Tài liệu The impact of remittances on financial development in selected asian countries

UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM ERASMUS UNVERSITY ROTTERDAM INSTITUTE OF SOCIAL STUDIES THE NETHERLANDS VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE IMPACT OF REMITTANCES ON FINANCIAL DEVELOPMENT IN SELECTED ASIAN COUNTRIES BY HUYNH THI MY CHI MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, DECEMBER 2016 UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE IMPACT OF REMITTANCES ON FINANCIAL DEVELOPMENT IN SELECTED ASIAN COUNTRIES A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By HUYNH THI MY CHI Academic Supervisor: DR. NGUYEN VAN NGAI HO CHI MINH CITY, DECEMBER 2016 DECLARATION “This declaration is to certify that this thesis entitled “The Impact of Remittances on Financial Development in Selected Asian Countries” which is conducted and submitted by me in partial fulfilment of the requirements for the degree of the Vietnam – The Netherlands Programme. The thesis constitutes only my original works and due supervision and acknowledgement have been made in the text to all materials used.” Huynh Thi My Chi ACKNOWLEDGEMENTS I would like to express my greatest appreciation to persons who greatly supported and contributed to this thesis by supervision and encouragement. First of all, I am deeply grateful to my supervisor, Assoc., Prof. Nguyen Van Ngai, for his guidance, enthusiasm, support, dedication and invaluable comments and advices. It was my privilege to have his supervision. Without his encouragement and support, I would not have been able to complete this thesis. I am also very obliged to Prof. Nguyen Trong Hoai, Dr. Pham Khanh Nam for their valuable comments and suggestions for my Concept Note and Thesis Research Design. My special thanks to Dr. Truong Dang Thuy for his encouragements, advices and enthusiasm to help me finish the thesis. I would also like to thank all VNP staff for their diligent assistance. I am thankful to my friends from VNP who supported, encouraged and shared experiences for my thesis completion. Besides, my sincere thankfulness also goes to my company’s managers and colleagues who kindly and understandingly facilitated my master studying. Finally, I am most grateful to my family for their endless support and encouragements to me all the way through my journeys. ABBREVIATIONS FDI : Foreign Direct Investment FEM : Fixed Effect Model GDP : Gross Domestic Product GDPPC : Gross Domestic Product Per Capita GMM : Generalized Method of Moments ODA : Official Development Assistant REM : Random Effect Model ABSTRACT Although the impact of remittances on economic growth and poverty has always been a controversial problem for researchers and policy makers as remittance inflow have been becoming one of the largest external capital sources for many countries, its direct effect on financial development merely attract more attention after the financial crisis of 2007-2008. In an effort to contribute to empirical studies on this issue, this study utilizes fixed effect, random effect and system Generalized Method of Moments (GMM) to investigate the direct impact of remittances on two dimensions of financial development comprising the percentage of domestic credit to private sector by banks and broad money to GDP in thirty-seven Asian countries during the period 1990-2014. Furthermore, this study also examines whether there are different effects of remittance inflows in high, middle and low-income countries in this area. The results show that an increase in remittances seems to have no impact on financial development in general while there are mix results regarding the different income groups of countries in Asia. In particular, while no evidence on the impact of remittances on both measurements of financial development as the whole region are obtained in middle and low-income countries, there is a significant and positive effect of these flows on the ratio of domestic credit to private sector by banks to GDP despite an insignificant influence on broad money to GDP in high income countries. Keywords: Remittances, Financial development, Asia, Income Group. TABLE OF CONTENTS LIST OF TABLES ..................................................................................................... LIST OF FIGURES.................................................................................................... CHAPTER 1: INTRODUCTION ............................................................................ 1 1.1. Problem statement ...................................................................................... 1 1.2. Research objectives .................................................................................... 3 1.3. Scope and data of the study ........................................................................ 3 1.4. Structure of the study.................................................................................. 5 CHAPTER 2: LITERATURE REVIEWS ............................................................... 6 2.1. Theory of remittances and financial development ..................................... 6 2.1.1. The concepts and channels of remittances........................................... 6 2.1.2. Definitions of financial development .................................................. 7 2.1.3. The role of remittances in financial development .............................. 7 2.2. Empirical studies ...................................................................................... 10 2.3. Other determinants of financial development .......................................... 15 CHAPTER 3: MODEL SPECIFICATION AND DATA ...................................... 18 3.1. Model specification .................................................................................. 18 3.2. Data sources .............................................................................................. 21 3.3. Estimation methods .................................................................................. 23 3.3.1. Pooled OLS model ............................................................................. 24 3.3.2. Fixed effect model ............................................................................. 25 3.3.3. Random effect model ......................................................................... 26 3.3.4. Tests for choosing sufficient model ................................................... 26 3.3.5. The system generalized method of moment estimation .................... 28 CHAPTER 4: THE IMPACT OF REMITTANCES ON FINANCIAL DEVELOPMENT IN ASIA ................................................................................... 31 4.1. Overview of remittance inflows and financial development in Asia ....... 31 4.1.1. Overview of remittance inflows to Asia from 1990 to 2014 ............. 31 4.1.2. Overview of financial development in Asia from 1990 to 2014. ...... 36 4.2. Empirical results ....................................................................................... 40 4.2.1. Descriptive statistic ............................................................................ 40 4.2.2. Empirical results ................................................................................ 45 CHAPTER 5: CONCLUSIONS AND POLICY IMLICATIONS ........................ 54 5.1. Conclusions .............................................................................................. 54 5.2. Policy implications ................................................................................... 55 5.3. Limitations and further researches ........................................................... 56 REFERENCES ........................................................................................................... APPENDIX I .............................................................................................................. APPENDIX II: THE REGRESSION RESULTS ...................................................... LIST OF TABLES Table 3.1: The definition and expected sign of variables ......................................22 Table 4.1: The summary statistics of variables .......................................................41 Table 4.2: The correlation between variables ........................................................44 Table 4.3: The results of tests for choosing models ................................................45 Table 4.4: The results of FEM with robust .............................................................47 Table 4.5: The results of system GMM ..................................................................49 Table 4.6: Summary of the impact of remittances on financial development in Asia and different income groups by FEM and system GMM .......................................50 LIST OF FIGURES Figure 4.1: Remittances received by areas in the world from 1990 to 2014 (US$ billion) .....................................................................................................................31 Figure 4.2: Top 10 remittance recipient countries in 2014 (US$ billion) ...............32 Figure 4.3: Top 10 remittance recipient countries in 2014 (% GDP) .....................33 Figure 4.4: Remittances to areas in Asia from 1990 to 2014 (US$ billion) ...........34 Figure 4.5: Remittances received by income groups in the world from 1990 to 2014 (US$ billion)...................................................................................................35 Figure 4.6: Remittances received by income groups in Asia from 1990 to 2014 ($US billion)............................................................................................................36 Figure 4.7: Domestic credit to private sector by banks (% of GDP) in Asia from 1990 to 2014 ............................................................................................................37 Figure 4.8: Broad money as % of GDP in Asia from 1990 to 2014 .......................38 Figure 4.9: The average ratio of domestic credit to private sector by banks to GDP across income groups in Asia (%) ...........................................................................39 Figure 4.10: The average ratio of broad money as % of GDP across income groups in Asia .....................................................................................................................39 Figure 4.11: Correlation between domestic credit to private sector by banks (%GDP) and remittance inflows (%GDP) and other controlling variables ............42 Figure 4.12: Correlation between broad money (%GDP) and remittance inflows (%GDP) and other controlling variables .................................................................43 CHAPTER 1: INTRODUCTION 1.1. Problem statement Together with the augmentations of migration flows in recent decades, remittances - money sent by migrants to home countries - have grown rapidly and appeared to surpass main conventional channels like official development assistant (ODA), private capital (Dilshad, 2013). According to the data from World Bank, in 2014, personal remittances recorded worldwide are up to onethird of foreign direct investment (FDI) and more than three times as large as the sum of ODA and official aids, from US$ 67 billion in 1990 to over US$ 533 billion. Moreover, while foreign direct investment (FDI) fluctuates wildly during the period from 2000 to 2014, ODA and other external sources remain either unchanged or even decrease substantially; remittances keep its routine to accelerate stably over time. In particular, officially recorded remittances worldwide declined the first time in 2009 since 2000. Nevertheless, the decrease in remittance inflows by nearly 5 percent in 2009 compared to the remittance amount in 2008 due to global financial recession was trivial, in comparison with a 45 percent decrease in FDI in the same year. After that, while remittances have been totally recovered and continued to rise, FDI already fell twice in 2012 by nearly 10 percent and in 2014 by 20 percent. As the stability and increment of remittance inflows has drawn enormous attention from researchers and policy makers in recent decades, a strong wave of papers and studies have dug into links between these flows and various aspects of economic development. However, while most investigations have attempted to figure out effects of remittances on growth, poverty, education, less effort has been spent for studying the linkage between remittance inward flows and financial development, which has been documented to foster economic growth and reduce poverty by literature extensively (Goldsmith, 1969; Bencivenga and Smith, 1991; King and Levine, 1993; Beck, Demirguc- 1 Kunt and Levine, 2004), across recipient countries despite their important contribution in total external financial sources. Moreover, various perspectives relating to this relationship argue different channels via which remittance flows may affect financial sectors, and empirical studies examining the impact of remittances on financial development also demonstrate inconsistent outcomes across countries and areas. On the one view, these flows may enhance financial development if formal financial channels are utilized in order to conduct transactions relating to remittances, recipients are acknowledged financial services; thereby permitting banks to get acquainted or approach unbanked recipients. At the same time, that other financial products might be need if recipients prefer to store surplus income fosters the development of banking products and services. (Orozco and Fedewa, 2006; Gupta, Pattillo and Wagh, 2009; Aggarwal et al., 2011; Demigüç-Kunt et al., 2011). Furthermore, playing as a collateral role, remittance flows may enlarge bank willingness to provide loans for families with stable remittances. Even in the case remittances cannot become sufficient collateral, overall credit might still surge through recipient communities due to the incremental loanable funds as a result of remittances deposited to banks (Chami et al., 2009). On the other view, remittances might impede the development of financial sectors if remittance inflows loosen recipients’ budget constraints and allow them to lower their demand for outside credit (Martínez, Mascaró and Moizeszowicz, 2008; Brown et al., 2011). Recipients might also consider remittances as additional income and utilize most of them for consumption, or their distrust of financial sectors might discourage them to deposit money to banks, therefore no need for financial products and no increase in bank deposits (Chami et al., 2009). As a result, whether, how and to what extent remittances impact financial developments in remittance recipient countries 2 are still complicated issues, hence the need for more studies to investigate these effects. In an effort to address the relationship between remittances and the development of financial sector in Asia, this study utilized a panel data from 1990 to 2014 for thirty-seven Asian countries and different econometric methods. In particular, the linkage of personal remittances and financial development’s indicators comprising domestic credit to private sector provided by banking system and broad money are analyzed with fixed effect, random effect and system Generalized Method of Moments method. Furthermore, based on the level of country’s income which is classified by World Bank, this study also examines whether there are different effects of remittance inflows in high, middle and low-income countries in this area. 1.2. Research objectives This study is conducted in an attempt to:  Analyze the trend of remittance inflows and the situations of domestic credit to private sector provided by banks and broad money in Asia region,  Access the impact of remittances on financial development in Asia in general,  Evaluate different impacts of remittance flows on financial development in different income-groups of countries in Asia. From the findings, this study will propose recommendations in order to foster the effects of remittance inflows on financial development in Asian remittance recipient countries. 1.3. Scope and data of the study This research investigates whether remittances have significant influence on financial development for Asian countries due to many reasons. First, remittances flowing to Asia have accelerated substantially in the recent decade 3 and captured nearly 50% total remittance inflows in the world. Especially many middle and low income countries have taken large parts in both numerical value and percentage of Gross domestic product (GDP) in the amount of remittances flowing to this area; nonetheless, the development impact of remittances on financial sectors has not been commensurately analyzed in this area. Second, researches on studying the impact of remittances on financial development are solely officially conducted for separate country or a part of Asia. For example, Chowdhury (2011) finds that there is a direct positive relationship between remittance flows and financial breadth and depth in Bangladesh while Noman and Uddin (2012) provides evidences of for an indirect impact of remittances on banking sector and economic growth in selected South Asia countries. Third, as previous studies have chosen sample basing on the division of developing and developed countries which may affect results when high tolerance among the income of countries may be occurred among those types of countries. Hence, it is necessary for studying the linkage of remittances and financial development in this area. Specially, investigation on the impacts of these flows on different income groups will provide a better view for policy makers. Finally, from the impact of remittances on financial development in Asia, several recommendations may be suggested in the case of Vietnam, one of Asian middle-income countries whose remittance inflows have been accelerate from US$1.34 million in 2000 to over US$13 million and account for nearly 7% of GDP in 2015. Hence, there is a need for investigating the impact of remittances both in general and in separate income groups in Asia. Data of selected Asian countries collected for the period from 1990 to 2014 are employed in this 4 study. Except for financial openness indicator which is represented by The Chinn-Ito Index (Chinn and Ito, 2006), the remained data are extracted from the database of World Bank. 1.4. Structure of the study This thesis consists of five chapters. Chapter 1 presents the motivation for scrutinizing the nexus between remittances and financial development in Asian countries. Chapter 2 provides concepts of remittances and reviews vital literature relating to perspectives on the role of remittances to financial sectors and empirical studies considering the effects of remittances and other variables on financial development. Chapter 3 demonstrates the research methodology in tandem with data utilized in this study. Chapter 4 presents an overview of remittances and financial development in Asia during the period 1990-2014 and analyzes empirical results derived from regression. The last chapter summarizes main findings, proposes policy recommendations; moreover, limitations and future researches are also mentioned in this chapter. 5 CHAPTER 2: LITERATURE REVIEWS This chapter comprises three parts. First part presents concept and channels of remittances, definitions of financial development and main perspectives on the effect of remittances on financial development. Previous empirical studies on the relationship between remittance inflows and financial development will be present in the second part. The last part delivers former papers investigating the impact of main macroeconomic and openness factors to financial development. 2.1. Theory of remittances and financial development 2.1.1. The concepts and channels of remittances The term “Remittances” has been used commonly recently but it is rarely defined. In many previous papers, remittances are defined generally as the cross-border money that migrants send back to their home countries Remittances may be transferred via either official or unofficial channels. Official transfers refer to transactions utilizing the banking system or money transfer organizations. Unofficial transfers are sent mainly in cash through friends, family members, migrants themselves or via traditional channels, called hawala in some countries, by which money may be deposited with an unlicensed organizations in one country and may be drew at their partners in the recipient country (Freund and Spatafora, 2008; Nyamongo, 2012; Giuliano and Ruiz-Arranz, 2005; Aggarwal et al., 2011). As mentioned in literature, informal channels are utilized widely for transferring remittances in the world due to the accessibility, anonymity, low cost, reliability. First, both the remittance senders and receivers do not need to have bank account or prepare complex procedures which are required at banks or official organizations. Second, the information relating to the transactions can be remained unknown with other people. Third, the cost of these transfers is lower than they should be when utilizing official channels. Finally, that 6 remittances are delivered via the networks of family members or friends creates the reliability especially for people who seldom used official financial organizations. Nevertheless, utilizing informal channels induce some consequents. First, official organizations may encounter difficulties in collecting data and make a miscalculation the volume of remittances. Second, criminal organizations or individuals can use remittances for money laundering. Finally, diminishes the financial development impact of remittances as envisaged by the proponents of financial development (Nyamongo, 2012). 2.1.2. Definitions of financial development According to the definitions of World Bank, financial sector is the combination of institutions, instruments, markets, and the legal and regulatory framework that permit transactions to be made by extending credit. Primarily, to develop the financial sector is to overwhelm “costs” arise in the financial system. The process of cost reduction in obtaining information, enforcing contracts, and conducting transactions leads to the appearance of financial contracts, markets, and intermediaries. Diverse kinds and conjunctions of information, enforcement, and transaction costs with various legal, regulatory, and tax systems have inspired distinctive financial contracts, markets, and intermediaries across nations and throughout history. Financial development appears when there are improvements in financial instruments, markets, and intermediaries although these improvements may or may not remove the burdens of information, enforcement, and transactions costs (Levine, 2005). 2.1.3. The role of remittances in financial development Different perspectives on the impact of remittances on financial development in recipient countries at the theoretical level have been mentioned in many previous studies. The first argument is that remittance inflows foster financial 7 sector on both demand and supply aspects. With regard to the demand side, remittances is assumed to enhance financial literacy within remittance recipient communities when migrants and remittance recipients adopt formal transfer channels, thereby accelerating requirements for and utilization of banking products and services (Orozco and Fedewa, 2006; Gupta, Pattillo and Wagh, 2009). For instance, the need for channels through with remittances can be transferred or received can increase the opportunities of searching information related to products offered by banks; hence, stimulating the need and usage of various financial products and services and increasing the chances for banks to approach un-banked recipients, which permit for their outreach expansion. It is also argued that even if these flows of remittances are not transacted through banks, money surpluses created by additional income from remittances might potentially stimulate the acquisition of other banking services as people feel necessity for a means to store or invest the excess balances (Aggarwal et al., 2011; Demigüç-Kunt et al., 2011). Regardless of supply side, remittances are also presumed to promote the development of breadth and depth of financial sectors. For example, banks are encouraged to provide more products and services or even more branches to satisfy the growing requirement of remittance recipients. Furthermore, banks might be obligingly permit or increase credit for remittance recipients with stable and considerable remittance receipts as they become more attractive and potential customers. Additionally, augmentation in loanable fund deposited to banks by remittance recipients along with the costs of transactions related to sending, receiving or storing remittances may result in rise of bank credit to communities (Giuliano and Ruiz-Arranz, 2005; Toxopeus and Lensink, 2008; Aggarwal et al., 2011). Consequently, financial systems in recipient economies may be further widening and deepening, and it is essential to investigate the impact of remittances on financial development at the country level. 8 In the second view, remittances may create deleterious effects on financial development since individuals with remittance receipts may relax their budget constraints and lower credit demand which may be needed from financial organizations otherwise (Caceres and Saca, 2006; Martínez, Mascaró and Moizeszowicz, 2008; Aggarwal et al., 2011). Moreover, it is worse in case a pattern of conspicuous consumption is developed along with the inability to promote a saving habit that can assist investments and economic growth. In the third view, remittance inflows may have no impact on stimulating financial development in many countries, especially in countries with less developed financial systems due to many reasons (Brown et al., 2011). Above all, migrants prefer to transfer money to home countries through informal transfer ways rather than formal channels then there might be no need for recipients to be aware of or utilize bank transfer services. As unbanked – receivers do not have acknowledge of banking products and services, namely financial literacy is not increased in the communities, the need for financial systems does not exist or rise. Moreover, remittance recipients might store excess money at home or utilize them for other purposes as they might distrust banks and other financial institutions, or spend most of them for consumption; hence, there is no demand for saving products provided by banks or other formal financial products. These behaviors of remittance recipients might result in neither growth nor harmfulness on financial sector performance. Besides debates on the impact of remittances on financial development, the adverse causality is also argued from different level of financial sector performance (Brown et al., 2011). Lacking of development financial system and accessibility of commensurate quantity of banks and other formal financial institutions within the remittance recipient countries may lead to distrust of this sector among unbanked individuals or insufficient adaptation for the demand of financial products and services, hence driving individuals to rely more on informal channels for transaction related to remittances. In 9 contrast, higher level of financial development might enhance the trust of individuals in financial sectors and stimulate the demand for financial products and services. Furthermore, lower cost of transferring remittances as a result of financial development might foster utilization of these services of both remittance senders and receivers. 2.2. Empirical studies Various methods and datasets have been utilized to access the effects of steadily accelerating remittance inflows on financial development in the world in recent decades; the approaches of the above relationship in those papers can be categorized in two main strands comprising indirect and direct link. For the indirect approach, researchers explore the nexus of remittances and financial development indirectly by analyzing whether remittances foster economic growth at given level of financial development. With regard to the direct approach, the impact of remittances on financial development is investigated directly to evaluate the widening and deepening effect of remittances on financial sector performance. The first indirect group of studies focusing on the relationship of remittances and growth while considering interactions between remittances and financial development derives two main contrary aspects relating to whether country’s financial development is less developed or relatively developed. On the one hand, in a country lacking in financial development, remittances are believed to play an important role in providing additional sources for capital market, thereby promoting investment and economic growth. For instance, by adding a representative variable for financial development in tandem with remittances in growth equations while analyzing for sample of over 100 countries from 1975 – 2002 with GMM approach, Giuliano and Ruiz-Arranz (2009) find strong evidence that remittance inflows enhance economic growth by providing an alternative financial source for investment and mitigating credit 10