstract 7
Introduction 8
I. Financial crisis and remittances 10
II. Remittances, growth and poverty 12
III. Remittances and rural poverty 15
IV. Data and empirical strategy 17
V. Empirical results 19
IV. Concluding observations 29
Annex A
List of countries 30
Annex B
List of variables 31
Annex C
Models 32
References 34
Tables
1 Remittances and growth 20
2 PVAR results: Effects of volatility of capital inflows on economic growth 21
3a Remittances, growth and poverty (with lagged growth of agricultural VA per worker) 23
3b Remittances, growth and poverty (with lagged agricultural VA per worker (level)) 24
3c Remittances, growth and poverty (with lagged GDP per capita (level)) 25
4 Effect of remittances on poverty 27
Acknowledgements
This study was funded by the International Fund for Agricultural Development (IFAD).
We are grateful to Thomas Elhaut and Ganesh Thapa, Asia and the Pacific Division,
IFAD, for their support and guidance throughout the study. The present version also
benefited from the constructive suggestions of two anonymous reviewers. The views
expressed are our personal views and not necessarily those of the organizations to
which we are affiliated.
4
5
Acronyms
AsDB Asian Development Bank
FDI foreign direct investment
FE-2SLS fixed effects two stage least squares
FFR Financing Facility for Remittances for Rural Sector Development
GDP-PC gross domestic product per capita
MFI microfinance institution
ODA official development assistance
PVAR panel vector autoregression
RE-2SLS random effects two stage least squares
VAR vector autoregression
WDI World Development Indicators (World Bank)
The flow of remittances to countries in the Asia and Pacific region reached
US$204 billion in 2011, which constitutes about 55 per cent of the global remittance
flow. By 2014, this is projected to increase to US$257 billion. For many countries in the
region, remittances constitute the largest source of foreign exchange earnings and
represent more than 10 per cent of gross domestic product. Thus, a better understanding
of their impact on economic growth and poverty reduction could help policymakers
design appropriate remittance policies.
Many studies have examined the relationship between the flow of remittances
and economic growth. However, most past studies are based on cross-sectional
analysis, which assumes homogeneity in the observed relationship across countries.
Such an assumption is very restrictive, as countries vary widely in terms of structural
characteristics and institutions, which can have an important bearing on the
remittance/growth relationship. The first innovative dimension of this study is that
it uses panel data from 24 developing Asia/Pacific countries, covering the period
1980-2009, to examine the impact of remittance flows on economic growth and
poverty reduction.
Second, the study assesses both the direct impact of remittances on poverty
reduction and the indirect impact through their effect on overall economic growth.
Third, it analyses the effect of the volatility of capital inflows such as remittances and
foreign direct investment on economic growth. This represents an important
dimension, as some recent studies show that remittance flows to several Asian
countries have declined substantially owing to the global financial crisis.
The study confirms the positive contribution of remittance flows to economic
growth, as well as to poverty reduction. However, it also shows that they can be a source
of output shocks during times of economic uncertainty. Based on the findings, it
identifies several important policy implications and recommendations that can
contribute to harnessing the full potential of remittance flows.
It is hoped that the findings of this study will be useful to policymakers,
development practitioners, academics and civil society.
Ganesh Thapa
Regional Economist
Asia and the Pacific Division
Foreword
6
Remittances, growth and poverty. New evidence from Asian countries
7
Abstract
The present study re-examines the effects of remittances on the growth of GDP per
capita using annual panel data for 24 Asia/Pacific countries. The results generally
confirm that remittance flows have been beneficial to economic growth. However, our
analysis also shows that the volatility of capital inflows such as remittances and foreign
direct investment is harmful to economic growth. In other words, while remittances
contribute to better economic performance, they are also a source of output shocks.
Finally, remittances contribute to poverty reduction especially through their direct
effects. Migration and remittances are thus potentially a valuable complement to
broad-based development efforts.
Introduction
In 2010, migrants from developing countries sent more than US$325 billion to their
countries of origin, far exceeding the official development assistance (ODA) received.
And this does not include unrecorded flows. The increase in remittances to developing
countries has been due to two factors: (i) more people are settling abroad; and
(ii) easier, faster and cheaper modes of transmitting money to another country are now
available, which also facilitates recording by central banks.
Evidence of the impacts of migration on the growth and poverty levels of any
country is mixed. While the resulting remittances increase the income of the recipient
country, and consequently decrease poverty, there are social costs not accounted for in
these effects.
1
On the one hand, remittances reduce work effort and dampen long-term
growth, and on the other, they improve financial-sector development and thus
stimulate growth. Remittances have a positive impact on the credit rating of a country,
provide a large and stable source of foreign currency that can curtail investor panic,
help deal with a balance-of-payments crisis, and can be used for development projects
(Ratha, Mohapatra and Scheja 2011).
Remittances reduce poverty through increased incomes, allow for greater investment
in physical assets and in education and health, and also enable access to a larger pool of
knowledge (Adams 2011). Inflow of workers remittances results in physical capital
accumulation through increased access to finance, although this depends on the
recipients marginal propensity to consume. In Nepal, for instance, one third to one half
of the reduction in the poverty headcount ratio from 42 per cent in 1995/96 to
31 per cent in 2003/04 is attributed largely to increases in remittances (World Bank
2006). In rural Pakistan, temporary migration is associated with higher female and total
school enrolment (Mansuri 2006). On the other hand, migration of highly skilled
workers can result in a brain drain (Adams 2003; Docquier, Lohest and Marfouk 2007)
that could have a negative impact on the growth of the country in the long run.
2
Many Asia/Pacific countries enjoyed a surge of remittances until the beginning of the
global financial crisis and experienced economic growth and poverty reduction at the
same time, but no studies, to our knowledge, have assessed the impacts of remittances on
economic growth and poverty in these countries. The present study attempts to fill this
gap. Its objectives are to assess: (i) the relationship between remittances and growth of
GDP; (ii) whether volatility of remittances is harmful to growth; and (iii) whether
remittances reduce poverty. The econometric methods we have employed here correct for
endogeneity of remittances and other variables. Robust results are obtained, based on a
cross-country panel of a large number of countries in the Asia and Pacific region.
3
8
Remittances, growth and poverty. New evidence from Asian countries
1 Remittances also involve risk of psychological stress and adverse emotional impact, both for the migrant and
the family.
2 However, the effect of the brain drain could be positive if migration prospects foster investment in education
because of higher expected earnings abroad (Beine, Docquier and Rapoport 2001).
3 For example, if remittances depend on the costs of sending them, then remittances are considered an
endogenous variable. Under certain conditions, the costs could then be used as an instrument to correct this
endogeneity. For details, see Greene (2008).
9
The remainder of this study is structured as follows. Section 1 discusses the impact of
the financial crisis of 2008/09 on remittances, and section 2 reviews the recent
literature on the relationship of remittances to economic growth and poverty. Section 3
examines the potential contribution of remittances to community development and
rural poverty, drawing on a recent review of IFAD initiatives. Section 4 is devoted to a
review of the data and a brief discussion of the econometric specifications used.
Results are discussed in section 5, while section 6 concludes with observations from a
broad policy perspective.
I. Financial crisis and remittances
The global financial crisis has had a dampening effect on the remittances received
by developing countries. A recent study by the Asian Development Bank
(AsDB 2011) shows that remittance flows to Asian countries have declined since the
onset of the financial crisis, primarily due to rising unemployment. Analysis of
household surveys shows that, during the crisis, the number of migrant workers
declined by 7 per cent for Bangladesh, 2 per cent for Indonesia and remained
unchanged for the Philippines. There was a decline in incomes as a result of the
crisis. Ninety-seven per cent of households in Bangladesh, 82 per cent in Indonesia,
and 64 per cent in the Philippines reported lower incomes. Apart from falling
remittances, the reasons include job losses, wage cuts and depreciation of the peso
(in the Philippines). Both savings and investments (in physical and human capital)
declined. As a coping mechanism, households in Bangladesh and Indonesia worked
more, and in the Philippines, borrowed more. Evidence from the Philippines shows
that children were removed from school as a result of the shock.
Although, in most cases, there has been a decline in remittances received by
developing nations (e.g. remittances to Tajikistan decreased by 29 per cent in 2009),
in some cases, remittances have increased due to workers coming back to their home
country and bringing their savings. This, however, may be just a temporary increase
(e.g. Pakistan witnessed a 23 per cent growth in remittances in the first half of 2009).
The Philippines received US$11.34 billion in remittances between January and
August 2009, as compared with US$10.94 billion for the same period in the previous
year. In Bangladesh, remittances increased from US$471 million in August 2007 to
US$935 million in August 2009. The absence of a steep decline in remittances in
some countries may be attributed to: (i) some permanent oversees migrants have not
suffered from the financial crisis; (ii) many migrants are settled in developing
nations that were not severely affected by the crisis; and (iii) migrants are engaged in
those jobs or industries that are relatively untouched by the crisis (Jha, Sugiyarto and
Vargas-Silva 2009).
More recent evidence points to a rise in remittances (IFAD 2011).
Migrant workers around the world began 2011 by sending home significantly more
money than they did in 2010. While Pakistan showed a 34 per cent increase,
Bangladesh reported a 2 per cent increase. This may be attributed to the rate of
recovery in the United States, the largest remitting economy. While short-term
migrant labourers tend to be the first to lose their jobs during an economic
downturn, they are often the first to be rehired during a recovery. So there is hope
for continued improvement in global remittances as the U.S. economy continues to
emerge from the crisis. Since the outbreak of the financial crisis, exchange rates have
been highly volatile. Accordingly, during 2010, while 70 per cent of the countries
showed an increase in dollars remitted, recipients in 60 per cent of the countries
experienced an actual decrease in the purchasing power of the money they received.
The rise of the dollar against developing country currencies at the outset of the
10
Remittances, growth and poverty. New evidence from Asian countries
11
global recession initially had a positive effect on families receiving remittances,
effectively delaying the effect of the crisis in those countries with a flexible exchange
rate. In 2010, however, that trend began reversing as developing country currencies
rebounded, leaving many recipient families to face the same financial pressures
experienced by migrant workers in more developed economies (ibid.).
12
Remittances, growth and poverty. New evidence from Asian countries
II. Remittances, growth and poverty
Remittances impact growth in the following three ways:
(i) By affecting the rate of capital accumulation. Remittances not only increase
the rate of accumulation of both physical and human capital, but also lower
the cost of capital in the recipient country. Thus, additional borrowing may
increase and lead to greater indebtedness. They may also have a role in
stabilizing the economy or reducing volatility, and hence in reducing the risk
premium that investors demand.
(ii) By affecting labour force growth. Remittance receipts have a negative impact
on labour force participation by substituting remittance income for labour
income and by creating more leisure, with the performance of less work.
(iii) By affecting total factor productivity growth. Remittances impact the efficiency
of investment, depending on who is making the investment decision (Barajas
et al. 2009). If the recipient makes the decision on behalf of the remitter, it is
likely that the decision is not as efficient as one made by a skilled domestic
financial intermediary in the case of formal capital inflow. Remittances may
result in greater financial development. But they can also result in exchange
rate changes inflow of funds can result in the Dutch disease, i.e. currency
appreciation and thus lower exports.
Barajas et al. (2009) examine the impact of remittances on growth in 84 recipient
countries, based on annual observations in the period 1970-2004. They use the
following instruments:
4
the ratio of remittances to the GDP of all other recipient
countries, which captures the effects of global reductions in transaction costs and other
macroeconomic determinants of remittances. In most cases, remittances have a
negative sign and, in others, there is no robust relationship between remittances and
economic growth.
Chami, Fullenkamp and Jahjahs model (2005) shows that remittances are
compensatory in nature, rising with the level of altruism, and falling as the recipients
wage in the high output stage rises, given a negative relationship between the recipients
income and the level of remittances. This is the opposite of what would happen if
remittances functioned as investment flows. The model also implies a negative
externality on both the immigrant and the recipient. Given the moral hazard issue
workers slackening with the receipt of higher remittances there is a negative effect on
aggregate output. Based on data for 113 countries over a 29-year period (1970-1998),
Chami, Fullenkamp and Jahjah (ibid.) controlled for lagged income gap and the
interest rate gap between the recipient country and the United States as determinants
of remittances, and showed that workers remittances have a negative and significant
effect on growth, which is consistent with the moral hazard issue.
4 As explained in footnote 3, certain conditions must be met for a valid instrument. For details, see Greene
(2008), as well as Imai et al. (2011) for tests of the validity of instruments.
13
Vargas-Silva, Jha and Sugiyarto (2009) examine the impact of remittances on poverty
and economic growth in Asia (using annual data). In their specification, GDP growth
rate and poverty gap ratio are expressed as a function of remittances (logarithm of
remittances as a per cent of GDP), logarithm of initial GDP per capita, primary school
completion rate, logarithm of gross capital formation, openness of trade and GDP
deflator. While the impact of remittances on growth is positive, the impact on poverty
is negative. A 10 per cent increase in remittances as a share of GDP in a given year leads
to about a 0.9-1.2 per cent increase in annual growth. A 10 per cent increase in
remittances (as a percentage of GDP) decreases the poverty gap by about
0.7- 1.4 per cent. Pradhan, Upadhyay and Upadhyaya (2008) examined the effect of
workers remittances on economic growth using panel data from 1980-2004 for
39 developing countries; they confirmed a positive impact on growth.
Adams and Page (2005) study the effect of international migration on poverty in
the developing world. Attention is given to endogeneity of migration and remittances
by using instrument variables. The instruments include: distance between
remittance- sending and receiving countries, level of education, and government
stability.
5
A merit of this study (compared with the extant literature) is that the
econometric analysis is based on a large data set (71 low- and middle-income
developing countries, covering migration, remittances, inequality and poverty).
Poverty indices are regressed on GDP per capita, the Gini coefficient of income
distribution, share of migrants in the population and (alternatively) per capita official
remittances. In addition, regional dummies are used. After taking account of the
endogeneity of international migration and remittances, these two variables have a
significant negative impact on poverty.
Aggarwal et al. (2011) assess the impact of remittances on financial-sector
development, using data for 109 countries over the period 1975-2007. Financial-sector
development is measured as the share of bank deposits or the ratio of bank credit to
the private sector, expressed as a percentage of GDP. This study addresses the problem
of reverse causality. The findings show that remittances are positively related to
the measures of financial development. The coefficient is larger for the
bank- deposit- to- GDP ratio than for that of bank credit to GDP. The results hold true
even for a smaller sample of countries (42) for which remittances also include those
received using informal or non-bank sources. After correcting for the endogeneity of
remittances using economic conditions in remittance-sending countries, and policies
and views on immigration in these countries the second-stage results show a positive
association between remittances and deposit and credit ratios. In line with this study,
using data for more than 100 countries over 1975-2002 and controlling for the
endogeneity of remittances and financial development, Giuliano and Ruiz-Arranz
(2009) investigated the relationship between remittances and growth. They found that
remittances promoted growth in less financially developed countries.
Remittances also help in reducing consumption instability in developing countries.
They act both as an ex-ante risk avoidance tool and an ex-post risk management
5 There are a few difficulties. (i) Use of the same set of instruments for both migration and remittances is
problematic. Specifically, remittances are likely to be affected by cost of transfers and exchange rate fluctuations,
among other factors. Also, the degree of altruism is key to remittances and not necessarily to migration.
(ii) Another difficulty is the separate use of migration and remittances in the poverty equation. Semyonov and
Gorodzeisky (2005) show that both matter.
14
Remittances, growth and poverty. New evidence from Asian countries
mechanism (e.g. remittances increase after natural disasters affect a region).
Combes and Ebeke (2011) analyse a cross-sectional panel of 87 developing countries
over the period 1975-2004 to estimate the impact of remittances on consumption
instability. They find that they significantly reduce such instability, the impact being
stronger in less financially developed countries. However, the stabilizing impact
decreases at higher remittance levels. Remittances also increase resilience to shocks,
such as natural disasters (e.g. floods) and macroeconomic events (e.g. a collapse of
export markets).
15
Our econometric analysis focuses on the role of remittances in reducing an overall measure
of poverty. The main reason for not examining the impact of remittances on rural poverty
through agricultural growth is paucity of cross-country estimates of rural poverty
especially in the context of the panel data models used here. However, some useful insights
on enhancing the impact of remittances on rural development and poverty can be found
in a recent account of IFADs initiatives (IFAD 2012). A selective summary is given below.
IFAD has been in the forefront of innovative practices to enhance the development
impact of remittances. A major endeavour is the creation of the multi-donor Financing
Facility for Remittances (FFR) for Rural Sector Development. Its goal is to leverage the
development impact of remittances and enable migrants and their families to achieve
financial independence.
The FFR has co-funded 50 innovative projects in more than 40 countries worldwide,
implemented by over 200 partner institutions on the ground. The majority of these
projects target: (i) governments, to encourage financial access to remittance senders and
recipients, and to empower migrant workers to realize their financial goals; (ii) the private
sector, to develop profitable services tailored to the needs of migrant workers and their
families; and (iii) diaspora organizations, to help them empower themselves, investing in
their members families and rural communities.
Up to 40 percent of remittances are sent to rural areas. But these areas pose specific
challenges that must be overcome to ensure access to finance by rural recipients. A few
illustrations will suffice (IFAD 2012):
Postal networks offer a unique combination of a broad global presence of
brick- and- mortar locations and a long tradition of procurement of financial services.
Through the modernization of rural branches and their scaling up, cheaper and faster
remittance services are being offered in Central and South Asia. The greater number of
clients served also allows post offices to develop strategies to increase revenues through the
cross-selling of financial services (e.g. postal savings accounts), together with an array of
other financial services tailored to the needs of clients.
Microfinance institution (MFI) networks are potentially the best equipped to provide
financial services to rural clients. By enhancing their capacity to offer remittance services,
MFIs stand to gain from both revenues and deposits, which can be used to make loans to
local community members. Training MFIs to become agents of remittance companies has
proved successful in helping agents serve their rural clients more efficiently for example,
FFR projects in Nepal and Tajikistan, among others.
Working with the private sector encourages attention to market data and
customer- oriented approaches. In Sri Lanka, the remittance-linked savings product
designed by Hatton National Bank provided access to financial products aligned to the
needs of migrant workers and their families, in particular insurance and loans for
production. The results of this initiative illustrate the value of scaling up successful
operations, where private-sector companies can have an impact far beyond the
envisaged original scope of a pilot.
III. Remittances and rural poverty
16
Remittances, growth and poverty. New evidence from Asian countries
Insurance products help protect migrant workers and their families against financial
risks. They are especially important when lack of access to formal financial services
forces migrants to make use of informal lenders. FFR experience in Nepal and Sri Lanka
demonstrates the untapped market potential of these products for migrants families,
even when a close-knit culture does not give much prominence to insurance.
Even if remittances can relieve the poverty of recipient households, and sometimes
have wider positive effects on communities, they do not automatically generate
development. In some specific contexts, remittances may enhance households
dependence. FFR is exploring how recipients could be enabled, as entrepreneurs, to
lessen their dependence on remittances.
17
Data
Our sample is dictated by data availability and consists of 24 Asia and Pacific
economies over the period 1980-2009. A list of countries, as well as definitions and
sources of all the variables used, are given in annexes A and B. Unless stated otherwise,
the data are drawn from World Development Indicators 2011 (World Bank 2011).
Remittances and economic growth
Based on the existing literature on remittances and growth, such as Chami, Fullenkamp
and Jahjah (2005), in our baseline specification growth rate of GDP per capita is
posited to depend on workers remittances as a share of GDP, a standard set of
determinants of growth such as lag of real GDP per capita, financial-sector
development, inflation, civil war, resource abundance, capital account openness and
investment, and unobserved country effects.
6
Following the empirical literature on economic growth, we include lagged real GDP
per capita to allow for convergence. Here, a negative coefficient is expected. In line with
Levine, Loayza and Beck (2000), we use deposit-money bank assets as a share of
deposit money and central bank assets (defined by Beck, Demirg-Kunt and Levine
2009) as a measure of financial-sector development to account for the fact that the
relationship between remittances and growth may work through the financial sector
(Guiliano and Ruiz-Arranz 2009). To capture the macroeconomic and political
environments, we account for inflation and civil conflicts measured by internal armed
conflicts from the UCDP/PRIO Armed Conflict Dataset (2009).
7
In addition, we
consider the role of resource abundance captured by fuel exports, as a percentage of
merchandise exports, sourced from the Quality of Government Dataset (2011).
8
We also use a capital-account openness measure, first introduced by Chinn and Ito
(2006), who take into account restrictions on cross-border transactions. Following
Barajas et al. (2009), we check the sensitivity of the remittances/growth nexus to the
inclusion of investment as a conditioning variable, recognizing that it may be one of
the most important channels through which remittances influence economic growth.
In an expanded specification, we add a few other control variables, including trade,
foreign direct investment (FDI), foreign aid, government expenditure and regime
durability measured by the number of years since the most recent regime change
(from the Quality of Government Dataset, 2011). Finally, we control for property rights
protection, captured by constraint on the executive from the Polity IV Dataset.
9
This follows Acemoglu and Johnson (2005), who make a strong case for the
appropriateness of this indicator as a measure of property rights protection. As this
6 For details of specification of the variables used, see annex C.
7 Available at www.prio.no/CSCW/Datasets/Armed-Conflict/UCDP-PRIO/ (accessed 5 November 2011).
8 Available at www.nsd.uib.no/macrodataguide/set.html?id=37&sub=1 (accessed 5 November 2011).
9 Available at www.systemicpeace.org/polity/polity4.htm.
IV. Data and empirical strategy
18
Remittances, growth and poverty. New evidence from Asian countries
10 Two different versions of two stage least squares (2SLS) are used, in which country effects are taken to be
either random (RE-2SLS) or fixed (FE-2SLS). For details, see annex C.
11 For details, see annex C.
variable captures procedural rules that constrain political leaders and other powerful
elites, it is closely linked to the security of private property rights.
We use a two-stage estimation procedure that first corrects for the endogeneity of
GDP per capita, financial development, investment and remittances, and then
estimates the effects of remittances on growth and poverty, allowing for unobservable
country effects.
10
For remittances we use lagged remittances and income gap between
the United States and each country as instruments.
Volatility of capital inflows and growth
It is generally accepted that most sources of foreign exchange for poorer countries tend
to follow global economic trends, increasing in good times and decreasing in bad
ones. Here, we empirically test whether the volatility of two types of inflows FDI and
remittances is harmful or beneficial to economic growth. To measure volatility, we
use the standard deviation of each variable measured over a non-overlapping five-year
period, as we are interested in a stable link between the volatility of capital inflows
and growth.
The model used has three dependent variables (i.e. real per capita income and
standard deviations of FDI and remittances), which are regressed on appropriate
instruments, and unobservable (fixed) country effects.
11
19
Remittances and growth
Our comments are confined to Table 1, which contains selected results of the expanded
specification.
12
The results show that macroeconomic instability in the form of high
inflation is detrimental to economic growth. This is in line with the conventional
wisdom that a stable macroeconomic environment reduces the risks and uncertainties
associated with investment projects and thus results in economic growth. Similarly, we
find that civil wars are negatively related to growth, presumably because of their
disruptive effects on economic activity.
Remittances are positively associated with better economic performance (the
coefficient ranges from 0.67 to 3.28). The existing literature (for example, Barajas et al.
2009) identifies various channels through which remittances are likely to enhance
growth, including the boosting of capital accumulation, labour force growth and total
factor productivity. While we did not explore these channels empirically, our results are
in sharp contrast with Barajas et al., whose empirical analysis finds no relationship
between remittances and growth, or Chami, Fullenkamp and Jahjah (2005) claiming
that remittances negatively affect growth. The reason why we have obtained different
results remains unclear, but it is surmised that focusing only on Asian countries and
more recent periods (1980-2009) may have overturned the sign of the coefficient
estimate. As the results are robust to different specifications and the favourable effects
of remittances on growth persist, the lack of a positive relationship between them in a
few studies reviewed here is suspect.
The results indicate that, on average, countries with open capital-account regimes
register higher rates of growth. This is in line with the new evidence, which indicates
that financial openness is likely to be associated with higher factor productivity and
greater efficiency, and hence better economic performance (Bekaert, Lundblad and
Harvey 2010). The estimated coefficients also suggest that both investment and natural
resources are positively related to growth.
The impact of regime durability on growth is positive, suggesting that countries
with stable governments tend to enjoy a higher level of economic growth. This variable
has previously been used as an indicator of political stability (e.g. Collier, Hoeffler and
Pattillo 2004). Both aid and government expenditure are inversely related to growth,
because aid may encourage corruption (as found by Knack 2001), while increased
government expenditures may crowd out private investment. Finally, FDI generally
carries the expected positive sign, even though it is mostly non-significant at the
10 per cent level.
To sum up, our findings indicate that remittances (as a share of GDP) have
promoted economic growth in our sample countries. In what follows, we investigate
the related issue of how volatility of remittance inflows influences economic growth
relative to other types of capital inflows, such as FDI.
12 For the omitted results, see Imai et al. (2011).
V. Empirical results
20
Remittances, growth and poverty. New evidence from Asian countries
Table 1
Remittances and growth
-14.657
(2.999)***
0.232
(0.080)***
10.719
(3.868)***
3.284
(0.636)***
-0.527
(0.375)
0.030
(0.040)
0.355
(0.498)
0.061
(0.364)
0.034
(0.020)*
0.676
(0.234)***
-0.006
(0.057)
-0.008
(0.289)
-4.857
(2.145)**
-0.982
(0.512)*
265
0.67
0.00
7.93
Lagged GDP
a
Investment/GDP
Fin. dev./GDP
a
Remittance/GDP
a
Inflation
a
Resource abundance
Cap. acc. openness
Civil war
Trade
Property rights
Regime durability
FDI
a
Gov. exp./GDP
a
ODA/GNP
a
Observations
Specification tests
b
Overidentification
Underidentification
F-statistic (weak inst.)
FE-2SLS
(1)
-2.920
(0.953)***
0.117
(0.049)**
1.144
(1.519)
1.065
(0.299)***
-0.607
(0.340)*
0.053
(0.016)***
0.729
(0.217)***
-1.089
(0.276)***
-0.011
(0.010)
-0.242
(0.141)*
0.039
(0.018)**
0.604
(0.220)***
0.460
(0.946)
-1.221
(0.281)***
265
RE-2SLS
(2)
Notes: Dependent variable is GDP per capita growth. Robust standard errors in parentheses. ***, ** and * indicate
significance at the 1, 5 and 10% levels, respectively.
a
Variables are in log form. Lagged real GDP, financial development and investment are instrumented with their own
lags. Remittance is instrumented with its 1
st
lag and the income gap between each country and the United States.
b
The specification tests are: (i) the overidentification test, which displays p-values for the Hansen J-statistic for the
null that instruments are uncorrelated with the error term and thus valid; (ii) the underidentification test, which
shows the p-values of the Kleibergen-Paap rk LM-statistic for the null that the excluded instruments are
uncorrelated with the endogenous variables; (iii) the weak identification test, which is the Kleibergen-Paap rk Wald
F-statistic for the null of weak correlation between the endogenous variables and the instruments.
21
Volatility of capital inflows and growth
Table 2 summarizes the results.
13
Volatility of both remittances and FDI is inversely
related to economic performance. The negative effects of volatility are marginally
greater with FDI than with remittances. While remittance flows may alleviate financial
constraints and thus stimulate economic development, they may also be a source of
output shocks, for example in situations where countries are unable to buffer against
sudden swings in inflows.
To understand better the response of income to changes in the volatility of capital
inflows, we also show the impulse response functions for our variables of interest the
volatility of remittances and FDI. Impulse response functions show that an exogenous
shock to the volatility of both types of capital inflows contracts economic growth
especially in the short run (i.e. in two to three years after the shock) in which countries
may find it harder to adjust to unexpected changes in capital inflows.
14
A related issue has been volatility of public expenditure in agriculture, and
consequently in capital formation, in some of the poorest countries in this region
(Cambodia and Laos, for example) as foreign flows declined in recent years (ODA and
other). This renders it difficult to accelerate agricultural productivity sustainably. As our
review shows, while remittances also declined during the initial phase of the financial
crisis, they recovered quickly, and to that extent acted as a buffer against declining
foreign flows and their dampening effects on living standards in rural areas.
Remittances and poverty in Asia
Here, we examine how remittances affect poverty in Asian countries as an extension of
the growth regressions in the previous sections, along the lines of Imai, Gaiha and
Thapa (2010). Among various poverty measures including both income and
non- income indicators we use international poverty headcount measures based on
the US$1.25 or $2-a-day poverty line, estimated by the World Bank (Ravallion, Chen
and Sangraula 2008), as they cover a large number of countries and years. However, as
Table 2
PVAR results: Effects of volatility of capital inflows on economic growth
0.130
(1.822)
0.196
(2.194)**
0.027
(0.211)
Rem volatility (t-1)
FDI volatility (t-1)
Income (t-1)
FDI volatility
-0.027
(2.010)**
-0.049
(-2.882)**
0.591
(21.872)**
Income
0.002
(0.010)
-0.001
(-0.014)
-0.090
(-0.998)
Rem volatility
Notes: The trivariate panel vector autoregression (PVAR) model is generated via generalized methods of moments
(GMM). Robust t-statistics appear in parentheses and ** indicates significance at the 5% level.
13 An important caveat to our results is that the sample size is reduced significantly with five-year averages
when calculating the volatility measures. Thus, we have also estimated models with four- and three-year
averages and the results remain largely unchanged. These alternative results are available on request from the
first-listed author, K.S. Imai (Katsushi.Imai@manchester.ac.uk).
14 For a brief exposition of impulse response function, see annex C.
these poverty estimates are usually based on household surveys that take place every
few years, the corresponding panel is highly unbalanced (i.e. the number of
observations for different countries varies a great deal). Constrained by limited data, we
have used a parsimonious specification in which growth rate of GDP per capita is
estimated by a small number of explanatory variables: a two-period, lagged growth of
agricultural value added (VA) per worker (or lagged level of agricultural VA per worker,
or lagged level of GDP per capita as an instrument), investment, financial development,
remittances and trade in the first stage of FE-2SLS.
15
In the second stage, the poverty
headcount ratio (based on either US$1.25 or $2 a day) is estimated by the same set of
variables except the instrument (i.e. GDP growth rate from the first stage). The growth
of two-year, lagged agricultural VA per worker is used as an instrument for economic
growth rate to capture the long-term effect of agricultural productivity on growth in our
sample countries in Asia.
Tables 3a, 3b and 3c give the FE-2SLS results for poverty. Table 3a is for lagged
agricultural growth per worker, 3b for lagged agricultural VA (in level) per worker and
3c for lagged GDP per capita. The first two columns of each table show the results for
poverty headcount based on US$1.25, and the second two columns on US$2.
Both cases, however, yield broadly similar results.
There is a striking difference in the effect of agricultural production on growth
depending on whether we use its level or growth. In Table 3a, we observe a strong and
statistically highly significant effect of lagged agricultural growth on economic growth
(consistent with a key role of the agriculture sector as an engine of economic growth).
However, in Table 3b, the coefficient of the level of agricultural value added per worker
is negative and statistically significant. This presumably reflects the convergence effect
of agricultural production, that is, a country with low initial agricultural production
tends to have a higher growth than those with high initial production. If we replace
lagged agricultural value added per worker by lagged GDP per capita in Table 3c, we
find a similar pattern of results. The results of other variables are the same as before
investment, financial development and remittances have positive and significant
effects. However, the effect of trade openness is positive, but non-significant.
In the second stage, the share of remittances in GDP is negatively associated with
poverty in Tables 3b and 3c. It follows that remittances not only promote economic
growth, but also reduce poverty (on the two criteria of US$1.25 and US$2).
However, in Table 3a, the coefficient of remittances is negative, but not significant, in
the second stage of the poverty equation. Simulation requires significant coefficient
estimates and thus we will use Table 3b for poverty simulations.
22
Remittances, growth and poverty. New evidence from Asian countries
15 See footnote 10.
23
Table 3a
Remittances, growth and poverty
(with lagged growth of agricultural VA per worker)
2nd stage
Poverty
headcount
($1.25)
-0.140
(0.079)*
-
-
-0.006
(0.026)
-0.645
(0.619)
-0.010
(0.166)
-0.013
(0.006)**
101
1st stage
Growth
rate
(GDP-PC)
-
-
17.71
(7.015)**
0.326
(0.074)***
2.491
(2.649)
1.026
(0.562)*
0.0126
(0.028)
103
0.000
0.0123
6.375
Dep. Var
Growth rate
a
Lagged growth of Ag.
VA per worker
a
Investment/GDP
Fin. dev./GDP
a
Remittance/GDP
a
Trade
Observations
Specification tests
Overidentification
Underidentification
F-statistic (weak
identification test)
1st stage
Growth
rate
(GDP-PC)
-
-
19.25
(6.224)***
0.255
(0.069)***
2.891
(2.350)
1.169
(0.499)**
0.017
(0.026)
101
0.000
0.0026
9.561
FE-2SLS
2nd stage
Poverty
headcount
($2.00)
-0.100
(0.062)
-
-
-0.0021
(0.023)
-0.110
(0.442)
-0.008
(0.117)
-0.006
(0.004)
103
FE-2SLS
Notes: Robust standard errors in parentheses. ***, ** and * indicate significance at the 1, 5 and 10% levels,
respectively.
a
Variables are in log form.
24
Remittances, growth and poverty. New evidence from Asian countries
Table 3b
Remittances, growth and poverty
(with lagged growth of agricultural VA per worker (level))
2nd stage
Poverty
headcount
($1.25)
0.198
(0.093)**
-
-
-0.094
(0.033)***
-1.64
(0.785)**
-0.5005
(0.205)***
-0.0174
(0.008)**
101
1st stage
Growth
rate
(GDP-PC)
-
-
-11.09
(3.058)***
0.361
(0.072)***
5.431
(2.671)**
1.796
(0.549)***
0.0355
(0.028)
103
0.000
0.0005
13.165
Dep. Var
Growth rate
a
Lagged Ag. VA per
worker (level)
a
Investment/GDP
Fin. dev./GDP
a
Remittance/GDP
a
Trade
Observations
Specification tests
Overidentification
Underidentification
F-statistic (weak
identification test)
1st stage
Growth
rate
(GDP-PC)
-
-
-9.86
(2.935)***
0.309
(0.069)***
5.434
(2.440)**
1.878
(0.502)***
0.031
(0.026)
101
0.000
0.0012
11.298
FE-2SLS
2nd stage
Poverty
headcount
($2.00)
0.110
(0.052)**
-
-
-0.067
(0.021)***
-0.648
(0.495)
-0.2804
(0.120)**
-0.009
(0.005)*
103
FE-2SLS
Notes: Robust standard errors in parentheses. ***, ** and * indicate significance at the 1, 5 and 10% levels,
respectively.
a
Variables are in log form.
25
Table 3c
Remittances, growth and poverty
(with lagged GDP per capita (level))
2nd stage
Poverty
headcount
($1.25)
0.103
(0.051)**
-
-
-0.069
(0.022)***
-1.361
(0.608)**
-0.362
(0.143)**
-0.0162
(0.006)**
101
1st stage
Growth
rate
(GDP-PC)
-
-
-9.534
(1.657)***
0.364
(0.065)***
5.699
(2.376)**
2.519
(0.527)***
0.0537
(0.026)
103
0.000
0.000
33.111
Dep. Var
Growth rate
a
Lagged GDP
per capita (level)
a
Investment/GDP
Fin. dev./GDP
a
Remittance/GDP
a
Trade
Observations
Specification tests
Overidentification
Underidentification
F-statistic (weak
identification test)
1st stage
Growth
rate
(GDP-PC)
-
-
-8.479
(1.548)***
0.312
(0.063)***
5.654
(2.170)**
2.511
(0.481)***
0.048
(0.023)**
101
0.000
0.000
30.010
FE-2SLS
2nd stage
Poverty
headcount
($2.00)
0.054
(0.029)*
-
-
-0.048
(0.014)***
-0.504
(0.394)
-0.207
(0.089)**
-0.008
(0.004)**
103
FE-2SLS
Notes: Robust standard errors in parentheses. ***, ** and * indicate significance at the 1, 5 and 10% levels,
respectively.
a
Variables are in log form.
Table 4 discusses in detail the magnitude of the effects of remittances on poverty.
In the case of the headcount ratio (US$1.25), the indirect effect of remittances on
poverty (0.061) is obtained by multiplying 0.309 (the elasticity of economic growth
with respect to remittances) and 0.198 (the elasticity of poverty with respect to
economic growth), assuming that other factors are unchanged. With regard to the
direct effect, the elasticity of poverty with respect to remittances is -0.500. This is much
larger than the indirect effect in absolute terms, and the total effect is -0.439.
This implies that a 1 per cent increase in the share of remittances in GDP leads to a
0.44 per cent decrease in the headcount ratio, other things being equal. Likewise, in the
case of the US$2 poverty, the indirect effect of remittances is obtained as 0.040 and the
direct effect is -0.280, leading to a total effect of -0.240, other things being equal.
16
We have estimated the change in the poverty headcount ratio for 10 selected
countries using these elasticity estimates. Three cases have illustrative value
a 10, 20 or 50 per cent increase in the current remittance ratio and their poverty effects.
For example, in Bangladesh, a 50 per cent increase of the share of remittances in GDP
(from 11.78 to 17.67 per cent) would increase the GDP per capita growth rate from
4.30 to 4.97 per cent and reduce the poverty headcount (on US$1.25 a day) from
49.60 to 38.69 per cent and that on the higher cut-off (US$2.00 a day) from
81.30 to 71.54 per cent. These results imply that remittances reduce poverty
significantly, especially extreme poverty.
A few other cases further corroborate these results. In India, a 50 per cent increase
in the share of remittances in GDP (3.59 to 5.39 per cent) accelerates economic
growth (from 7.65 to 8.84 per cent) and reduces US$1.25 poverty from
41.6 to 32.45 per cent, and US$2 poverty from 75.60 to 66.53 per cent. Again, a
potential reduction in poverty arising from increased remittances is substantial.
Similar results are obtained for Nepal, the Philippines and Sri Lanka. In Nepal, where
the remittance share has increased significantly in recent years, a 50 per cent increase
a rise in the share from 23.83 to 35.75 per cent leads to a substantial poverty
reduction, from 55.10 to 42.98 per cent (US$1.25 a day), and from
77.60 to 68.29 per cent (US$2.00 a day). If Sri Lanka sees a rise in the share of
remittances from 8.01 to 12.02 per cent (i.e. by 50 per cent), the headcount ratio
(on US$2.00) will decline from 29.1 to 25.61 per cent. However, these results will
have to be interpreted with some caution, as the same elasticity estimates are applied
to all countries in the sample. Nevertheless, it would be safe to conclude that an
increase in remittances not only promotes economic growth, but also reduces poverty.
26
Remittances, growth and poverty. New evidence from Asian countries
16 Our results are consistent with Adams (2011), who surveyed 50 studies on the economic impact of international
remittances and concluded that remittances generally have a favourable impact on poverty and health. But negative
effects of remittances on growth, based on Chami, Fullenkamp and Jahjah (2005), are contentious.
27
log gdp pc
growth *
log
remittances
0.361 *
10.0
20.0
50.0
log poverty
log gdp pc
growth
0.110
% increase in remittance ratio 2.4 % reduction of poverty headcount ratio ($2 a day)
% increase in remittance ratio 4.8 % reduction of poverty headcount ratio ($2 a day)
% increase in remittance ratio 12.0 % reduction of poverty headcount ratio ($2 a day)
log poverty
log gdp pc
growth
0.198
% increase in remittance ratio 4.4 % reduction of poverty headcount ratio ($1.25 a day)
% increase in remittance ratio 8.8 % reduction of poverty headcount ratio ($1.25 a day)
% increase in remittance ratio 22.0 % reduction of poverty headcount ratio ($1.25 a day)
Table 4
Effect of remittances on poverty
indirect
effect
0.061 +
direct
effect
(-0.500) =
log gdp pc
growth *
log
remittances
0.309 *
10.0
20.0
50.0
Case 1. Headcount ratio based on US$1.25
log gdp pc
growth
log
remittances
-0.439
direct
effect
(-0.280) =
log gdp pc
growth
log
remittances
-0.240
indirect
effect
0.040 +
2009
10%
increase
20%
increase
50%
increase
2009
10%
increase
20%
increase
50%
increase
2009
10%
increase
20%
increase
50%
increase
11.78 %
12.96 %
14.14 %
17.67 %
0.98 %
1.08 %
1.18 %
1.47 %
3.59 %
3.95 %
4.31 %
5.39 %
Case 2. Headcount ratio based on US$2
Remittance ratio
(% in GDP)
2005
10%
increase
20%
increase
50%
increase
2005
10%
increase
20%
increase
50%
increase
2005
10%
increase
20%
increase
50%
increase
81.30 %
79.35 %
77.40 %
71.54 %
36.30 %
35.43 %
34.56 %
31.94 %
75.60 %
73.79 %
71.97 %
66.53 %
Poverty headcount
ratio
2005
10%
increase
20%
increase
50%
increase
2005
10%
increase
20%
increase
50%
increase
2005
10%
increase
20%
increase
50%
increase
49.60 %
47.42 %
45.24 %
38.69 %
15.90 %
15.20 %
14.50 %
12.40 %
41.60 %
39.77 %
37.94 %
32.45 %
Poverty headcount
ratio
2009
10%
increase
20%
increase
50%
increase
2009
10%
increase
20%
increase
50%
increase
2009
10%
increase
20%
increase
50%
increase
4.30 %
4.43 %
4.57 %
4.97 %
8.54 %
8.80 %
9.07 %
9.86 %
7.65 %
7.89 %
8.12 %
8.84 %
Growth rate
Bangladesh
China
India
% change in
remittance ratio
(% in GDP)
% change in
poverty
headcount ratio
US$2 a day
% change in
growth rate per
capita
% change in
poverty
headcount ratio
US$1.25 a day
28
Remittances, growth and poverty. New evidence from Asian countries
2009
10%
increase
20%
increase
50%
increase
2008
10%
increase
20%
increase
50%
increase
2009
10%
increase
20%
increase
50%
increase
2009
10%
increase
20%
increase
50%
increase
2008
10%
increase
20%
increase
50%
increase
2009
10%
increase
20%
increase
50%
increase
1.26 %
1.39 %
1.51 %
1.89 %
2.05 %
2.26 %
2.46 %
3.08 %
0.63 %
0.69 %
0.76 %
0.95 %
23.83 %
26.21 %
28.60 %
35.75 %
11.19 %
12.31 %
13.43 %
16.79 %
8.01 %
8.81 %
9.61 %
12.02 %
Remittance ratio
(% in GDP)
2005
10%
increase
20%
increase
50%
increase
2005
10%
increase
20%
increase
50%
increase
2005
10%
increase
20%
increase
50%
increase
2005
10%
increase
20%
increase
50%
increase
2006
10%
increase
20%
increase
50%
increase
2005
10%
increase
20%
increase
50%
increase
50.60 %
49.39 %
48.17 %
44.53 %
1.48 %
1.44 %
1.41 %
1.30 %
66.00 %
64.42 %
62.83 %
58.08 %
77.60 %
75.74 %
73.88 %
68.29 %
45.00 %
43.92 %
42.84 %
39.60 %
29.10 %
28.40 %
27.70 %
25.61 %
Poverty headcount
ratio
2005
10%
increase
20%
increase
50%
increase
2007
10%
increase
20%
increase
50%
increase
2005
10%
increase
20%
increase
50%
increase
2004
10%
increase
20%
increase
50%
increase
2006
10%
increase
20%
increase
50%
increase
2007
10%
increase
20%
increase
50%
increase
18.70 %
17.88 %
17.05 %
14.59 %
0.17 %
0.16 %
0.16 %
0.13 %
33.90 %
32.41 %
30.92 %
26.44 %
55.10 %
52.68 %
50.25 %
42.98 %
22.60 %
21.61 %
20.61 %
17.63 %
7.04 %
6.73 %
6.42 %
5.49 %
Poverty headcount
ratio
2009
10%
increase
20%
increase
50%
increase
2008
10%
increase
20%
increase
50%
increase
2009
10%
increase
20%
increase
50%
increase
2009
10%
increase
20%
increase
50%
increase
2008
10%
increase
20%
increase
50%
increase
2009
10%
increase
20%
increase
50%
increase
3.35 %
3.45 %
3.56 %
3.87 %
0.14 %
0.14 %
0.15 %
0.16 %
4.49 %
4.63 %
4.77 %
5.19 %
2.80 %
2.89 %
2.97 %
3.23 %
1.86 %
1.92 %
1.98 %
2.15 %
2.79 %
2.88 %
2.96 %
3.22 %
Growth rate
Indonesia
Kazakhstan
Lao PDR
Nepal
Philippines
Sri Lanka
% change in
remittance ratio
(% in GDP)
% change in
poverty
headcount ratio
US$2 a day
% change in
growth rate per
capita
% change in
poverty
headcount ratio
US$1.25 a day
29
The present study re-examined the effects of remittances on growth of GDP per capita
using annual panel data for 24 Asia/Pacific countries. The results confirm that
remittance flows have been beneficial to economic growth. However, the present study
also offers new evidence suggesting that the volatility of remittances and FDI is
harmful to economic growth. This means that, while remittances contribute to better
economic performance, they are also a source of output shocks. Finally, remittances
contribute to poverty reduction especially through their direct effects. This result is
robust to two measures of poverty, estimated using the cut-off points of US$1.25 and
US$2 a day per capita.
If our review of IFAD initiatives is anything to go by, remittances have potential in
community development and in the reduction of rural poverty over time.
Migration and remittances are thus potentially a valuable complement to
broad - based development efforts. However, we argue that they should not be seen as a
panacea for growth and poverty reduction, as they have been linked, among other
things, to lower work effort, brain drain and the Dutch disease. Also, remittances
cannot act as a substitute for official sources of capital such as aid, because private
money cannot be expected to contribute towards public projects. Moreover, not all
poor households receive remittances, and public funds are meant to alleviate poverty.
Nonetheless, in tandem with extant literature, our results suggest that remittances can
have a positive effect on growth and poverty reduction. A supplementary conclusion
emanating from this study is that policymakers should adopt policies that encourage
the use of remittances for physical and human capital investments, so as to harness
their full potential for entrepreneurial and economic development.
VI. Concluding observations
30
Remittances, growth and poverty. New evidence from Asian countries
Armenia
Azerbaijan
Bangladesh
Cambodia
China
Fiji
India
Indonesia
Iran (Islamic Rep. of)
Kazakhstan
Korea (Rep. of)
Kyrgyzstan
Lao Peoples Democratic Republic
Malaysia
Maldives
Mongolia
Nepal
Pakistan
Papua New Guinea
Philippines
Sri Lanka
Thailand
Tonga
Vanuatu
Annex A
List of countries
31
Variable Source
Growth Real per capita growth (World Bank 2010)
Lagged GDP Lagged real per capita income (WDI 2011 April) expressed
in log form
Remittances Workers remittances and compensation of employees,
received (% of GDP) (WDI 2011 April) expressed in log form
Financial development Captured by deposit-money bank assets/(deposit money +
central bank assets) (Beck, Demirg-Kunt and Levine
2009) expressed in log form
Investment Gross capital formation (% of GDP) (WDI 2011 April)
expressed in log form
Inflation Measured by CPI (annual %) (WDI 2011 April)
Resource abundance Proxied by fuel exports (% of merchandise exports)
(Quality of Government Dataset 2011 April footnote 8)
Capital account openness A measure of a countrys degree of capital account
openness based on the existence of multiple exchange
rates, current account and capital account transaction
restrictions (Chinn and Ito 2006)
Civil war Internal armed conflicts (UCDP/PRIO Armed Conflict
Database 2009 footnote 7)
Trade Exports plus imports (% of GDP) (WDI 2011 April)
expressed in log form
Property rights protection A measure of property rights protection or institutional
quality: measured by constraint on the executive from the
Polity IV Dataset. A 7-point scale where higher values imply
strong property rights (Marshall, Gurr and Jaggers 2009)
Regime durability Number of years since the most recent regime change
(Quality of Government Dataset 2011)
FDI Foreign direct investment (% of GDP) (WDI 2011 April)
Government size General government final consumption expenditure
(% of GDP) (WDI 2011 April)
Aid Oversees development aid (% of GNP) (WDI 2011 April)
Poverty headcount Percentage of population living on less than US$1.25 a day
at 2005 international prices (World Bank 2011)
Agricultural value added per worker Net output of agriculture sector (after adding up all outputs
and subtracting intermediate inputs) divided by the labour
force (World Bank 2011)
Annex B
List of variables
32
Remittances, growth and poverty. New evidence from Asian countries
(a) Model of remittances and economic growth
Our baseline specification takes the following form:
(1)
where for country i at time (denoting year) t, y denotes rate of growth of real GDP
per capita, LREM is logarithm of workers remittances expressed as a percentage of
GDP, n
i
is unobserved country-specific effect and
it
is the idiosyncratic error term.
The vector X contains a standard set of determinants of economic growth, such as lag
of real GDP per capita,
17
financial-sector development, inflation, civil war, resource
abundance, capital account openness and investment.
As some of the explanatory variables, including remittances, are likely to be
endogenous, we use the panel two stage least squares (2SLS). Here, lagged GDP per
capita, financial development and investment are instrumented by their own lags.
Our main variable of interest remittances is also instrumented by its own lag.
In line with Chami, Fullenkamp and Jahjah (2005), we use the income gap between
each remittance-receiving country and the United States as an additional instrument.
(b) Model of volatility of capital inflows and growth
Following Love and Zicchino (2006), we estimate a trivariate PVAR in the following form:
(2)
where for country i at time t, Y
it
is a vector of three endogenous variables (i.e. the
logarithm of real per capita income and the standard deviations of FDI and
remittances), n
i
denotes a country-specific fixed effect and
it
is the error term. Since by
construction the lagged dependent variables are correlated with the unobserved
country-level fixed effect, n
i
, we use forward mean-differencing, which validates the use
of lagged right-hand-side variables as instruments for the endogenous variables.
Our interest lies in generating impulse response functions that show the effects of
shocks on the adjustment path of the variables. The matrix of the impulse response
functions is based on the estimated VAR estimates and their standard errors, and the
confidence intervals are produced with Monte Carlo simulations.
18
Annex C
Models





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17 A two-year lag has been taken in the present study, but use of a one-year or a longer lag will not change the
results significantly.
18 For further details, see Imai et al. (2011).
33
(c) Models of remittance and poverty in Asia
The 2SLS panel model is estimated. Using a parsimonious specification, in the first
stage, growth of GDP per capita is estimated by a two-period, lagged growth of
agricultural value added per worker, or lagged (level of) agricultural value added per
worker or lagged GDP per worker as instruments, remittances, other controls including
investment, financial development and trade, and fixed country effects. In the second
stage, the poverty headcount ratio (US$1.25 or US$2-a-day poverty line) is estimated
by the same set of variables except the instrument (i.e. lagged GDP per capita).
The growth of two-year lagged agricultural value added per worker is used as an
instrument for GDP growth rate to capture the long-term effect of agricultural
productivity on growth in our sample of countries in Asia.
19
19 For specification of the variables used, see Tables 3a, 3b and 3c.
34
Remittances, growth and poverty. New evidence from Asian countries
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IFAD
The International Fund for Agricultural Development (IFAD) works with poor rural
people to enable them to grow and sell more food, increase their incomes and
determine the direction of their own lives. Since 1978, IFAD has invested about
US$14.3 billion in grants and low-interest loans to developing countries through
projects empowering over 400 million people to break out of poverty, thereby helping
to create vibrant rural communities. IFAD is an international financial institution and
a specialized UN agency based in Rome the United Nations food and agriculture
hub. It is a unique partnership of 168 members from the Organization of the
Petroleum Exporting Countries (OPEC), other developing countries and the
Organisation for Economic Co-operation and Development (OECD)
Contacts:
Ganesh Thapa
Asia and the Pacific Division
IFAD
Via Paolo di Dono, 44
00142 Rome, Italy
Tel: +39 06 54592098
E-mail: g.thapa@ifad.org
Valentina Camaleonte
Asia and the Pacific Division
IFAD
Via Paolo di Dono, 44
00142 Rome, Italy
Tel: +39 06 54592670
E-mail: v.camaleonte@ifad.org
www.ifad.org
Asia and the Pacific Division
Occasional Papers Series
1. Millennium Development Goal of halving poverty in the Asia and the Pacific region:
Progress, prospects and priorities, by Raghav Gaiha, Katsushi Imai and Mani A.
Nandhi [2006]
2. A methodology for assessment of the impact of microfinance on empowerment and
vulnerability, by Raghav Gaiha and Ganesh Thapa [November 2006]
3. History and spread of the self-help affinity group movement in India: The role played by
IFAD, by Aloysius P. Fernandez [July 2007]
4. Supermarkets, smallholders and livelihood prospects in selected Asian countries,
by Raghav Gaiha and Ganesh Thapa [October 2007]
5. Agricultural technology choices for poor farmers in less-favoured areas of South and East
Asia, by John Pender [April 2008]
6. Assessment of likely impacts of avian influenza on rural poverty reduction in Asia:
Responses, impacts and recommendations for IFAD strategy, by Jim Hancock and
Gyudam Cho [August 2008]
7. Drought, coping mechanisms and poverty: Insights from rainfed rice farming in Asia, by
Sushil Pandey and Humnath Bhandari [January 2009]
8. Sustainability of rural development projects: Best practices and lessons learned by IFAD in
Asia, by Tango International [May 2009]
India Case Study [August 2009]
Lao Peoples Democratic Republic Case Study [August 2009]
Philippines Case Study [August 2009]
Viet Nam Case Study [August 2009]
9. Institutions and rural services: Lessons from IFAD-supported projects in Asia,
by Ashok Seth [August 2009]
10. Fiscal stimulus, agricultural growth and poverty in Asia and the Pacific, by Raghav
Gaiha, Katsushi S. Imai, Ganesh Thapa and Woojin Kang [September 2010]
11. Interrelationships between labour outmigration, livelihoods, rice productivity and gender
roles, by Thelma R. Paris, Maria Fay Rola-Rubzen, Joyce S. Luis, Truong Thi Ngoc
Chi, Chaicharn Wongsamun and Donald Villanueva [December 2010]
12. Policy responses to the food price crisis and their implications: The case of four Greater
Mekong Subregion countries, by Mercedita A. Sombilla, Arsenio M. Balisacan,
Donato B. Antiporta and Rowell C. Dikitanan [December 2011]
13. Womens empowerment and microfinance: An Asian perspective study, by Vani S.
Kulkarni [December 2011]
14. Role of Agriculture in Achieving MDG 1 in Asia and the Pacific Region, by Katsushi S.
Imai, Raghav Gaiha and Ganesh Thapa [December 2011]
ISBN 978-92-9072-346-2
International Fund for Agricultural Development
Via Paolo di Dono, 44 - 00142 Rome, Italy
Tel: +39 06 54591 - Fax: +39 06 5043463
E-mail: ifad@ifad.org
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