Do remittances promote labor productivity growth in Mexico? An empirical analysis, 1970-2014

Over the past two decades or so, remittance flows to Latin America and the Caribbean in general, and Mexico in particular, have increased dramatically, even surpassing their foreign direct investment (FDI) inflows for selected years. The onset of the Great Recession in 2008-09 led to a significant reduction in these flows before they leveled off in 2010 and moved upward again. More importantly, from a development standpoint, these flows are relatively more stable than other private and official flows, such as FDI, portfolio investment, and even official development assistance (ODA) flows.

This paper investigates remittance flows to Mexico during the 1980-2014 period in absolute terms, relative to GDP, in comparison to FDI inflows, and in terms of their regional destination. I review the growing literature that assesses the impact of remittances on investment spending and economic growth. I then present a simple endogenous growth model that explicitly incorporates the potential impact of remittance flows on economic and labor productivity growth. Finally, I present a modified empirical counterpart to the simple model that tests for both single- and two-break unit root tests, as well as performs cointegration tests with an endogenously determined level shift over the 1970-2014 period. The error-correction model estimates suggest that remittance flows to Mexico have a positive and significant effect, albeit small, on both economic growth and labor productivity growth.

The economic data used in this study were obtained from official government sources such as INEGI (various issues), Nacional Financiera, S.A., La Economia Mexicana en Cifras, the Banco de Mexico, Informe Anual (various issues), and the World Bank’s Migration and Development Brief (various issues). Private and public investment data for Mexico have been obtained from International Finance Corporation, Trends in Private Investment in Developing Countries: Statistics for 1970-2000 [2002]. The private, public and foreign capital stock data were generated using a standard perpetual inventory model assuming an estimate of the rate of depreciation of 5 percent.