Workers' Remittances and the Equilibrium Real Exchange Rate: Theory and Evidence

Abstract

economic integration in the early twenty-first century is conInternational ventionally thought of in terms of increased openness to trade in goods and services, as well as a dramatic increase in the volume of capital flows. The twenty-first-century experience is sometimes contrasted with that of the last wave of globalization at the end of the nineteenth century, when increased integration in both of those dimensions was also accompanied by large waves of international migration. However, this contrast is probably overdrawn, as increases in international flows of labor services have also been characteristic of the current wave of globalization, and the impact of these factor movements is increasingly being felt in the international economy. A particularly dramatic manifestation of this fact is the sharp recorded increase in flows of worker remittances to the large number of developing countries that have been the source of these flows of labor services. In recent years, many such countries have witnessed significant increases in remittance flows, to the point that their scale has come to dwarf that of other types of resource inflows, whether development assistance, foreign direct investment, or other types of capital flows. In 2007 remittance flows to sub-Saharan Africa were equal in magnitude to flows of official development assistance, for example. Remittance flows now account for some 17 percent of GDP and 77 percent of exports in El Salvador, and over 20 percent of GDP and nearly 50 percent of exports in Honduras. In these countries, remittance flows are more than five times larger than foreign direct investment flows. Unlike capital flows, remittances do not entail the creation of external debt with future repayment obligations; unlike foreign development assistance, they do not come encumbered with a variety of political and economic conditions with which the recipient country must comply. Despite these virtues, however, large inflows of worker remittances have been perceived as posing 45