Remittances, Dutch Disease, and Manufacturing Growth in Developing Economies
| Published date | 01 July 2019 |
| Author | Sarah Lynne Salvador Daway‐Ducanes |
| DOI | http://doi.org/10.1111/sjpe.12185 |
| Date | 01 July 2019 |
REMITTANCES, DUTCH DISEASE, AND
MANUFACTURING GROWTH IN
DEVELOPING ECONOMIES
Sarah Lynne Salvador Daway-Ducanes*
ABSTRACT
Remittances have grown tremendously in magnitude and economic importance in
the past four decades, providing economies with additional disposable incomes
and even serving as buffers against economic downturns. It is thus but fitting to
ask how remittances have impacted on growth, particularly on manufacturing
growth. This note presents a simple model linking remittances and manufactur-
ing growth via a ‘Dutch Disease’ channel. Using Blundell and Bond’s (1998)
system general method of moments on a panel dataset of 56 developing econo-
mies from 1992 to 2016, we verify that remittances adversely affect manufactur-
ing growth in economies that experience high real appreciation rates. This result
is robust to alternate specifications, such as the inclusion of financial develop-
ment indicators, the expansion of the sample to include high-income economies,
and the use of different sample periods.
II
NTRODUCTION
In the last four decades, remittances have increased tremendously from $1.93
billion in 1970 to $536.99 billion in 2016.
1
While only 14.76% of remittances
flowed into low- and middle-income economies in 1970, this percentage more
than quintupled to 75.73% in 2016.
2
In more than 30 developing economies,
remittances as a percentage of gross domestic product (GDP) ranged from
around 10% to 43% in 2014 and around 10% to 31% in 2016.
3
With more
than a decade of high volume remittance flows that have already reached the
half-trillion-dollar mark, there is much conjecture regarding the nature of the
*University of the Philippines School of Economics
1
To verify these numbers and those that follow, see World Development Indicators 2015.
2
As pointed out by an anonymous referee, while a recent resurgence of migratory flows to
higher income economies has resulted in greater remittance inflows to lower income econo-
mies, there has also been a significant improvement in official migration corridors and remit-
tance transfer-facilitating institutions and in financial data collection, which might also
partially account for this recorded increase in remittances flows.
3
In 2014, Tajikistan had the highest remittances-to-GDP ratio at 43.01%, while Nepal
had the highest ratio at 31.29% in 2016.
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12185, Vol. 66, No. 3, July 2019
©2018 Scottish Economic Society.
360
channels and mechanisms through which remittances affect a recipient devel-
oping economy’s growth prospects.
Figure 1 presents the average remittances received (as % of GDP) by low-
income and middle-income economies from 1984 to 2016. Throughout the
period, remittances (% of GDP) into lower income economies appear to have
exceeded those in higher income economies. However, remittances into low-
income economies appear to be only slightly higher than that which flowed
into middle-income economies up until the early 1990s. In the mid 1990s,
rapid globalization and the consequent relaxation of cross-border flow of
labor from low-income economies, where wages are much lower to high-
income economies, where wage opportunities –both for low- and high-skilled
labor –present a more attractive compensation for migrant workers, have
enabled a steep rise in remittances into low-income economies. Indeed, the
share of remittances in GDP in low-income economies surged from barely
above 1% until the early 1990s to about 5.4% of GDP in 2016.
While remittances represent additional disposable incomes to domestic
households that enable both higher consumption and investment expenditures
and potentially serve as buffers against economic downturns, contributing to
poverty alleviation (Ratha, 2013; Ducanes, 2015), much of the cross-country
literature on remittances corroborate a ‘Dutch Disease’ story: An increase in
remittances results in a real local currency appreciation that renders tradables
–which are mostly manufactured goods and services –less competitive in the
world market. See, for instance, Bourdet and Falck (2006); Amuedo-Dorantes
and Pozo (2004); Hyder and Mahboob (2005); Petri and Saadi-Sedik (2006);
Acosta et al. (2009); Lartney et al. (2012); and Rabbi et al. (2013). However,
these studies fail to establish a direct connection to growth –particularly to
0
1
2
3
% of GDP
4
5
6
1986 1991 1996 2001 2006 2011 2016
Low-income economies Middle-income economies
High-income economies Wor ld
Figure 1. Remittances (% GDP), 1986–2016
Raw data from World Development Indicators 2017.
REMITTANCES, DUTCH DISEASE, AND MANUFACTURING GROWTH 361
Scottish Journal of Political Economy
©2018 Scottish Economic Society
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