Macroeconomic determinants of remittances and growth in the Dominican Republic November 23 rd, 2004 Columbia University
Economic dynamics of remittances 1. Benefit to households 2. Distributive nature 1. Rural Sector 2. Country 3. Macro-economico Impact 1. FC source 2. Counter-cyclical role 3. Determined by macro-economic shifts 4. Multiplying effect 5. Effect on economic growth 4. Tied to finance: savings, credit, investment 5. Part of a broader process: The 5Ts
Dominican Republic: Economic growth 3500 20 3000 15 2500 10 2000 5 1500 0 1000-5 500-10 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2001 2002 2003-15 PC gdp gdp growth
Dominican Republic: Quarterly GDP and imports, 1997-2003 $7,000,000,000.00 $2,400,000.00 $6,500,000,000.00 $2,200,000.00 $6,000,000,000.00 $5,500,000,000.00 $2,000,000.00 $5,000,000,000.00 $1,800,000.00 $4,500,000,000.00 $1,600,000.00 $4,000,000,000.00 $1,400,000.00 $3,500,000,000.00 GDPUSD Imports $1,200,000.00 $3,000,000,000.00 $1,000,000.00 97-I 97- II 97-97- 98-I 98- II 98-98- 99-I 99- II 99-99- 00-I 00- II 00-00- 01-I 01- II 01-01- 02-I 02- II 02-02- 03-I 03- II 03-03-
Dominican Republic: Economic deterioration 35 200 33 180 31 160 29 140 27 120 25 100 23 80 21 60 19 40 17 20 15 1999 2000 2001 2002 2003* Foreign Exchange (nominal rate) Lending rate CPI (index) 0
220 215 210 205 200 195 190 185 180 175 170 Average amount sent by a Dominican 215 210 209 208 204 202 202 200 200 195 195 194 193 193 192 191 189 183 180 175 177 176 175 172 170 186 2-Jan 2-Feb 2-Mar 2-Apr 2-May 2-Jun Jul. 2002 Aug. 2002 Sept. 2002 Oct.2002 Nov. 2002 Dec. 2002 3-Jan 3-Feb 3-Mar 3-Apr 3-May 3-Jun 3-Jul 3-Aug 3-Sep Oct. 2003 Nov. 2003 Dec. 2003 4-Jan 4-Feb
Dominican Republic: Quarterly Remittances, 1997-2003 $700,000,000 $650,000,000 $600,000,000 $550,000,000 $500,000,000 $450,000,000 $400,000,000 $350,000,000 $300,000,000 $250,000,000 $200,000,000 98-I 98-II 98-98- 99-I 99-II 99-99- 00-I 00-II 00-00- 01-I 01-II 01-01- 02-I 02-II 02-02- 03-I 03-II 03-03- 04-I 04-II 04- * 04- *
Macroeconomic determinants Do remittances respond to economic shifts? How do remittances respond in the D.R.? Inflation: an increase in prices affects a household cost of living and thus prompt immigrants to increase their support to relatives at home; Interest rates (lending): as lending rates decline, investment increases; Foreign exchange: an increase in the supply of foreign currency may appreciate local currency. Unemployment DR : downward shifts in employment cause adjustment measures and new forms of income; Unemployment USA : same as above R DR t-1 = CPI DR +HispUn US + FX DR + IR DR (+) (-) (?) (-) [Expected sign in the statistical relationship] Where, R DR t-1 = Monthly remittance transfers to the D.R. (lagged values) HispUn US = Monthly unemployment in the U.S. among Latino immigrants CPI DR = Consumer price index in the D.R. FX DR = Foreign exchange (nominal) in the D.R. IR DR = Interest lending rate in the D.R.
Dominican Republic: Remittances, prices, interest and exchange rates 250 230 Foreign exchange -0.507 Current Price Index 0.46 *** Interest Lending Rate -0.105 Hispanic Unemployment 0.179 35 210.09 *** R2 = 0.54 adjusted R2 = 0.29, statistical significance p<.10 *, p < 0.05 **, p < 0.01 *** 30 190 170 25 150 130 20 110 Remittances (left axis) Consumer Prices (left axis) FX (right axis) 90 15 1/1/1999 5/1/1999 9/1/1999 1/1/2000 5/1/2000 9/1/2000 1/1/2001 5/1/2001 9/1/2001 1/1/2002 5/1/2002 Sept. 2002 1/1/2003 5/1/2003 9/1/2003 Jan.04 May. 04
Significance: basic support, women, age, income Home country variations in exchange rates and unemployment in the U.S. among Latinos does not have an effect on transfers. Market of transfers occur independently from exchange rate variations: under the economic crisis affecting devaluation, remittance transfers, and the control of its volume by companies, were not related to exchange rates. There is also correspondence between microeconomic and macroeconomic determinants: family commitment will increase with need and number of beneficiaries, and commitment. Administration of remittances OLS Regression on amount remitted Food Clothing Education Housing Business Savings Other Unknown/NR Domincan Rep. 80% 25.3% 21.3% 32.7% 4.0% 8.0% 14.0% 2.7 Having bank account Schooling Sex Income Length of time receiving remittances House caretaker Source: Orozco, Manuel. Survey conducted by the author. Number of beneficiaries B -22.584-10.038 12.994 6.745 25.964 13.042 -.925 Beta -.056 -.086.168 ***.019.128.135 ** -.003
Economic growth in the age of transnationalism and globalization Pablo Rodas (2000) economic integration is reflected in terms of the commercial flows (manufactures, agricultural products, and tourism) and the flow of factors of production (migration and foreign investment). (p.17) William Robinson (2003) a transnational model in Central America and the D.R. is observed in terms of production of exportprocessing factories (of clothes in particular), transnational services (especially tourism), export of non-traditional agricultural products, and remittances sent by Central Americans working in the United States (p.539). GDP dr = Remit dr + Tourism dr + Maquila dr + Non-traditionals dr
Dominican Republic: Remittances, non-trad exports, tourism, and maquila $6,000,000,000 r 2 : 0.4 adj. r 2 : 0.27 Tourism Non-tradit. Remittances Maquila Beta (Unstandardized) -0.202 0.286 0.368 0.01536 Beta (Standardized) $5,000,000,000-0.164.333 *.486 *** 0.006 Quarterly flows 93-03 600000000 500000000 $4,000,000,000 $3,000,000,000 400000000 $2,000,000,000 300000000 $1,000,000,000 $0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Remittances Tourism Maquila Nontrad. (right axis) 200000000
The national income equation in Latin America: a rent seeking and courtesan state? GDP: (X-M) + I + G + C -DOMESTIC SAVINGS - INVESTMENT -FOREIGN SAVINGS - INVESTMENT -Maquila, Tourism, Non-traditional exports -Transportation, Telecommunication, Nostalgic Trade -FDI: Transnational capital, migrant capital investment -TECHNOLOGY TRANSFER -UNILATERAL TRANSFERS -ODA- BILATERAL & MULTILATERAL -PRATE DONATIONS FOUNDATIONS, PPOs, HTAs -WORKER REMITTANCES
Immigrant economic practices (annual expenses) Family remittances Donations Consumption Capital investment Household economy (US$270) Community (US$10,000 year) Trade and services retail (US$3,000) Property and other I (US$5,000)
Policy implications Remittances respond to economic indicators, particularly inflation. They also conform to micro-determinants to provide basic assistance to as many people as possible; These efforts do contribute to economic growth and reflect a counter cyclical behavior An economic policy that seeks to increase migrant foreign savings and investment to stimulate the economy can induce a response of remittances to other indicators like interest rates. This also calls attention that remittances play an important role in increasing domestic consumption without dramatically affecting an increase in imports;
Remittance recipient households 60% Urbana Rural Income distribution in the Dominican Republic $1,321.76 50% $498.78 $324.20 $224.45 $124.69 40% 30% 20% Income share held by lowest 20% Income share held by second 20% Income share held by third 20% Income share held by fourth 20% Income share held by highest 20% 10% $0.00 $200.00 $400.00 $600.00 $800.00 $1,000.0 0 $1,200.0 0 $1,400.0 0 0% R.D. Source: Emmanuel Sylvestre & Associates survey (commissioned out by the author); Income distribution: World developement indicators, World Bank, 2003.