Development economics report the impact of remittance flows on the economic growth of selected asean countries in recent years

FOREIGN TRADE UNIVERSITY INSTITUTION OF ECONOMICS AND INTERNATIONAL BUSINESS DEVELOPMENT ECONOMICS REPORT The impact of remittance flows on the economic growth of selected ASEAN countri

FOREIGN TRADE UNIVERSITY INSTITUTION OF ECONOMICS AND INTERNATIONAL BUSINESS

DEVELOPMENT ECONOMICS REPORT

The impact of remittance flows on the economic

growth of selected ASEAN countries in recent years

Group: 16 Class: KTEE406(HK1-2324)2.1 Instructor: Assoc Prof Vu Hoang Nam

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Abstract:

In developing countries, remittances play an important role as a source of household

income and a stable source Through literature reviews from prior research, this study

will provide a better grasp of how remittance flows might affect economic growth by

using data from the World Bank, IMF & World Economics to examine the impact of remittance flows on economic growth in eight ASEAN countries over eleven years from

2011 to 2021 Analyzing various macroeconomic factors and GDP per capita growth,

the research delves into intricate relationships, unveiling insights that challenge

conventional perspectives Contrary to prevailing studies, findings suggested an adverse

effect on GDP per capita growth associated with increased remittance inflows

Emphasizing the beneficial impact of remittances on domestic consumption and poverty

reduction in Southeast Asian nations, the study advocates that remittances play a more significant role in poverty alleviation than in driving economic growth From the results,

our group proposes recommendations for fostering economic growth among ASEAN

nations

Keywords: remittance flows, economic growth, ASEAN

Chapter 1: Introduction

1.1 The importance of the study

Economic growth is defined as a process measuring the development of a country, as it can be influenced by many factors shaping its complexity Among these, external

factors such as foreign capital flows play a fundamental role in increasing economic

growth, especially in developing countries Foreign capital flow is known as a source

of funds coming from abroad, which is the inflow of funds into the economy from

another nation These capital flows might come in the form of foreign direct investment

(FDD, foreign trade, debt, or remittances

Remittances represent the financial flows sent to families in their home countries from

expatriate workers Remittances are becoming a new financial phenomenon and are one

of the most important sources of finance and have an impact on the world economy,

especially in developing countries, both in size and growth rate (Meyer and Shera,

2017) From the macroeconomic perspective, remittances prove relevant, especially for low-income countries through various transmission channels On the one hand,

remittances are an essential source of external financing for the domestic economy,

thereby fostering economic growth On the other hand, remittances may have adverse

consequences, particularly by contributing to the depletion of labor force supply in the

home nation Therefore, regarding the obvious importance for developing countries, the effects of remittances on economic growth has become a matter of controversy, which

urges economists and researchers to uncover the impact of remittance flows

1.2 Objects and scope

In the last two decades, ASEAN has been among the areas observing the rapid rise in

remittances, from 11.75 trillion USD to 74 trillion USD from 2000 to 2022 respectively (World Bank, 2023) The nations of this area have also experienced impressive

economic growth, in which the gross domestic product (GDP) accelerated from 514

trillion USD in 2000 to 3138 trillion USD in 2022 (World Bank, 2023) This has drawn

the attention of many economists to the rapid growth of the remittance flow to the

developing countries as a whole and especially to the ASEAN countries The eight

ASEAN countries (including Vietnam, Thailand, Philippines, Laos, Cambodia,

Indonesia, Malaysia, and Myanmar) studied in this paper are developing countries that

possess identical conditions and have to encounter major obstacles in the economic

development process Consequently, this study empirically examines whether the

impact of remittance on the economic growth of Southeast Asian developing countries

is positive and to what extent the remittance flows influence economic growth

1.3 Research question

In light of the increasing importance of remittances for economic development, our group chose the topic “The impact of remittance flows on the economic growth of selected ASEAN countries in recent years” to shed light on how remittances affect

economic growth in a few ASEAN developing nations The research then provided

several recommendations to help the government in the ASEAN region design feasible

plans and policies to foster the economy

1.4 Structure of the thesis

Using a quantitative approach, four sections of this article will examine the effects of

remittance flows on eight ASEAN nations: Vietnam, Thailand, Philippines, Cambodia,

Myanmar, Laos, Indonesia, and Malaysia For further information, see the literature

study on the subject of the connection between remittance flows and economic growth

in section 2 The data, variables, and econometric model used in this work will be

displayed in Section 3 After the data are shown, the quantitative analysis's findings will

be explained The final portion contains the study's results as well as some suggestions

for ASEAN countries’ policymakers

Chapter 2: Literature review

2.1 Foreign research

According to The Economic Times (2023), remittances refer to the funds migrants send

to their relatives in their home country while working and living abroad It's essentially

the transfer of money from someone working abroad to a recipient in their home

country, often a significant source of income for families in slower-growing economies

These payments can be made through various electronic methods and are crucial for

supporting living standards, economic growth, disaster relief, and even surpass official

development aid in some cases

World Bank (2022) data shows that global remittances have steadily grown since 1970,

reaching a substantial $767 billion USD in 2022 India stands out as the highest

recipient, having received $111 billion USD in this year Across the globe, remittance

payments account for a share of 0.8% of GDP in 2022 These payments serve as a

crucial income stream for low-income countries, constituting 3.6% of their GDP, as

well as for lower-middle-income countries, representing 4.6% of their GDP However,

their impact is comparatively less pronounced for middle-income countries, accounting

for 1.5% of GDP, and for high-income countries, registering at 0.7% of GDP

World Bank (2022)

Figure 1 Development of global remittance payments from 1970 to 2022

After the provision of the importance and scope of remittance payments, the positive

effects on economic growth will be displayed and evaluated

Ratha (2013) researched that remittances, when aiding families in overcoming poverty,

enable them to spend less time securing basic necessities This freedom allows them to

engage in activities that collectively foster sustainable economic growth within their communities and countries These remittances act as a safety net, enabling households

to pursue potentially more profitable economic endeavors that alleviate poverty and

might have been unattainable without migration Moreover, the overall national

economy benefits from increased investment opportunities facilitated by remittances

Various regions such as the Philippines, Mexico, and sub-Saharan Africa indicate that

receiving remittances correlates with increased asset accumulation, higher self- employment rates, and amplified small-business investments in areas from where migrants originate For instance, in sub-Saharan Africa, international remittances are

linked to heightened access to technology like computers and the internet Additionally,

remittances contribute to domestic savings, improving financial services and potentially

enhancing the overall growth prospects of a country (Ratha, 2013)

However, the extent of a country's benefit from remittances depends significantly on its

domestic institutions and the broader macroeconomic context Strategies like issuing

diaspora bonds or securities backed by remittances can alleviate financial constraints

for developing countries During crises, migrant investors are anticipated to exhibit

stronger loyalty compared to other foreign investors, particularly in financing critical

projects like infrastructure, housing, health, and education (Ratha, 2013)

Moreover, leveraging future remittance flows as collateral in international capital

markets can assist in funding developmental projects such as low-income housing or water supply systems Accurately factoring remittance inflows into macroeconomic

analysis is likely to improve the credit rating and external debt sustainability of remittance-receiving nations Despite these benefits, the impact of remittances on

economic growth remains inconclusive due to challenges in separating causation from

correlation (Ratha, 2013)

Ratha's description of the positive influence of remittance payments is supported by

various quantitative studies A multiple regression analysis (Meyer and Shera, 2017)

conducted in Eastern Europe, revealed a positive and significant correlation between

worker remittances and economic growth The study underscores the substantial and

pivotal role of worker remittances in fostering economic growth However, optimizing

their productive utilization can further fortify and enhance the economic trajectory of these nations This research primarily emphasizes the relationship between worker

remittances and economic growth, urging forthcoming studies to explore the relationship between worker remittances and other critical macroeconomic indicators

that exert considerable influence on economic growth

However, some experts also warn of negative impacts of remittance payments, most

often related to influences on the receiving country's exchange rate

Amuedo-Dorantes and Pozo (2004) described a relationship between remittance

payments and the real exchange rate which suggests a potential for appreciation in the

recipient country’s currency, leading to decreased competitiveness, especially in

exports

A quantitative study (Molina et al., 2007) proves this by revealing that a rise in the

remittances to GDP ratio by | percentage point could result in a real effective exchange

rate appreciation of around 2.5 percent This appreciation tends to increase further when

using instrumental variable (IV) techniques, reaching estimates between 18 to 24 percent These findings emphasize that remittances could significantly impact the real

exchange rate, potentially leading to misalignment The study further indicates that the

observed changes in the real exchange rate are a mix of adjustment towards a new

equilibrium and apparent overshooting It's worth noting that while remittances do

impact the real exchange rate, only a portion of the fluctuations seem to be attributed to equilibrium adjustments The study concludes that the negative impacts of remittance

payments must not be neglected

(= RemittancesGDP —®=REER =e Remitiances;GDP_—®= REER |

Figure 2 and 3 Relationship between remittance payments and the real exchange

rate

After reviewing the relevant literature it can be evaluated that research outcomes on

remittances are ambivalent

This is also mentioned in a Czech study (Cazachevici et al., 2020), which suggests that consensus regarding remittances’ impact on economic growth remains elusive Through

an extensive quantitative survey encompassing 95 studies and 538 estimates, findings

reveal a disparity: approximately 40 percent of these studies suggest a positive

correlation between remittances and economic growth, while 40 percent indicate no

discernible effect, and 20 percent suggest a negative impact A noticeable inclination

towards publishing studies highlighting positive effects is observed, indicating potential

publication bias After employing corrective methodologies to address this bias, the overall mean effect of remittances on economic growth remains positive but modest in

scale Studies failing to account for alternative external financial sources like foreign

aid and foreign direct investment tend to misjudge the influence of remittances

Furthermore, analyses overlooking issues of endogeneity and those conducted within

time-series frameworks tend to overestimate the effect of remittances on economic

growth

Current research on remittance payments exhibits several shortcomings that hinder a

comprehensive understanding of their impact on economic development Primarily, a

prevalent limitation lies in the heavy reliance on quantitative analyses, neglecting

qualitative research avenues This approach overlooks the nuanced socio-economic

dynamics and fails to capture the qualitative aspects of remittance utilization Moreover,

studies often isolate the analysis of remittances without contextualizing them within

broader macroeconomic frameworks This narrow focus can introduce bias, as it

disregards potential interactions with other economic factors, hindering a holistic

assessment of their effects Additionally, the regional restriction of research limits the

generalizability of findings on a global scale, leading to inconsistent and fragmented

conclusions when attempting broader implications or policy recommendations These

limitations underscore the need for a more comprehensive and integrated approach to

researching remittance impacts, embracing qualitative perspectives, contextual

analysis, and a broader, global scope to yield more robust and reliable findings

2.2 Domestic research

Data (World Bank, 2022b) shows that since the turn of the millennium, remittance

payments in Vietnam have experienced a substantial increase, peaking at 8 percent of GDP in 2007 Following a notable decline to 3.3 percent of GDP in 2015, remittance

payments have since stabilized, showing slight fluctuations at this level Despite efforts

to reduce dependence on these income flows, they continue to represent a noteworthy

source of income for the country

Z

Figure 4 Remittance payments to Vietnam as share of GDP (in%) from 2000-2022

The relevant literature mainly focuses on the relationship of remittance payments and

personal income as well as the influence on poverty

According to Pfau and Giang (2009), remittances possess the potential to bolster economic development by facilitating risk-sharing, poverty reduction, and enhanced

equality However, when viewed through the lens of economic theory, the overall

effects of remittances remain uncertain due to contradictory mechanisms at play

Vietnam has witnessed a significant surge in inbound remittances since the 1990s,

offering a unique case study perspective Unlike many other nations, Vietnam's outward

migration historically stemmed from different motives Findings suggest that

international remittances contribute positively to enhancing equality

A quantitative study (Cuong & Daniel, 2012) analyzing the Vietnam Household Living

Standard Surveys 2006 and 2008 indicates that the majority of international remittances

are allocated toward housing, land, debt repayment, and savings, with a minor fraction

allocated to purchasing durable goods These funds are not typically directed towards

production or basic living expenses As a result, the impact of international remittances

on poverty based on consumption is notably restricted

Another study (Nguyen et al., 2009) finds that while international remittances lead to a notable increase in income, they do not significantly reduce poverty, and in the short

term, might even contribute to increased inequality and reduced working-hours of recipients This outcome is influenced by the fact that remittances mainly benefit the non-poor in Vietnam The study notes that direct effects are observed and acknowledges

the potential significant indirect impacts, especially if remittances are used

productively However, the study does not account for these spill-over effects or the earnings the migrant would have had if they stayed in their home country, which might skew the positive estimation of their effects

Overall, the analysis suggests that while international remittances could enhance

production and investment in the long term, for immediate poverty reduction, direct income distribution and poverty reduction programs targeting the poor might be more

effective The study also warns against overestimating the poverty reduction impact of remittances in other developing countries with a similar economic structure to Vietnam,

casting doubts on the belief that international remittances are a key solution for

immediate poverty reduction in developing nations (Nguyen ef al., 2009)

The reviewed literature presents consistent findings but remains limited by a lack of qualitative research Additionally, it draws primarily from a select of a few experts and

does not encompass diverse perspectives Moreover, the time frame typically focuses

on the initial decade of the millennium, neglecting more recent research data

Chapter 3: Research Methodology

3.1 Data and variables

Our research investigates the impacts of remittance inflows on economic growth in

eight countries with high remittance in the SEA region (including Vietnam, Thailand,

Philippines, Cambodia, Myanmar, Laos, Indonesia, Malaysia) during 11 years (2011-

2021)