Economics Discussion Paper Series EDP-1308

Transcription

1 Economcs Dscusson Paper Seres EDP-1308 Do Mgrant Remtances Complement Domestc Investment? New Evdence from Panel Contegraton Abdlah Al Bars Alpaslan May 2013 Economcs School of Socal Scences The Unversy of Manchester Manchester M13 9PL

2 Do Mgrant Remtances Complement Domestc Investment? New Evdence from Panel Contegraton Abdlah Al* and Bars Alpaslan Economcs, School of Socal Scences, Unversy of Manchester, UK Ths verson: May 2013 Abstract Ths paper examnes whether mgrant remtances crowd n or crowd out domestc nvestment n developng countres. Usng recently developed panel contegraton technques that account for cross-sectonal dependence, structural breaks and regme shfts, the paper shows that remtances form a long-run equlbrum relaton wh domestc nvestment. The results of the panel vector error correcton model reveal the absence of a short-run relatonshp but the presence of a long-run bdrectonal lnk between remtances and nvestment. Thus, remtances drve nvestment whle nvestment self cause more remtances, suggestng that remtances are not only drven by altrustc motves but also nvestment motves. Keywords: Remtances, Investment, Panel Contegraton JEL classfcaton: F24, E22, C23 *Correspondng Author Department of Economcs, School of Socal Scences Unversy of Manchester, Arthur Lews Buldng, Oxford Road, Manchester M13 9PL, UK Emal: Abdlah.al@manchester.ac.uk

3 1 Introducton Over the last few decades, mgrant remtances have taken a more promnent role n developng countres. As a result, the queston of whether they crowd-n or crowd-out domestc nvestment has become an mportant polcy ssue. In general terms, the macroeconomc effects of remtances largely depend on whether they act as pure compensatory transfers or capal flows (Cham et al. 2005). In the frst case, altrustc motves domnate n the sense that the mgrant s concerned wh the well-beng of hs/her relatves. In the latter case, though, self-nterest domnates, such that the mgrant retans some sort of ownershp over the assets. In both cases, however, the response of the economy to ncreases n remtances could be eher negatve or posve. On the one hand, remtance flows can have negatve effects on the recpent economy through ther adverse nfluences on ncome dstrbutons (Orrenus et al. 2010), household s labour supply and savngs rates (Cham et al. 2005). In addon, smlar to any other resource nflow, sustaned levels of remtances tend to be assocated wh Dutch dsease effects (Amuedo-Dorantes et al. 2005) as well as ncreases n conspcuous consumpton rather than productve nvestments (Cham et al. 2005). On the other hand, there s consderable evdence showng that, although remtances may manly go to consumpton, a substantal porton of goes to human capal formaton n the form of better nutron, schoolng and health (Gupta et al. 2009). Moreover, ncreased consumpton and even unproductve nvestments (e.g. real estate) can have sgnfcant multpler effects, encouragng more capal accumulaton and growth through spllover effects (Ratha, 2003; Gupta et al. 2009). Evdence also suggests that remtances tend to reduce households cred constrants and thus boost the depth of the fnancal sector (Gulamo and Ruz-Arranz, 2009; Aggarwal et al. 2011). Furthermore, has been shown that remtance recevng households, on average, tend to save and nvest more than other comparable households (Adams, 2007). Other studes found that remtances are assocated wh poverty reducton (Adams and Page, 2005) and hgher educatonal attanments (Rapoport and Docquer, 2006). Fnally, remtance flows have been found to act more counter-cyclcally than other types of nflows and thus are a more stable 1

4 source of foregn exchange at tmes of economc dffcultes (Combes and Ebeke, 2011; Cham et al. 2009). The objectve of ths study s to contrbute to ths lerature but we depart from the exstng lerature n a number of ways. Frst, we use recently developed panel contegraton tests that can handle a number of econometrc ssues, ncludng cross-sectonal heterogeney, structural breaks and endogeney concerns. Second, we examne the long-run relatonshp between remtance nflows and domestc nvestment. Thrd, we apply panel error correcton methods to uncover the short-run dynamcs n the relatonshp. Fnally, we conduct a panel Granger causaly analyss n order to establsh whether the long and short-run effects are ndeed of a causal nature. The paper s organsed as follows. Secton 2 sets out the econometrc analyss, presentng the technques used as well as the fndngs whle Secton 3 concludes. 2 Emprcal analyss To examne the relatonshp between remtances and domestc nvestment, we use a balanced panel of 47 developng and emergng economes over the perod The model takes the followng form: INV = REM (1) where and are, respectvely, country specfc fxed and tme effects, capturng any country-specfc unobservables that are relatvely stable over tme and s the error term. INV s the share of nvestment n GDP for countres and = 1,... N and tme perods t = 1,... T, REM s the share of remtances n GDP, both sourced from World Development Indcators (2011). As s the standard norm n panel contegraton studes (see for example, Crowder and de Jong, 2011; Herzer and Grmm, 2012), equaton (1) s a parsmonous specfcaton that solely focuses on the bvarate long-run lnk between REM and INV. The valdy of ths specfcaton, 1 The sample selecton s based on the avalably of consstent data. 2

5 however, requres that the varables n (1) are nonstatonary or, more precsely, ntegrated of the same order. In that case, they would have a statonary error term, mplyng that they constute a contegratng vector (Asterou and Hall, 2007). Once a set of varables form a contegratng relaton, such (long-run) relatonshp should exst even f more varables are added to the model (see for example, Herzer and Grmm, 2012). 2.1 Panel statonary tests In estmatng equaton (1), we frst test the tme seres propertes of the varables usng the panel un root tests developed by Levn, Ln and Chu (2002) (LLC) and Im, Pesaran and Shn (2003) (IPS). The LLC s an extenson of the standard (Augmented) Dckey-Fuller test and assumes parameter homogeney whle the IPS allows for heterogeney across the panel and seral correlaton n the error terms. Both the LLC and IPS may lead to erroneous results f there s cross-sectonal dependence among the panel members emanatng from, for example, common effects. Hence, we also report the cross-sectonally augmented panel un root test (CIPS) proposed by Pesaran (2007), whch takes nto account possble cross-sectonal dependence. Table 1: Panel un root test results LLC statstcs IPS statstcs CIPS statstcs Levels Dff Levels Dff Levels Dff ** ** ** ** ** ** Notes: The tests are: Levn, Ln and Chu (2002, LLC), Im, Pesaran and Shn (2003, IPS) and Pesaran (2007, CIPS). ** ndcates the rejecton of the null of non-statonary at the 5% level or better. Two lags used to account for autocorrelaton and the tests nclude ntercept and trend n levels. Table 1 reports the results of the un root tests whch ndcate that we cannot reject the null hypothess of a un root n levels, suggestng that the varables are non-statonary. However, the seres are statonary n frst-dfferences, mplyng that they are ntegrated of order one, I (1). Hence, we can now proceed wh panel contegraton tests to explore whether there s a long-run equlbrum relatonshp between REM and INV. 2.2 Panel contegraton tests Havng establshed that the varables under study are I (1), we now explore whether there s a long-run contegraton between INV and REM. To ths end, we mplement the resdual based 3

6 panel contegraton test developed by Kao (1999) whch s an ADF-type test. The null hypothess tested here s that there s no panel contegraton aganst the alternatve of contegraton based on the assumpton of homogenous contegratng vectors. Snce the assumpton of homogeney among the cross-sectonal uns may be too strong, we also report the Pedron (1999, 2004) panel contegraton test whch offers consderable flexbly as allows for heterogeney n the long-run contegratng vectors. Pedron (1999, 2004) constructs seven test statstcs whch capture both the whn- and between-dmensons of the panel. However, an mportant shortcomng wh the above panel contegraton tests s that they mpose a common factor restrcton - that s, they assume that the long-run parameters for the level varables are equal to the short-run parameters of the varables n ther frst dfferences. As shown by Westerlund (2007), when ths assumpton does not hold, the above contegraton methods suffer from a sgnfcant loss of power. Therefore, n addon to the above methods, we also report more approprate panel contegraton tests proposed by Westerlund (2007). Westerlund (2007) sdesteps the assumpton of a common factor restrcton by utlsng the structural (rather than resdual) dynamcs. The Westerlund test can handle serally correlated resduals, country-specfc ntercept and slope parameters along wh trend terms. Westerlund (2007) develops four dfferent statstcs whch can be used to establsh the exstence of a panel contegraton. Two of them are panel tests (denoted P and P ), testng the alternatve hypothess that the panel s contegrated as a whole (H p 1 : = < 0 for all ). The other two are group-mean statstcs, (denoted G and G ), whch test the alternatve that at least one element n the panel s contegrated (H g 1 : < 0 for at least one ). Thus, the panel tests assume that s homogenous for all whle the group-mean tests do not requre ths. To formally examne whether the panel members are ndeed ndependent, we apply the CD test proposed by Pesaran (2004). Pesaran (2004) shows that the CD test s robust to a sngle as well as multple breaks n the slope parameters and/or n the resdual varances of the ndvdual regressons. Gven the length of the tme perod we cover and the heterogeney of the countres under study, s hghly lkely that our varables of nterest may have been nfluenced by varous 4

7 shocks emanatng from, for example, regme and polcy changes. Thus, to fully understand the relatonshp between INV and REM, structural breaks and regme shfts need to be accounted for. In ths study, as an addonal robustness, we mplement the panel contegraton test proposed by Westerlund and Edgerton (2008), whch accounts for both structural breaks and cross-sectonal dependence. Westerlund and Edgerton (2008) develop two dfferent tests that allow for unknown structural breaks n both ntercept and slope of the contegratng model, heteroskedastc and serally correlated errors as well as tme trends. The locaton of the structural breaks may be at dfferent dates for the cross-sectonal uns. Table 2: Panel contegraton test results Kao (1999) T-statstc Prob. ADF ** Pedron (1999, 2004) ** ** ** ** ** ** Westerlund (2007) ** ** ** ** Pesaran (2004) CD statstc ** Westerlund and Edgerton (2008) Model No break ** ** Level break ** ** Regme shft Notes: The null hypothess of the Kao and Pedron tests s that the varables are not contegrated and the lag lenghts are based on Schwartz Informaton Creron wh a maxmum number of 3 lags. Under the null, the Pedron tests are dstrbuted as normal and ther fne sample dstrbuton are tabulated n Pedron (2004). For the Westerlund (2007) test, the optmal lag/lead length s determned by Akake Informaton Creron wh the maxmum of lags set equal to 3 and the wdth of Bartlett-kernel s set to 3 (bootsrapped robust p-values reported). The Pesaran (2004) CD test takes cross-sectonal ndepedence as the null and s assocated p-values are for a one-sded test based on normal dstrbuton. The lag length selecton of the Westerlund and Edgerton (2008) test s based on an automatc procedure and 3 breaks are used based on grd search at the mnmum of the sum of squared resduals. The p-values are for a one-sded test based on the normal dstrbuton. ** denotes sgnfcance level at the 5% or better. In the top panel of Table 2, we report the results of the Kao (1999) test whch strongly 5

8 rejects the null hypothess of no contegraton between INV and REM. The null of no contegraton s also rejected when we allow for heterogenous contegratng vectors usng the Pedron (1999, 2004) tests. The table also reports the results based on Westerlund (2007). To account for cross-sectonal dependence, bootsraped robust p-values are reported (based on 500 replcatons). The results ndcate that the null hypothess of no contegratng relatonshp can be rejected rrespectve of whether we treat as homogenous (tests P and P ) or not (tests G and G ). Thus, there s a strong evdence of a contegratng relatonshp between REM and INV. To formally establsh the exstence of a cross-sectonal dependence, we apply the CD test whch strongly rejects the null hypothess of no cross-sectonal dependence (see Table 2). Thus, a falure to take ths nto consderaton may result n based results. Fnally, we consder the effects of structural breaks and regme shfts on the long-run relatonshp between REM and INV usng the test developed by Westerlund and Edgerton (2008). Table 2 reports the results for three cases (no-break, level-break and regme-shft). When possble structural breaks are gnored (the no-break case) or accounted for (the level-break case), the null hypothess of no contegraton can be rejected. However, when we consder regme shfts we fal to reject the null of no contegraton. To sum up, we fnd that there s a long-run relatonshp between INV and REM. Ths lnk s robust to heterogeney n the long-run contegratng vectors as well as to cross-sectonal dependence and structural breaks. However, s not robust to regme shfts. Wh ths n mnd, we now estmate the nature of ths relatonshp. 2.3 Long-run estmaton Havng confrmed the presence of a contegraton, we apply the whn-dmenson-based dynamc OLS (WD-DOLS) estmator developed by Kao and Chang (2001) to uncover the effect of REM on INV. To mplement the WD-DOLS estmator, we consder the followng panel model: INV = REM (2). 1 6

9 Because our data s non-statonary, the WD-DOLS estmator addresses ssues of seral correlaton and endogeney concerns by augmentng equaton (2) wh leads and lags of the frst dfferences of the rght hand sde (endogenous) varable as follows: INV = REM REM (3) q j=q j j where j are the leads and lags. The WD-OLS estmator s superconsstent, under contegraton, producng unbased estmates of the long-run contegratng relatonshp. Nevertheless, a partcular weakness wh the WD-DOLS estmator s that assumes that the slope coeffcents are homogenous across the cross-sectonal uns. However, ths poolng assumpton, f not true, can result n a serous bas n both statc and dynamc panels (Asterou and Hall, 2007). Thus, as a robustness check, we also estmate our model (equaton 2) usng the between-dmenson mean-group DOLS (MG-DOLS) estmator for heterogeneous contegrated panels suggested by Pedron (2001). Ths estmator allows the long-run slope coeffcents to vary across countres by runnng seperate regressons for each cross-secton and then averagng them, ˆ = N 1 N =1 ˆ. Thus, the estmates can be vewed as the mean value of the ndvdual contegratng vectors. As emphassed by Pesaran and Smh (1995), group-mean estmators generate more consstent estmates, n the presence of heterogeneous contegratng vectors, than do whn-dmenson estmators. In addon, the MG-DOLS estmator has better small sample propertes (Pedron, 2001). As hghlghted prevously, we need to consder the possble ssue of cross-sectonal dependency. For example, nvestment rates and remtance flows n our sample of countres may respond to (unobserved) common external shocks (e.g. global busness cycles), meanng that they may become correlated across. Ignorng ths nterdependence may result n erroneous estmates. A smple way to deal wh ths type of error dependence s to demean the data over the cross-sectonal uns so that the cross-secton averages of the varables, say subtraced from the observatons, say t 1 N = 1 x = N x are x. Ths procedure can mgate the effects of error dependence (Pedron, 2001; Levn et al. 2002). Thus, we re-estmate the WD-DOLS regressons usng demeaned data. Ths smple strategy, whle effectve, mples that the unobserved external 7

10 factors are the same across countres. To the extent that countres have dfferent macroeconomc and nstutonal envronments, for example, s hghly lkely that ther responses and behavour towards remtances would be dfferent. To ths end, we also apply the Common Correlated Effects Mean Group estmator (CCEMG) developed by Pesaran (2006). Applyng ths estmator, one can rewre the error term n Equaton (2) as havng a multfactor structure as follows: = f (4) ' t where f t s k x 1 vector of unobserved common factors, whch may affect the countres wh dfferent ntenses, and s country-specfc error term, assumed to be weakly dependent across the cross-sectonal uns. The common factors f t are allowed to be correlated wh the regressors n Equaton (2): x = f (5) ' t where x s each of our regressors, s k x 1 vector of factor loadngs, and s the error term assumed to be ndependently dstrbuted of f t and. To take nto account the presence of common effects, Pesaran (2006) suggests that one can approxmate f t by cross-secton averages of the dependent and explanatory varables and then run standard panel regressons augmented wh these averages. As shown by a number of studes (e.g. Pesaran, 2006; Pesaran and Tosett, 2011), ths CCEMG performs well n small samples and can handle the presence of autocorrelaton n the resduals and un roots n the common factors. As a fnal robustness check, we apply Breung s (2005) two-step estmator whch, unlke the above methods, can handle dynamc effects. Followng Breung (2005), can be shown that a contegrated model has the followng Vector Error Correcton Model (VECM) representaton (n the case of a VAR[1]): y = a y (6) ' 1 8

11 where s a whe nose error wh E ) = 0 and posve defne covarance matrx E( ). The matrx = jt assumed to be the same across whle ( ' captures the long-run relatonshp among the varables and s a and are short-run parameters whch vary across. In the frst step, the country-specfc short-run parameters are generated from separate models for each cross-secton un resultng n country-specfc contegraton vectors. In the second step, the long-run contegraton matrx ' s estmated usng the pooled regresson: qˆ ' = y ˆ 1 (7) where qˆ and ˆ are based on the generated short-run parameters a and. Breung (2005) and Breung and Pesaran (2008) show that ths estmator has a normal dstrbuton and corrects for endogeney n the second step. Table 3: The mpact of REM on INV Estmator N Obs WD-DOLS (Kao and Chang, 2001) [4.460]*** WD-DOLS (Demeaned data) [1.910]** MG-DOLS (Pedron, 2001) [9.380]*** CCEMG estmator (Pesaran, 2006) [0.981] step estmator (Breung, 2005) [6.293]*** Notes: T-statstcs n parenthess. ** and *** ndcate sgnfcance at the 5% and 1% levels, respectvely. The DOLS regressons are estmated wh two leads and two lags. The regressons nclude unreported fxed effects. Table 3 contans the results of the estmates of the long-run effects of REM on INV. The coeffcent of REM s posve and hghly sgnfcant at the 1% level. The magnude of the coeffcent ranges between 0.22 and 0.63, mplyng that, n the long-run, a one percentage pont ncrease n the REM to GDP rato leads to an ncrease n percentage ponts. INV of around

12 2.4 Short-run dynamcs and causaly tests Gven that the varables are contegrated, we set up a panel vector error correcton model n order to explore whether the relatonshp between REM and INV s of a causal nature. To ths end, followng Engle and Granger (1987), we use the followng two-step procedure (Pesaran et al. 1999). Frst, the long-run model specfed n equaton (2) s estmated n order to obtan s resduals. Second, defnng the lagged resduals from equaton (2) as the error correcton term, the followng error correcton model s generated: INV REM p p = 1 j k =1 11k k k =1 12k k INV REM u, (8) p p = 2 j k =1 21k k k =1 22k k REM INV u, (9) where s the frst-dfference operator; p s the optmal lag length determned by standard nformaton creron. The null hypothess of no short-run causaly can be examned, respectvely, based on H 0 : = 0 and H 0 : = 0 for all k. In other words, short-run 12k causaly can be tested evaluatng the statstcal sgnfcance of the partal F -statstc assocated wh the correspondng regressor. On the other hand, long-run causaly can be tested by the statstcal sgnfcance of T-statstcs. 1 and 2 22k (the error correcton terms), respectvely, usng Table 4: Short-run dynamcs and causaly tests Dependent varable Source of causaly Short-run Long-run ECT Equaton (8) [0.262] 0.458*** [0.000] Equaton (9) [0.166] *** [0.009] Notes: Partal F-statstcs are reported wh respect to short-run changes n the respectve regressor. The ECM s the coeffcent of the error correcton term. *** ndcates sgnfcance at the 1% level. The long and short-run Granger causaly tests are reported n Table 4. The results show there s no causal relatonshp between REM and INV n the short-run as both respectve (lagged) regressors are not sgnfcantly dfferent from zero at standard confdence levels. However, n the long-run, we fnd a sgnfcant two-way causal relatonshp. That s, ncreases n INV are both a result of as well as a cause of ncreases n REM. 10

13 2.5 Dscusson of the fndngs Our central fndngs show that remtances have a robust long-run effect on domestc nvestment n developng countres. Ths result s consstent wh the recent fndngs by Zesemer (2010), who has shown that remtances enhance fxed capal formaton drectly as well as ndrectly through ther benefcal nfluences on publc expendures on educaton and leracy. The dea that remtance flows mprove human capal (e.g. educaton, nutron and health) has been confrmed by a number of studes (see for example, Acosta et al. 2007; Calero et al. 2009). Hence, these flows are lkely to have posve effects n the long-run. Our fndngs are also n lne wh the results of Nsah and Fayssa (2011) who found that remtances are posvely related to economc development n developng countres. Unlke ther study, however, we pay partcular attenton to the propertes of the varables under study as well as the underlyng assumptons of the econometrc technques. Gven that we employ more superor estmaton methods, our results should be more relable. Our causaly analyss show that there s a bdrectonal causal relatonshp between REM and INV. Ths could be because of the multpler effects generated by the expendures of remtance-recevng households may be encouragng more nvestment. Alternatvely, could be that the households themselves may be makng small capal nvestments. In the latter case, ths could generate more remtance flows f we assume that the mgrant s not just altrustc but also self-nterested. In other words, f remtance-recevng households engage n successful busness ventures, the mgrants may send more remtances n order to enhance ther own wealth 2. Results by Alleyne et al. (2008) confrm that remtances are not only drven by altrustc motves but also nvestment motves. Thus, remtances may drve nvestment whle nvestment self may cause more remtances. These deas are consstent wh the theoretcal work by Le (2011), who has shown that remtances can act as a useful source of fnance for nvestment projects partcularly when the domestc fnancal system s suffcently developed. 2 Ths assumes that the mgrant and the remtance-recevng household can overcome ssues of adverse selecton and moral hazard and that they can trust each other. 11

14 3 Concludng Remarks The objectve of ths study was to establsh whether there s a long-run stable relatonshp between domestc nvestment and remtances n developng countres. Usng recently developed panel contegraton technques, we show that there s a long-run relatonshp between nvestment and remtances. Ths result s robust to cross-sectonal dependency as well as structural changes. Upon estmatng the nature of the long-run equlbrum relatonshp, the study found that remtances have a statstcally sgnfcant posve effect on nvestment n the long-run. Moreover, the Granger causaly tests show that the long-run lnk between remtances and nvestment s bdrectonal and of a causal nature. The overall fndngs suggest a number of mportant polcy mplcatons. Frst, developng countres should mprove the effectveness of remtance nflows. A partcular channel s the fnancal system. Thus, developng countres should develop ther fnancal sectors n order to allow remtance-recevng households to have the facles needed for productve nvestments. Gven that remtances tend to boost the level of deposs and cred n bankng system (Aggarwal et al. 2011), a well-developed fnancal system would lkely generate more benefs. In the same ven, they should adopt polces that may reduce the transacton costs attached to recevng the funds so that households can get ther remtances as smoothly as possble. One way to do ths s to reduce red tape, but perhaps, more mportantly, competon should be encouraged among money transfer companes. Overall, the mportant role mgrant remtances can play n economc development s not a trval matter. As shown n ths study, remtances can mprove the economc performance of developng economes by augmentng the rate of capal accumulaton. 12

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