Beyond Altruism and Self-interest: The Growing Importance of External Factors in the Determination of Remittances Flowing to Latin America

ABSTRACT

Remittances have become an important and reliable source of funds for many developing countries, affecting the well-being of its population and the performance of their economies. However, challenging conditions in the economies were migrant workers reside has unveiled the increasing importance of external factors in determining their ability to send money back home. This study relies on migration patterns to create migration and distance-weighted measures of external condition, and uses the Arellano and Bond dynamic panel methodology to gauge the relevance of these external macroeconomic conditions during the 1995–2015 period for a set of 18 Latin American countries. The results indicate that external conditions, irrespective of the way in which they are measured, have a positive and statistically significant effect on the amount of remittances flowing into the region, and that such effect go beyond differences in levels, as relative differences prove to be important as well. While the results also show that remittances are inversely related to the income level of receiving countries and that these flows respond positively to better economic performance and higher interest rates in the receiving country, such altruistic and self-interest factors are less consistent than the one found for foreign economic activity.

KEYWORDS:

• Migration
• remittances
• Latin America
• macroeconomic impacts

JEL CLASSIFICATIONS:

• F22
• F24
• J61
• O54
• F62

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1 Official remittances to Mexico stand at around 2.3% of GDP.

2 Carling (2008) also provides an extensive review of motivations to remit.

3 Different studies have raised endogeneity concerns because domestic economic activity can affect remittances but remittances could also affect economic performance in the receiving country. Our specification controls for these endogeneity concerns through (i) the use of a dynamic panel data estimation, allowing past observations to be used as instruments for our explanatory variables and (ii) by declaring endogenous the growth rate of real GDP, inflation, and the migration share.

4 These data are available from the author upon request.

5 This control set is as comprehensive as possible but our specification, like any other, could still suffer from omitted variable bias as other relevant variables may be omitted when they are strongly correlated to the dependent variable and the remittances measure. Still, our choice of regressors is in line with existing literature in the area.

6 Country-level statistics are available in the author’s webpage together with other supplemental material.

7 Testing for bias and precision (by comparing the OLS, the fixed effects estimator, and the system estimator) determined that the Arellano-Bond first-differenced estimator is the appropriate estimator. Also, while the sample has small N, indicating potential problems with the Nickell bias and thus necessitating the use of Least Square Dummy Variable Corrected (LSDVC) estimator, the fact that some of the independent variables are not strictly exogenous renders the LSDVC estimation inappropriate.

8 The economic conditions of the destination countries would affect the immigrant’s ability to send funds to their countries of origin, but since the importance of these destination countries is conditional in its proximity to the country of origin, then such effect should be inversely correlated with the distance between such countries. Akobeng (2016), Acosta, Calderon, Fajnzylber, and Lopez (2008), and Fajnzylber and Lopez (2006) use a similar normalization to account for such proximity.

9 The complete results for these estimations are available in the author’s web page.

10 The real interest rate has also been redefined as the difference between the home country interest rate and the weighted average real interest rate in the destination countries, weighted by migration shares.

Additional information

Notes on contributors

Diego E. Vacaflores

Diego E. Vacaflores is an Associate Professor of economics at Texas State University. He specializes in capital flows and monetary policy affecting the growth and development of Latin America, with a special emphasis on remittances, foreign direct investment and cash transfer.