For Bangladesh, More Migrants Mean More Money

Remittances sent by migrant workers have emerged as a key driver of poverty reduction in many developing countries. Bangladesh has caught up with growing migration trends since the mid-70s when only 6,000 Bangladeshis were working abroad. Today, there are about 8 million. Migration has now become a major source of gainful employment for Bangladesh’s growing number of unemployed and under-employed labor force. The sharpest increase in the level of manpower exports occurred during 2006--2009. Remittances have grown at a rapid pace, particularly since 2004.

So, what are the key correlates of aggregate remittance inflows in Bangladesh? What does the data tell us about Bangladesh? Many researchers have used aggregate data to analyze the macro-economic factors affecting the behavior of remitters. For example, Barua et al (2007) show that income differentials between host and home country and devaluation of home country currency positively and high inflation rate in home country negatively affect workers’ remittances¹. Hasan (2008) finds remittances respond positively to home interest rate and incomes in host countries². Ordinary Least Squares estimation is frequently used to characterize the statistical relationships between aggregate remittance inflows and their proximate macro correlates.

The key finding is that a limited number of macroeconomic factors are important in predicting the behavior of aggregate remittances.

• The most robust predictor of total remittances received annually is the stock of migrants. Each additional migrant increases annual remittances by between US$1540 to US$3650. This is a range too wide for practitioners’ liking, but the point is that the marginal gains from migration in the form of remittances are very large—even the lower bound is 80% larger than Bangladesh’s per capita GNI of $850.
• Another robust predictor is GDP per capita. There exists a strong nonlinear relationship. Evaluated at the 2011 level of GDP per capita, the overall marginal impact of GDP per capita is positive. The GDP per capita threshold beyond which the marginal impact is positive is US$700—a level of per capita GDP that Bangladesh crossed just in 2011. This means that further increases in Bangladesh’s GDP per capita can be expected to associate with higher level of remittance, other things equal.
• The exchange rate matters as well. A one taka increase in the exchange rate increases remittances by US$71 to $142 million, other things equal. The economic significance of maintaining a competitive exchange rate should thus not be under-estimated.
• Real deposit rate does not seem to matter by itself. The impact of real interest rate on remittance depends on the exchange rate. Remittance tends to rise with increase in real deposit rate, but the impact of the rise in real deposit rate is dampened the higher the exchange rate.

What do we make of the results from aggregative statistical analysis above? Remittances will keep flowing in as long as the stock of migrants keeps growing and macroeconomic policies remain supportive. However, growth in the stock of migrant Bangladeshis abroad cannot be a sustainable source of long run growth in remittances for the simple reason that the entire labor force will not emigrate. Nevertheless, in the short and medium term, there is still considerable room for sustained positive net migration. Growth in remittance per worker in turn is a product of the workers’ earnings, the propensity to save, and the propensity to remit. Factors determining remittances at the individual level is the subject matter of my next blog post.

¹Barua, et al (2007), Determinants of Workers’ Remittances: An Empirical Study, Policy Analysis Unit, Bangladesh Bank.
²Hasan (2008), The Macroeconomic Determinants of Remittances in Bangladesh, MPRA Paper No. 27744, February, 2008.