migration

Recent evidence suggests that remittances have a positive impact on economic growth. This post will examine evidence based on an international panel data set that captures the surge in migration and remittances observed during 2006-09. The dataset includes 70 countries spanning from 1990 to 2009. This to our knowledge is the most recent data set that has been used in empirical remittance work. The recent effort of countries to decrease money laundering, use of improved technology and decrease in transaction costs is leading to a decrease in the unofficial portion of remittances. There has also been a surge in migration and remittances in the last half of the past decade. Thus this dataset should more comprehensively capture the growth impact of remittances compared to previous studies. Different models used to calculate the impact of remittances on growth are detailed in the report titled Bangladesh: Towards Accelerated, Inclusive and Sustainable Growth—Opportunities and Challenges, Volume II, Main Report, published in June 2012.

The impact of remittances on per capita GDP growth is economically significant

What impact do remittances have on stimulating overall economic growth? Remittances can be used for consumption and investment which further stimulates demand for goods and services, as well as contribute to financial development. On the other hand, they can create dependence in recipients and cause real exchange-rate appreciation which adversely affects domestic production.

The answer is an empirical one which we can answer using available data. Our findings echo recent economic research which shows that remittances, even when not invested directly, can have an important multiplier effect.

In our study, we focused only on the magnitude of the impact of remittances on aggregate demand in Bangladesh and calculated the traditional Keynesian multiplier effect, that is how much income is generated from every remittance dollar, following the approach adopted by Nicholas Glytsos by estimating a consumption function, an investment function, and an imports function. To estimate the parameters we used data from the Bangladesh Bureau of Statistics national accounts covering the period 1981-2010. We ran simple Ordinary Least Squares regressions to estimate the structural parameters. Here is a summary of our results:

Remittances sent by migrant workers have emerged as a key driver of poverty reduction in many developing countries. Bangladesh has caught up with growing migration trends since the mid-70s when only 6,000 Bangladeshis were working abroad. Today, there are about 8 million. Migration has now become a major source of gainful employment for Bangladesh’s growing number of unemployed and under-employed labor force. The sharpest increase in the level of manpower exports occurred during 2006--2009. Remittances have grown at a rapid pace, particularly since 2004.

So, what are the key correlates of aggregate remittance inflows in Bangladesh? What does the data tell us about Bangladesh? Many researchers have used aggregate data to analyze the macro-economic factors affecting the behavior of remitters. For example, Barua et al (2007) show that income differentials between host and home country and devaluation of home country currency positively and high inflation rate in home country negatively affect workers’ remittances¹. Hasan (2008) finds remittances respond positively to home interest rate and incomes in host countries². Ordinary Least Squares estimation is frequently used to characterize the statistical relationships between aggregate remittance inflows and their proximate macro correlates.

The key finding is that a limited number of macroeconomic factors are important in predicting the behavior of aggregate remittances.