## 5. Migration and Remittances in Latin America and the Caribbean: Macroeconomic Stabilizers and Engines of Growth?

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### Migration and remittance patterns
- Emigrant stocks in LAC (as a share of the home country population) are among the highest globally.
- Regional and subregional shares:
  - Caribbean: about one-fifth of the population lives abroad.
  - Central America, Panama, and the Dominican Republic (CAPDR) and Mexico: emigrants represent about 10 percent of the population in both instances.
  - South America (average): about 2½ percent of the subregion’s population.
  - Paraguay and Uruguay: emigrant populations represent more than 10 percent of their populations.
- Destinations:
  - About two-thirds of all LAC migrants reside in the United States.
  - Almost all emigrants from Mexico and four out of five emigrants from CAPDR live in the United States.
  - Caribbean migrants: slightly more than half reside in the United States; significant shares also go to Canada and Europe.
  - Within South America: Argentina and (historically) Venezuela have been important destinations; migration to the United States and Spain has grown since the 1980s.
- Drivers of emigration: search for better economic opportunities since the 1960s; violent conflict and deteriorating security in parts of Central America, especially through the 1990s.

### Characteristics of emigrants and remitters (U.S. microdata)
- Entry profiles and legal status:
  - Immigrants typically enter the United States in their early 20s.
  - Immigrants from Mexico and CAPDR tend to be younger and have lower levels of education compared with those from South America and the Caribbean.
  - Of South American and Caribbean migrants, 40 percent or more have attended college (or beyond).
  - Emigrants from Mexico and CAPDR are more likely to be undocumented and much less likely to become U.S. citizens than those from the Caribbean and South America.
- Occupations and wages:
  - Mexico and CAPDR emigrants: concentrated in construction, maintenance, transportation, production, and food preparation.
  - South America and Caribbean emigrants: concentrated in office and administration, sales, management, and health-related occupations.
  - Hourly wages: higher-skilled immigrants from South America and the Caribbean earn almost 60 percent higher, on average, than immigrants from Mexico and CAPDR (figure based on migrants who entered after age 22; wages in 2014 U.S. dollars).
- Remitting behavior:
  - About a third of LAC immigrants in the United States send remittances to their home countries.
  - The share who remit is somewhat higher for CAPDR and falls with age.
  - The likelihood of remitting does not appear to relate to the immigrant’s income.
  - Immigrants who are married but with an absent spouse are the most likely to remit.
  - Average amount remitted per remitting immigrant: about US$2,500 annually.
  - Conditional on remitting, immigrants in the United States with lower levels of education and income tend to remit more as a share of their income.
  - Immigrants from the Caribbean send home much less than those from Central America (conditional amounts by income bracket shown in the source).

### Size, channels, and costs of remittance flows
- Aggregate and cross-country magnitudes:
  - LAC remittances reached 1.4 percent of regional output in 2015.
  - Remittances to CAPDR and Caribbean countries are large as a share of GDP and dwarf those received by South American neighbors.
  - In four countries—El Salvador, Haiti, Honduras, and Jamaica—remittances exceed 15 percent of GDP.
  - Mexico is one of the largest recipients worldwide in nominal terms, though remittances as a share of GDP are smaller than for many CAPDR and Caribbean countries.
  - Remittances to the region peaked at about 2 percent of regional output before the global financial crisis, then fell precipitously during and after the crisis, and have since begun to recover but remain below the precrisis peak.
- Channels and costs:
  - Most remittances are deposited and received in cash through either money or value transfer service operators or banks.
  - Money transfer operators (largest: Western Union and MoneyGram) provide the dominant channel, with a market share of more than 80 percent of remittance channels in LAC.
  - Fees for sending remittances are substantial and reduce amounts received by families.

### Estimation approach for macroeconomic effects
- Objective: estimate the net effect of both emigration and remittances on real per capita GDP growth.
- Methodology highlights:
  - Two-way causality addressed via instrumental variables (two-stage least squares).
  - Regressions estimated on the period 1980–2015 (unbalanced sample).
  - OLS regressions include country fixed effects; IV regressions include country fixed effects but not time fixed effects.
  - Endogenous variables instrumented using their regional averages (excluding the country), the share of rural population, and unemployment in destination countries.
  - Controls: growth in the United States, FDI/GDp, export growth, change in the terms of trade, country risk, emigrant stock as a share of the home population, investment, and lagged real GDP per capita.
  - First-stage F statistics exceed 10 for all specifications except the Caribbean.
  - Specifications pass tests of overidentifying restrictions.
  - Data limitation: ages and skill levels of emigrants not available for sufficiently long periods; cross-sectional variation absorbed by country fixed effects.

### Empirical findings on growth and stability
- Net effects on growth:
  - Outward migration, taken separately, has a negative effect on per capita growth in LAC countries; most pronounced in subregions experiencing brain drain.
  - Remittances have positive (though not always statistically significant) growth effects, largest in high-remittance-receiving subregions (Mexico and CAPDR).
  - Net effect of migration and remittances on growth tends to be negative for the Caribbean; impact is less clear-cut for other groupings.
- Channels and heterogeneity:
  - Negative emigration effects arise from reductions in the labor force and potential brain drain, reducing innovation and imposing negative externalities.
  - Remittances can reduce labor supply by substituting for labor income, but can also support investment, education, and migrant networks that foster trade and investment.
  - South America: substantial heterogeneity—many countries have limited emigration/remittances, but Paraguay and Uruguay have large emigrant stocks; remittances are significant for Bolivia and Ecuador.

### Stabilizing role of remittances
- Remittances contribute to macroeconomic stabilization, with statistically significant beneficial effects especially for the Caribbean and CAPDR.
- Stabilizing channels:
  - Increase consumption smoothing (countercyclicality).
  - Help generate fiscal revenues.
  - Support financial stability.
- Remittances’ impact on real exchange rate and inflation tends to be minor; little evidence of adverse “Dutch disease” effects in most of LAC.

### Consumption smoothing and countercyclicality
- Empirical points:
  - Remittances lower income volatility in recipient countries; overall income including remittances is less volatile than domestic income for most LAC countries.
  - Higher remittances (as a share of GDP) are associated with more consumption smoothing across countries facing idiosyncratic shocks.
  - Consumption-growth correlations are lower where remittances are higher; cushioning of consumption risk in the Caribbean is largely associated with remittances.
  - Interaction with fiscal policy: consumption-smoothing impact occurs mainly during periods of fiscal consolidation and fiscal shocks, suggesting remittances and fiscal policy may act as substitutes.
- Illustrative example:
  - Grenada remittances rose from 2 percent of GDP in 2003 to 4 percent of GDP in 2004 (Hurricane Ivan), then normalized thereafter.

### Financial-sector stability and credit quality
- Empirical results (controlling for reverse causality):
  - Higher remittances are associated with lower nonperforming loans (NPLs) in LAC, though the effect is significant only for CAPDR.
  - Quantitative example: an increase in the remittances-to-GDP ratio for CAPDR by 1 percentage point would cause a drop in the NPL ratio by almost 0.5 percentage point.
  - The increase in the remittances-to-GDP ratio since 2000 has contributed to the fall in CAPDR’s NPL ratio by 1 percentage point.
  - In South America, other determinants (terms-of-trade shocks, cyclical factors) dominate NPL drivers.

### Fiscal revenue effects
- Mechanism: remittances typically not taxed directly, but spending out of remittances expands the base for indirect taxation and can raise fiscal revenues.
- Empirical results (controlling for determinants and endogeneity):
  - Remittances help mobilize fiscal revenues, particularly strongly and significantly for CAPDR and the Caribbean.
  - Example: the actual increase in the remittance-to-GDP ratio since 2000 in CAPDR accounted for an increase in fiscal revenues of 1 percent of GDP.
  - In the Caribbean, higher remittances associated with improved fiscal balances; in CAPDR associated with higher expenditures and no significant effect on fiscal balances.

### Limited impact on competitiveness and inflation
- Real exchange rate:
  - Estimates generally do not reveal a significant impact of remittances on the real effective exchange rate in LAC due to large leakages through imports and high openness.
  - A significant (but small) real exchange rate appreciation effect is found only for CAPDR.
- Inflation:
  - The lagged change in the remittances-to-GDP ratio is associated with somewhat higher inflation in the Caribbean and CAPDR.
  - The contemporaneous effect on inflation appears significant only for the Caribbean.
  - These inflation associations may reflect prevalence of fixed or stabilized exchange rate regimes in many countries in these subregions.

### Risks from dependence on remittances and migration destinations
- Concentration risk:
  - Heavy reliance on remittances concentrated from a single host country is risky: negative shocks to host-country labor markets or immigration policy can sharply reduce remittance inflows.
- Example from the global financial crisis:
  - A rise in Hispanic unemployment in the United States of 5½ percentage points was followed by a decline in remittances, harming incomes, external positions, and fiscal revenues in Latin America.
  - In CAPDR, remittances as a share of GDP declined by more than 1 percentage point and the ratio of fiscal revenue to GDP fell by more than 1 percentage point in 2008–10 relative to 2007; econometric estimates attribute about half of this revenue decline to the contraction in remittance flows.
- Migration and deportation statistics and risks:
  - Deportations of aliens from the United States totaled 3.7 million between 2006 and 2015; peaked at 434,000 in 2013.
  - The unauthorized immigrant population in the United States has been estimated at about 11 million since 2009.
  - Close to 80 percent of unauthorized immigrants in the United States are from Latin America, mostly from Mexico.
  - About half of the stock of immigrants originating from Mexico and two-thirds of immigrants originating from CAPDR were estimated to be unauthorized in 2015.
- Recent movements:
  - Remittances to some Latin American countries, such as El Salvador and Mexico, have recently increased in anticipation of potential shifts in U.S. immigration policy and remittance treatment.

### Key empirical coefficients (selected IV results; standard errors in parentheses)
- Real exchange rate:
  - LAC: 0.027 (0.03)
  - Caribbean: 0.003 (0.016)
  - CAPDR: 0.061*** (0.02)
- Revenue-to-GDp ratio:
  - LAC: 0.44 (0.31)
  - Caribbean: 1.16** (0.56)
  - CAPDR: 0.39** (0.16)
- Inflation (lagged change in remittances-to-GDp ratio):
  - LAC: 1 21 (20.34)
  - Caribbean: 2.52** (1.27)
  - CAPDR: 3.37* (1.97)
- Nonperforming loan ratio:
  - LAC: 20.48 (0.46)
  - Caribbean: n.a.
  - CAPDR: 20.45** (0.22)
- Note: standard errors in parentheses; *p < 0.1; **p < 0.05; ***p < 0.01.

### Net effect on growth and time horizons
- Overall:
  - Emigration and remittances together have had a small and ambiguous effect on real per capita GDP growth in LAC as a whole; effects vary across subregions.
  - Estimated cumulative joint impact uses changes in migrant stocks and remittances during 2003–13 and shows ranges because of two-way causality concerns.
- Subregional outcomes (2003–13):
  - Joint/net effect likely negative for the Caribbean and South America (large emigrant outflows; brain drain; relatively smaller remittance receipts).
  - Net impact appears small and possibly positive for CAPDR, which receives much higher remittances.
- Longer term:
  - Five-year-average specifications suggest the net effect becomes more negative in the longer term; remittances (and migration) appear unlikely to act as drivers of durable growth.
  - Mexico’s estimated effect is about zero but is estimated purely from time series variation with a particularly small sample.

### Policy-relevant implications and recommended actions
- Recognize remittances as a relatively reliable source of external financing and a countercyclical buffer, especially for disaster-prone Caribbean countries.
- Avoid overreliance on remittances as a growth strategy given limited long-term growth effects.
- Strengthen fiscal and financial policy frameworks to harness remittance-driven increases in revenues and financial inclusion while guarding against inflationary or competitiveness pressures where relevant.
- Monitor concentration risks tied to migrants’ destination countries and prepare contingency measures for sudden shocks to remittance flows or return migration.
- Specific recommended policy measures:
  - Reduce the cost of remittances and facilitate formal intermediation.
  - Strengthen anti–money laundering/combating the financing of terrorism frameworks and explore regional cooperation to improve regulatory environment and keep formal financial channels open.
  - Develop and enhance payments systems (including mobile money) and ensure remittance-service providers have access to them to foster competition and drive prices down.
  - Support measures to enhance financial sector resilience to volatility and potential sudden stops of remittances.
  - Educate consumers about remittance costs and improve transparency about costs.
  - Short-term steps to curb brain drain: limit subsidization of brain drain with public funds (for example, bonding schemes requiring beneficiaries of public education funding to remain in the home country for a number of years).
  - Long-term measures to retain skilled workers: structural reforms to foster job opportunities for the highly educated (for example, development of a medical tourism industry).
  - Promote return migration by skilled workers through recognition of foreign qualifications and experience, and provision of portable social security benefits.
  - Improve security in Central American and some Caribbean countries to increase productive use of remittances.
  - Leverage ties with diasporas to bolster foreign direct investment and tourism receipts.
  - Boost labor supply, in particular by raising female labor market participation, to offset the impact of emigration.
  - Cushion adverse impact of real currency appreciation from remittance spikes by reducing labor and product market rigidities and supporting credit provision to firms.
  - For countries with flexible exchange rates, allow exchange rate adjustments to act as a shock absorber in the short term.
  - In the long term, maintain fiscal discipline and prioritize social assistance expenditures to limit adverse effects on poverty and inequality.

### Risks, alternative channels, and operational considerations
- Taxing wire transfers has been proposed as a possible U.S. policy measure; taxing wire transfers could somewhat reduce remittances and force them to nonwire systems or informal channels.
- Alternative remittance channels mentioned include Bitcoin and sending gift cards as ways to remit funds outside the wire system.
- Global withdrawal of correspondent banking relationships (CBRs) has put upward pressure on remittance costs and disproportionately affected money transfer operators (MTOs).
  - 60 percent of members of the Asociación de Supervisores Bancarios de las Américas reported that remittances to LAC have been affected by changes in CBRs.
- Policy priorities: strengthen CBR access and ensure MTOs and new payment technologies can operate to lower transaction costs and preserve formal channels.

### Key boxes and annex highlights
- Box 5.1 — “Brain Drain” in Jamaica:
  - Nearly half of Caribbean emigrants residing in the United States have at least a college education; only one-quarter of other Latin American and Caribbean emigrants in the United States have at least a college education.
  - In Jamaica:
    - Among Jamaican-born women living in the United States, 50 percent have at least a college education; in Jamaica only one-quarter of women have a college education.
    - Nearly one-third of all women with at least a college education in Jamaica have emigrated; about 13 percent of those with high school or less have emigrated.
    - 65 percent of Jamaican immigrants are in nursing and health care practitioner sectors versus 7 percent in the United States–born population.
    - For men: 21 percent of men in Jamaica are college educated, while 37 percent of Jamaican men in the United States have at least a college education.
- Box 5.2 — Cost of sending remittances:
  - LAC cost: 6.2 percent for a US$200 transaction (regional average).
  - Costs declined over 2001–15 by about 40 percent for flows to El Salvador, Colombia, and Guatemala, and by 15 percent to Jamaica.
  - Mobile remittance-service providers are the most cost effective at 3.5 percent for a US$200 transaction.
  - UN SDG: reduce transaction costs to less than 3 percent and eliminate remittance corridors with costs higher than 5 percent by 2030.
- Box 5.3 — Mexico case study on poverty and inequality:
  - About 5 percent of Mexican households received remittances in 2014, on average about US$290 per month (US$140 median).
  - Remittances show a pro-poor pattern in Mexico; inequality would be higher in the absence of remittances even accounting for behavioral responses.
- Annex 5.1 — Migrant characteristics (entered the United States after age 22, 2014) — selected figures (preserve numeric values exactly):
  - Proportion female: Mexico 52; Central America 55; Caribbean 59; South America 58
  - Proportion married: Mexico 69; Central America 55; Caribbean 54; South America 66
  - Proportion in one-adult household: Mexico 17; Central America 22; Caribbean 24; South America 19
  - Female labor force participation: Mexico 46; Central America 58; Caribbean 63; South America 61
  - Male labor force participation: Mexico 79; Central America 81; Caribbean 68; South America 81
  - Married female labor force participation: Mexico 44; Central America 58; Caribbean 67; South America 61
  - Married male labor force participation: Mexico 81; Central America 82; Caribbean 71; South America 82
  - Female hourly wage (U.S. Dollars): Mexico 9.06; Central America 10.43; Caribbean 17.56; South America 14.27
  - Male hourly wage (U.S. Dollars): Mexico 12.34; Central America 13.33; Caribbean 19.34; South America 21.05
  - Age (mean): Mexico 49; Central America 50; Caribbean 56; South America 51
  - Years in United States (mean): Mexico 17; Central America 17; Caribbean 22; South America 17
  - Entry age (mean): Mexico 20; Central America 21.7; Caribbean 24.5; South America 24.5
  - Proportion U.S. citizens: Mexico 28.5; Central America 41.5; Caribbean 64.4; South America 51.6
  - Family size: Mexico 4.1; Central America 3.5; Caribbean 3.3; South America 3.2

*Source: IMF staff calculations, Regional Economic Outlook: Western Hemisphere, April 2017.*

### 5. Migration and Remittances in Latin

### 5. Migration and Remittances in Latin America and the Caribbean: Macroeconomic Stabilizers and Engines of Growth?

### Migration and remittance patterns
- Emigrant stocks in LAC (as a share of the home country population) are among the highest globally.
- Regional and subregional shares:
  - Caribbean: about one-fifth of the population lives abroad.
  - Central America, Panama, and the Dominican Republic (CAPDR) and Mexico: emigrants represent about 10 percent of the population in both instances.
  - South America (average): about 2½ percent of the subregion’s population.
  - Some South American countries (Paraguay and Uruguay): emigrant populations represent more than 10 percent of their populations.
- Destinations:
  - About two-thirds of all LAC migrants reside in the United States.
  - Almost all emigrants from Mexico and four out of five emigrants from CAPDR live in the United States.
  - Caribbean migrants: slightly more than half reside in the United States; significant shares also go to Canada and Europe.
  - Within South America: Argentina and (historically) Venezuela have been important destinations; migration to the United States and Spain has grown since the 1980s.
- Drivers of emigration: search for better economic opportunities since the 1960s; violent conflict and deteriorating security in parts of Central America, especially through the 1990s.

### Characteristics of emigrants and remitters (U.S. microdata)
- Entry profiles:
  - Immigrants typically enter the United States in their early 20s.
  - Immigrants from Mexico and CAPDR tend to be younger and have lower levels of education compared with those from South America and the Caribbean.
  - Of South American and Caribbean migrants, 40 percent or more have attended college (or beyond).
  - Emigrants from Mexico and CAPDR are more likely to be undocumented and much less likely to become U.S. citizens than those from the Caribbean and South America.
- Occupations and wages:
  - Mexico and CAPDR emigrants: concentrated in construction, maintenance, transportation, production, and food preparation.
  - South America and Caribbean emigrants: concentrated in office and administration, sales, management, and health-related occupations.
  - Hourly wages: higher-skilled immigrants from South America and the Caribbean earn almost 60 percent higher, on average, than immigrants from Mexico and CAPDR (figure based on migrants who entered after age 22; wages in 2014 U.S. dollars).
- Remitting behavior:
  - About a third of LAC immigrants in the United States send remittances to their home countries.
  - The share who remit is somewhat higher for CAPDR and falls with age.
  - The likelihood of remitting does not appear to relate to the immigrant’s income.
  - Immigrants who are married but with an absent spouse are the most likely to remit.
  - Average amount remitted per remitting immigrant: about US$2,500 annually.
  - Conditional on remitting, immigrants in the United States with lower levels of education and income tend to remit more as a share of their income.
  - Immigrants from the Caribbean send home much less than those from Central America (conditional amounts by income bracket shown in the source).

### Size and channels of remittance flows
- Aggregate and cross-country magnitudes:
  - LAC remittances reached 1.4 percent of regional output in 2015.
  - Remittances to CAPDR and Caribbean countries are large as a share of GDP and dwarf those received by South American neighbors.
  - In four countries—El Salvador, Haiti, Honduras, and Jamaica—remittances exceed 15 percent of GDP.
  - Mexico is one of the largest recipients worldwide in nominal terms, though remittances as a share of GDP are smaller than for many CAPDR and Caribbean countries.
  - Remittances to the region peaked at about 2 percent of regional output before the global financial crisis, then fell precipitously during and after the crisis given the concentration of emigrants in the United States, and have since begun to recover but remain below the precrisis peak.
- Channels and costs:
  - Most remittances are deposited and received in cash through either money or value transfer service operators or banks.
  - Money transfer operators (largest: Western Union and MoneyGram) provide the dominant channel, with a market share of more than 80 percent of remittance channels in LAC.
  - Fees for sending remittances are substantial and reduce amounts received by families.

### Macroeconomic effects: estimation approach
- Objective: estimate the net effect of both emigration and remittances on real per capita GDP growth.
- Methodology highlights:
  - Two-way causality between migration/remittances and growth addressed via instrumental variables (two-stage least squares).
  - Regressions estimated on the period 1980–2015 (unbalanced sample).
  - Ordinary least squares regressions include country fixed effects; instrumental variables regressions include country fixed effects but not time fixed effects.
  - Endogenous variables instrumented using their regional averages (excluding the country in question), the share of rural population, and unemployment in destination countries.
  - Controls include growth in the United States, foreign direct investment as a share of GDP, export growth, change in the terms of trade, country risk, the stock of emigrants as a share of the home population, investment, and lagged real GDP per capita.
  - First-stage F statistics exceed 10 for all specifications except the Caribbean (where sample sizes are particularly small).
  - Specifications pass tests of overidentifying restrictions.
  - Data limitation: ages and skill levels of emigrants are not available for sufficiently long periods to include in regressions; cross-sectional variation in these factors absorbed by country fixed effects.

### Empirical findings on growth and stability
- Net effects:
  - Outward migration, taken separately, has a negative effect on per capita growth in LAC countries; this impact is most pronounced in subregions experiencing brain drain.
  - Remittances seem to have positive (though not always statistically significant) growth effects, which are largest in the high-remittance-receiving subregions (Mexico and CAPDR).
  - The net effect of migration and remittances on growth tends to be negative for the Caribbean, while the impact is less clear-cut for other country groupings.
- Channels and heterogeneity:
  - Negative effects of emigration arise from reductions in the labor force and potential brain drain, which can reduce innovation and impose negative externalities on the broader economy.
  - Remittances can reduce labor supply by substituting for labor income, but can also support investment, education, and migrant networks that foster trade and investment.
  - South America exhibits substantial heterogeneity: for many countries emigration and remittances are limited, but Paraguay and Uruguay have large emigrant stocks, and remittances are significant for Bolivia and Ecuador. Restricting the sample to these four countries does not materially change the estimation results.

### Policy-relevant implications (from analysis)
- Dependence on remittances poses risks given concentration of emigrants in the United States and sensitivity to U.S. economic cycles and policies.
- Labor market developments and changes to immigration and remittance policies in host countries (notably the United States) could have far-reaching regional repercussions.
- The net macroeconomic impact of migration and remittances varies by subregion:
  - Caribbean: net negative effect on per capita growth.
  - Mexico and CAPDR: remittances provide larger potential positive effects relative to other subregions.
  - South America: effects are heterogeneous and country-specific; brain drain concerns for countries with high-skilled emigrants.

*Chapter 5, Regional Economic Outlook: Western Hemisphere, International Monetary Fund | April 2017*

### 5. MIGRATION AND REMITTANCEs IN LAC: MACROECONOMIC sTABILIZERs AND ENGINEs OF GROWTH?

### 5. MIGRATION AND REMITTANCEs IN LAC: MACROECONOMIC sTABILIZERs AND ENGINEs OF GROWTH?

### Net effect of emigration and remittances on growth (overview)
- Emigration and remittances together have had a small and ambiguous effect on real per capita GDP growth in LAC as a whole; effects vary across subregions.
- Estimated cumulative joint impact uses changes in migrant stocks and remittances during 2003–13 and shows ranges (not point estimates) because of two-way causality concerns.
- Subregional outcomes (2003–13):
  - Joint/net effect likely negative for the Caribbean and South America (Caribbean experienced large emigrant outflows; both regions characterized by brain drain and relatively smaller remittance receipts).
  - Net impact appears small and possibly positive for CAPDR, which receives much higher remittances.
- Five-year-average (longer-term) specifications suggest the net effect becomes more negative in the longer term; remittances (and migration) appear unlikely to act as drivers of durable growth.
- Note on comparability: Mexico’s estimated effect is about zero but is estimated purely from time series variation with a particularly small sample.

### The stabilizing role of remittances
- Remittances have contributed to macroeconomic stabilization in LAC, with statistically significant beneficial effects especially for the Caribbean and CAPDR.
- Stabilizing channels identified:
  - Increase consumption smoothing (countercyclicality).
  - Help generate fiscal revenues.
  - Support financial stability.
- Remittances’ impact on the real exchange rate and inflation tends to be minor; little evidence of adverse “Dutch disease” effects in most of LAC.

### Consumption smoothing and countercyclicality
- Remittances rise following natural disasters; illustrative example: Grenada remittances rose from 2 percent of GDP in 2003 to 4 percent of GDP in 2004 (Hurricane Ivan), then normalized thereafter.
- Remittances to LAC are typically set in U.S. dollars, which helps cushion effects of exchange rate depreciation on income measured in international prices.
- Empirical findings:
  - Remittances lower income volatility in recipient countries (overall income including remittances is less volatile than domestic income for most LAC countries).
  - Higher remittances (as a share of GDP) are associated with more consumption smoothing across countries facing idiosyncratic shocks; consumption-growth correlations are lower where remittances are higher.
  - The cushioning of consumption risk in the Caribbean appears to be largely associated with remittances.
- Interaction with fiscal policy: consumption-smoothing impact of remittances occurs mainly during periods of fiscal consolidation and fiscal shocks, suggesting remittances and fiscal policy may act as substitutes.

### Financial-sector stability and credit quality
- Theoretical ambiguity: remittances could either fuel excessive private credit growth (worsening credit quality) or strengthen borrowers’ capacity to repay (improving credit quality).
- Empirical results controlling for reverse causality indicate higher remittances are associated with lower nonperforming loans (NPLs) in LAC, though the effect is significant only for CAPDR.
  - Quantitative interpretation: an increase in the remittances-to-GDP ratio for CAPDR by 1 percentage point would cause a drop in the NPL ratio by almost 0.5 percentage point.
  - The increase in the remittances-to-GDP ratio since 2000 has contributed to the fall in CAPDR’s NPL ratio by 1 percentage point.
- In South America, other determinants (terms-of-trade shocks, cyclical factors) dominate NPL drivers; remittances are small in most South American countries.

### Fiscal revenue effects
- Mechanism: although remittances are typically not taxed directly, spending out of remittances expands the base for indirect taxation and can raise fiscal revenues.
- Empirical results (controlling for determinants and endogeneity) find remittances help mobilize fiscal revenues, particularly strongly and significantly for CAPDR and the Caribbean.
  - Example: the actual increase in the remittance-to-GDP ratio since 2000 in CAPDR accounted for an increase in fiscal revenues of 1 percent of GDP.
  - In the Caribbean, higher remittances have been associated with improved fiscal balances; in CAPDR they are associated with higher expenditures and no significant effect on fiscal balances (revenues used to create scope for additional spending).

### Limited impact on competitiveness and inflation
- Literature generally finds remittances tend to appreciate the real exchange rate, but evidence is mixed and often small.
- This chapter’s estimates generally do not reveal a significant impact of remittances on the real effective exchange rate in LAC, reflecting large leakages through imports and high openness of many countries.
  - A significant (but small) real exchange rate appreciation effect is found only for CAPDR.
- Inflation effects:
  - The lagged change in the remittances-to-GDP ratio is associated with somewhat higher inflation in the Caribbean and CAPDR.
  - The contemporaneous effect on inflation appears significant only for the Caribbean.
  - These inflation associations may reflect prevalence of fixed or stabilized exchange rate regimes in many countries in these subregions.

### Risks from dependence on remittances and migration destinations
- Heavy reliance on remittances concentrated from a single host country is risky: negative shocks to host-country labor markets or immigration policy can sharply reduce remittance inflows.
- Example from the global financial crisis:
  - A rise in Hispanic unemployment in the United States of 5½ percentage points was followed by a decline in remittances, harming incomes, external positions, and fiscal revenues in Latin America.
  - In CAPDR, remittances as a share of GDP declined by more than 1 percentage point and the ratio of fiscal revenue to GDP fell by more than 1 percentage point in 2008–10 relative to 2007; econometric estimates attribute about half of this revenue decline to the contraction in remittance flows.
- Migration and deportation statistics and risks:
  - Deportations of aliens from the United States totaled 3.7 million between 2006 and 2015; peaked at 434,000 in 2013.
  - The unauthorized immigrant population in the United States has been estimated at about 11 million since 2009.
  - Close to 80 percent of unauthorized immigrants in the United States are from Latin America, mostly from Mexico.
  - About half of the stock of immigrants originating from Mexico and two-thirds of immigrants originating from CAPDR were estimated to be unauthorized in 2015.
- Recent movements: remittances to some Latin American countries, such as El Salvador and Mexico, have recently increased in anticipation of potential shifts in U.S. immigration policy and remittance treatment.

### Key empirical coefficients (selected results from instrumental variable regressions)
- Real exchange rate:
  - LAC: 0.027 (0.03)
  - Caribbean: 0.003 (0.016)
  - CAPDR: 0.061*** (0.02)
- Revenue-to-GDp ratio:
  - LAC: 0.44 (0.31)
  - Caribbean: 1.16** (0.56)
  - CAPDR: 0.39** (0.16)
- Inflation (specification with lagged change in the remittances-to-GDp ratio):
  - LAC: 1 21 (20.34)
  - Caribbean: 2.52** (1.27)
  - CAPDR: 3.37* (1.97)
- Nonperforming loan ratio:
  - LAC: 20.48 (0.46)
  - Caribbean: n.a.
  - CAPDR: 20.45** (0.22)
- Note: standard errors in parentheses; *p < 0.1; **p < 0.05; ***p < 0.01.

### Policy-relevant implications and considerations
- Remittances provide important macroeconomic stabilization benefits—consumption smoothing, fiscal revenue mobilization, and improvements in credit quality—particularly for CAPDR and the Caribbean.
- These stabilizing benefits do not imply remittances are engines of durable growth; net growth effects are small and can be negative in some subregions.
- Policymakers should:
  - Recognize remittances as a relatively reliable source of external financing and a countercyclical buffer, especially for disaster-prone Caribbean countries.
  - Avoid overreliance on remittances as a growth strategy given limited long-term growth effects.
  - Strengthen fiscal and financial policy frameworks to harness remittance-driven increases in revenues and financial inclusion while guarding against inflationary or competitiveness pressures where relevant.
  - Monitor concentration risks tied to migrants’ destination countries and prepare contingency measures for sudden shocks to remittance flows or return migration.

*Source: IMF staff calculations, Regional Economic Outlook: Western Hemisphere, April 2017.*

### 5. MIGRATION AND REMITTANCEs IN LAC: MACROECONOMIC sTABILIZERs AND ENGINEs OF GROWTH?

### 5. MIGRATION AND REMITTANCEs IN LAC: MACROECONOMIC sTABILIZERs AND ENGINEs OF GROWTH?

### Policy priorities and recommended actions
- Remittances merit policy support given their key financing and stabilizing roles.
- Policy measures should focus on reducing the cost of remittances and facilitating formal intermediation.
- Strengthen anti–money laundering/combating the financing of terrorism frameworks and explore regional cooperation to improve regulatory environment and keep formal financial channels open.
- Develop and enhance payments systems (including mobile money) and ensure remittance-service providers have access to them to foster competition and drive prices down.
- Support measures to enhance financial sector resilience to volatility and potential sudden stops of remittances.
- Educate consumers about remittance costs and improve transparency about costs (noting the World Bank’s Remittance Price Worldwide database).
- Short-term steps to curb brain drain: limit subsidization of brain drain with public funds (for example, bonding schemes requiring beneficiaries of public education funding to remain in the home country for a number of years).
- Long-term measures to retain skilled workers: structural reforms to foster job opportunities for the highly educated (for example, development of a medical tourism industry).
- Promote return migration by skilled workers through recognition of foreign qualifications and experience in professional regulations and public sector hiring, and provision of portable social security benefits.
- Improve security in Central American and some Caribbean countries to relieve bottlenecks to productive use of remittances, including greater use for investment.
- Leverage economic ties with diasporas to bolster foreign direct investment and tourism receipts.
- Boost labor supply, in particular by raising female labor market participation, to offset the impact of emigration.
- Cushion adverse impact of real currency appreciation from remittance spikes by reducing labor and product market rigidities and supporting credit provision to firms.
- For countries with flexible exchange rates, allow exchange rate adjustments to act as a shock absorber in the short term.
- In the long term, maintain fiscal discipline and prioritize social assistance expenditures to limit adverse effects on poverty and inequality.

### Risks, alternative channels, and policy implications
- Taxing wire transfers has been proposed as a possible U.S. policy measure; taxing wire transfers could somewhat reduce remittances and force them to nonwire systems (banks, credit unions) or informal channels.
- Alternative remittance channels mentioned include Bitcoin and sending gift cards as viable ways to remit funds outside the wire system.
- The global withdrawal of correspondent banking relationships (CBRs) has put upward pressure on remittance costs and disproportionately affected money transfer operators (MTOs).
- 60 percent of members of the Asociación de Supervisores Bancarios de las Américas reported that remittances to LAC have been affected by changes in CBRs.
- Strengthening CBR access and ensuring MTOs and new payment technologies can operate are policy priorities to lower transaction costs and preserve formal channels.

### Box 5.1 — “Brain Drain” in Jamaica: key findings
- Nearly half of Caribbean emigrants residing in the United States have at least a college education, a ratio comparable to the U.S. Native-born population; in contrast, only one-quarter of other Latin American and Caribbean emigrants in the United States have at least a college education.1
- In Jamaica:
  - Among Jamaican-born women living in the United States, 50 percent have at least a college education; in Jamaica only one-quarter of women have a college education.2
  - A simple calculation implies that nearly one-third of all women with at least a college education in Jamaica have emigrated, compared with about 13 percent of those with high school or less.
  - 65 percent of Jamaican immigrants are in nursing and health care practitioner sectors versus 7 percent in the United States–born population.
  - For men: 21 percent of men in Jamaica are college educated, while 37 percent of Jamaican men in the United States have at least a college education.
- Notes:
  - 1 This difference is statistically significant at 99 percent.
  - 2 This difference is statistically significant at 95 percent.

### Box 5.2 — Cost of sending remittances: key statistics and trends
- LAC cost: 6.2 percent for a US$200 transaction (regional average), lower than most regions except South Asia.
- Costs declined over 2001–15 by about 40 percent for flows to El Salvador, Colombia, and Guatemala, and by 15 percent to Jamaica.
- Within LAC:
  - Largest recipients and dollarized economies benefit from lower transaction costs due to eliminated currency conversion costs.
  - Costs remain relatively elevated for Caribbean countries compared with Latin America.
- Remittances from the United States are the most cost effective, likely reflecting competition among remittance-service providers.
- Global withdrawal of CBRs has increased challenges for MTOs meeting know-your-customer and anti–money laundering/combating the financing of terrorism standards.
- The United Nations Sustainable Development Goal: reduce transaction costs to less than 3 percent and eliminate remittance corridors with costs higher than 5 percent by 2030.
- Mobile remittance-service providers are the most cost effective at 3.5 percent for a US$200 transaction.
- Source of cost data: World Bank Remittance Prices Worldwide database.

### Box 5.3 — Migration, remittances, poverty, and inequality: Mexico case study
- About 5 percent of Mexican households received remittances in 2014, on average about US$290 per month (US$140 median).
- Remittances show a pro-poor pattern in Mexico:
  - Remittances-receiving households were poorer than non-remittances-receiving households even when including remittances in household income.
  - For poorer households, remittances constituted a larger share of income.
  - During the global financial crisis, the likelihood of receiving remittances increased for poorer households and fell for richer households, reflecting increased insurance role and reduced investment motive.
- Macro-level effect: Comparing actual Gini coefficients with counterfactual incomes for remittances-receiving households suggests inequality would be higher in the absence of remittances, even when accounting for behavioral responses.

### Annex 5.1 — Migrant characteristics (entered the United States after age 22, 2014) — selected figures
- Proportion female: Mexico 52; Central America 55; Caribbean 59; South America 58
- Proportion married: Mexico 69; Central America 55; Caribbean 54; South America 66
- Proportion in one-adult household: Mexico 17; Central America 22; Caribbean 24; South America 19
- Female labor force participation: Mexico 46; Central America 58; Caribbean 63; South America 61
- Male labor force participation: Mexico 79; Central America 81; Caribbean 68; South America 81
- Married female labor force participation: Mexico 44; Central America 58; Caribbean 67; South America 61
- Married male labor force participation: Mexico 81; Central America 82; Caribbean 71; South America 82
- Female hourly wage (U.S. Dollars): Mexico 9.06; Central America 10.43; Caribbean 17.56; South America 14.27
- Male hourly wage (U.S. Dollars): Mexico 12.34; Central America 13.33; Caribbean 19.34; South America 21.05
- Age (mean): Mexico 49; Central America 50; Caribbean 56; South America 51
- Years in United States (mean): Mexico 17; Central America 17; Caribbean 22; South America 17
- Entry age (mean): Mexico 20; Central America 21.7; Caribbean 24.5; South America 24.5
- Proportion U.S. citizens: Mexico 28.5; Central America 41.5; Caribbean 64.4; South America 51.6
- Family size: Mexico 4.1; Central America 3.5; Caribbean 3.3; South America 3.2
- Source: Integrated Public Use Microdata Series, American Community Survey.

### Annex 5.2 — Empirical results: consumption smoothing and growth
- Consumption smoothing specification (variables preserved as in source):
  - Δc̃it = b0 + b1 Rit + g1 Dỹit + g2 Rit Dỹit + g3 KAit Dỹit + g4 FIit Dỹit + eit
  - Definitions preserved: Δc̃it = Δcit − Δc̄t; Δỹit = Δyit − Δȳt; Rit = ratio of remittances to GDP; KAit = Chinn and Ito de jure capital account openness index; FIit = Lane and Milesi-Ferretti de facto indicators of financial integration.
  - Degree of consumption smoothing captured by 1 − γ1 − γ2 − γ3 − γ4, where γ2 measures extent remittances facilitate consumption risk-sharing.
  - Estimation used ordinary least squares panel regressions with country-specific and time fixed effects.
- Annex Table 5.2.1 (Effects on Short-Term Growth) — selected coefficients (OLS and IV, standard errors in parentheses); preserve numeric values exactly:
  - Change in emigrants/population:
    - Latin America and the Caribbean OLS: 2.478** (0.937)
    - Latin America and the Caribbean IV: −13.97*** (4.734)
    - South America OLS: −2.848 (2.472)
    - South America IV: −33.63** (13.68)
    - Caribbean OLS: −2.295 (1.767)
    - Caribbean IV: −27.14 (31.75)
    - Central America, Panama, and the Dominican Republic OLS: 12.85*** (2.982)
    - Central America, Panama, and the Dominican Republic IV: −6.108 (25.36)
  - Remittances/GDp:
    - Latin America and the Caribbean OLS: −0.0174 (0.0863)
    - Latin America and the Caribbean IV: 0.990*** (0.305)
    - South America OLS: −0.657 (0.515)
    - South America IV: 1.220 (1.461)
    - Caribbean OLS: −0.062 (0.0793)
    - Caribbean IV: 2.277 (2.018)
    - Central America, Panama, and the Dominican Republic OLS: 0.129 (0.0722)
    - Central America, Panama, and the Dominican Republic IV: 0.0297 (0.241)
  - Expenditure/GDp, M2/GDp, ppp GDP per capita, Real GDP growth in AEs/U.S., FDI/GDp, Export growth, Change in terms of trade, Country risk, Emigrants/population — full table preserved in source; selected significant entries include:
    - Change in terms of trade (Latin America and the Caribbean OLS): 0.0485*** (0.0128)
    - Country risk (Latin America and the Caribbean OLS): 0.133** (0.0468)
    - Real GDP growth in AEs/U.S. (Latin America and the Caribbean OLS): 0.537*** (0.104)
  - Number of observations:
    - Latin America and the Caribbean: 361
    - South America: 170
    - Caribbean: 152
    - Central America, Panama, and the Dominican Republic: 105
  - Adjusted R-squared reported (see source table).
- Note: Table source: IMF staff calculations. Abbreviations: AEs = advanced economies; FDI = foreign direct investment; IV = instrumental variables; M2 = money supply; OLS = ordinary least squares; ppp = purchasing power parity.

*International Monetary Fund | April 2017*

### 5. MIGRATION AND REMITTANCEs IN LAC: MACROECONOMIC sTABILIZERs AND ENGINEs OF GROWTH?

### 5. MIGRATION AND REMITTANCEs IN LAC: MACROECONOMIC sTABILIZERs AND ENGINEs OF GROWTH?

### Effects on Long-Term Growth (Annex Table 5.2.2.)
- Change in emigrants/population (OLS and IV estimates shown by region)
  - Latin America and the Caribbean: 2 1.019 (1.644)
  - South America: 2 10.06** (4.756)
  - Caribbean: 2 19.91*** (5.106)
  - Central America, panama, and the Dominican Republic: 2 22.46** (9.446)
  - Additional estimates in table: 2.483 (1.647); 2.446* (1.249); 3.214 (10.64); 2 3.948 (10.51)
- Remittances/GDp (coefficients and standard errors)
  - Latin America and the Caribbean: 2 0.339** (0.130)
  - South America: 2 0.427* (0.219)
  - Caribbean: 0.297 (0.461)
  - Central America, panama, and the Dominican Republic: 0.292 (1.005)
  - Additional estimates: 0.277 (0.163); 0.356*** (0.128); 2 0.349** (0.0935); 2 0.255* (0.144)
- Expenditure/GDp
  - Coefficients: 0.0253 (0.0596); 0.446 (0.312); 2 0.134 (0.0781); 2 0.0535 (0.113); 0.0251 (0.138); 0.122 (0.0914); 0.477** (0.128); 0.979*** (0.354)
- M2/GDp
  - Coefficients: 0.702 (3.935); 10.24 (8.029); 2 9.443** (3.285); 2 20.21** (8.034); 2 11.33*** (2.577); 2 12.96*** (2.916); 2.788 (4.933); 2 13.11 (11.92)
- ppp GDp per capita
  - Coefficients: 2 0.122 (0.148); 2 0.611* (0.317); 0.221** (0.0920); 0.267** (0.134); 0.0107 (0.111); 0.0123 (0.103); 2 0.260** (0.0753); 2 0.225 (0.162)
- Real GDp growth in AEs/U.s.
  - Coefficients: 2 0.662** (0.305); 2 1.047** (0.443); 2 0.882* (0.448); 2 0.959** (0.408); 2 0.0577 (0.499); 2 0.078 (0.421); 2 0.0942 (0.193); 2 0.0559 (0.247)
- FDI/GDp
  - Coefficients: 2 0.373 (0.266); 2 0.0609 (0.249); 2 0.00465 (0.289); 0.0966 (0.306); 2 0.239* (0.130); 2 0.214** (0.0885); 2 0.830** (0.251); 2 1.034*** (0.266)
- Export growth
  - Coefficients: 0.00185*** (0.000410); 0.00245 (0.00167); 2 0.00032 (0.000891); 2 0.00059 (0.00106); 0.168*** (0.0451); 0.210*** (0.0465); 2 0.0477 (0.0287); 2 0.039 (0.0277)
- Change in terms of trade
  - Coefficients: 0.00917 (0.0742); 2 0.267 (0.194); 2 0.185 (0.119); 2 0.245 (0.194); 2 0.242* (0.133); 2 0.242** (0.0968); 0.248*** (0.0555); 0.351*** (0.129)
- Country risk
  - Coefficients: 0.150*** (0.0452); 0.296*** (0.100); 0.121* (0.0606); 0.123 (0.0765); 0.0206 (0.116); 2 0.067 (0.106)
- Emigrants/population (additional)
  - Coefficients: 0.364** (0.145); 0.0971 (0.270); 1.820*** (0.385); 2.318*** (0.428); 2 0.0531 (0.0482); 2 0.0665 (0.0485); 0.264 (0.299); 2 0.192 (0.359)
- Sample and fit
  - Number of observations by column: 83; 83; 39; 39; 37; 37; 23; 23
  - Adjusted R-squared reported: 0.370; 0.712; 0.379; 0.490
- Note on terminology in table: AEs = advanced economies; FDI = foreign direct investment; IV = instrumental variables; M2 = money supply; OLs = ordinary least squares; ppp = purchasing power parity.

### Remittances and Risk-Sharing (Annex Table 5.2.3.)
- Key regression coefficients (EMDEs, LAC, Caribbean)
  - R_it: 0.000513 (0.515); 20.000278 (0.806); 20.00151 (0.536)
  - ∆y~_it: 0.895*** (0); 0.999*** (1.35e-09); 1.290*** (0.000926)
  - KA_it ∆y~_it: 20.0493 (0.253); 20.0302 (0.648); 0.0516 (0.733)
  - R_it ∆y~_it: 20.0298** (0.0216); 20.0428* (0.0565); 20.0718* (0.0964)
  - FI_it ∆y~_it (volume): 0.0989 (0.122); 20.0215 (0.781); 20.132 (0.763)
  - FI_it ∆y~_it (equity): 20.371** (0.0171); 20.149 (0.476); 20.217 (0.809)
  - Constant: 20.0132*** (0.000443); 20.00750 (0.195); 0.00222 (0.880)
- Sample and fit
  - Observations: 2,012; 679; 284
  - R-squared: 0.113; 0.094; 0.053
  - Number of countries: 117; 29; 12
- Note: EMDEs = emerging market and developing economies; LAC = Latin America and the Caribbean.

### Remittances and Volatility / Risk Sharing (Annex Figures 5.2.1 and 5.2.2)
- Annex Figure 5.2.1 (Remittances and Income Volatility)
  - Plots standard deviations of income (domestic income plus remittances) on vertical axis and GDP standard deviations on horizontal axis.
  - Dots below the 45-degree line indicate that remittances lower income volatility.
  - Panels shown for:
    - 1. Emerging market and developing economies
    - 2. Latin America and the Caribbean
    - 3. Caribbean
- Annex Figure 5.2.2 (Remittances and Deviation from Perfect Risk Sharing)
  - Slope coefficients from time series country-specific regressions of idiosyncratic consumption growth on idiosyncratic output growth are plotted on the vertical axis.
  - Average levels of remittances as a share of GDP are plotted on the horizontal axis.
  - A negative relationship suggests that higher average remittances are associated with lower deviations from perfect risk sharing.
  - Panels shown for:
    - 1. Emerging market and developing economies
    - 2. Latin America and the Caribbean
    - 3. Caribbean

*Source: IMF staff calculations. International Monetary Fund | April 2017*

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_Source: https://www.imf.org/-/media/files/publications/reo/whd/2017/may/wreo0517-chp5.pdf_