2022-05-12-IMF-Evolution_of_Remittances_to_CAPDR_Countries_and_Mexico_During_the_COVID-19_Pandemic_32页_1mb

Analysis of Remittances to CAPDR Countries and Mexico During COVID-19

Introduction

• Remittances are a vital source of income for Central American countries and Mexico, supporting nearly 20% of GDP in El Salvador and Honduras in 2019 and accounting for over 50% of GDP in some countries.
• The COVID-19 pandemic initially caused a significant drop in remittances during April-May 2020 (e.g., a 33% decline correlated with a surge in U.S. Hispanic unemployment), but they rebounded strongly, surpassing pre-pandemic levels by year-end 2020, with notably higher growth rates.
• This paper aims to explain both the initial shock and the subsequent strong rebound, and to identify lessons for future policy responses.

Literature Review

• Existing literature focuses on three motives for remittances: altruism (helping family affected by home country conditions like infections), exchange/income, insurance, and investment.
• Empirical models link remittances with economic conditions in both host (especially U.S.) and recipient countries, showing elastic responses to host country income/economic activity (positive) and recipient country hardship or distress (positive, counter-cyclicality). U.S. real wages are a key driver.

Stylized Facts (Key Observations)

• Countries: Mexico (largest recipient and focus). CAPDR includes Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua.
• Source: ~60-95% of remittances to the region originate from the U.S.
• Pre-pandemic Trend: Steady increase driven primarily by higher transaction volumes (reflecting migration).
• COVID-19 Impact (Initial Shock, Apr-May 2020):
  • Rapid drop in remittances (-1/3) driven mainly by a sharp rise in U.S. Hispanic unemployment.
  • Similar shock across all studied countries (CAPDR + Mexico).
• Post-Shock Rebound (May 2020 onwards):
  • Strong rebound surpassing pre-pandemic levels by end-2020.
  • Growth rate significantly higher than pre-pandemic levels by late 2020/early 2021.
  • Initially driven by both higher transaction volume and higher average remittance amounts. The increase in average amounts became more pronounced from June 2020.
• Comparison: In 2020, remittances were resilient globally compared to other regions, with the largest share (over half) seeing increases. Growth remained strong in 2021.

Traditional Model Analysis

• Approach: Used panel data regressions and a Panel Vector Autoregression (PVAR) model focusing on factors like U.S. real wage growth, U.S. Hispanic unemployment, recipient country economic activity (manufacturing), U.S. new housing permits (sector-specific employment), Real Effective Exchange Rate (REER), and Interest Rate Differential.
• Results:
  • U.S. Hispanic unemployment was a strong predictor, with improvement leading to higher remittances.
  • The PVAR model captured the initial drop (Apr-May) and the subsequent rapid recovery well until June 2020, driven mainly by U.S. economy factors.
  • Crucially: These traditional models, estimated pre-pandemic, failed to capture the momentum and amplitude of the recovery and growth observed in the second half of 2020 and throughout 2021, exceeding the explanatory power of just the U.S. unemployment rate recovery.

Traditional Model Failure & Decomposition of Aggregate ("Total") Remittances

• Inability to Predict Post-June 2020 Surge: After June 2020, remittances were pulled up significantly by factors beyond pre-pandemic models.
• Decomposition (Treatment by Parts): Aggregate remittances are the product of Number of Transactions and Average Remittance Amount.
  • Pre-pandemic growth (~2019): Driven mainly by an increase in transaction volume/migration.
  • Spring 2020 Shock: Primarily driven by a decline in the number of transactions (travel restrictions limited migration).
  • Post-Shock Rebound (June 2020 - Mid-2020): Both transaction volume and the amount per transaction increased. After July 2020, the rebound was largely driven by an increase in the Average Remittance Amount.
  • Contribution 2020 (vs. 2019): In some CAPDR countries (e.g., El Salvador), half of the 28% remittance growth by year-end 2020 was due to significantly higher average amounts.

Explanation of Average Remittance Amount Increase

• Focus Country: El Salvador serves as a detailed case study due to available corridor-level data (23 U.S. states to 14 Salvadoran departments).
• Method: Reduced-form panel regressions using the "altruism" model augmented by host and home factors:
  • Endogenous variables: Average remittance amount.
  • Exogenous variables: U.S. real wages (residential construction), U.S. state-level unemployment relief, Motor vehicle travel (proxy for U.S. mobility/jobs), COVID-19 infection rates in El Salvador, Salvadoran government transfers.
• Key Findings:
  • The primary driver of average remittance increases since June 2020 was higher real-wage gains for migrants in the U.S.
  • U.S. COVID-19 unemployment relief (especially eligibility extended to undocumented workers in some states like California/NYC/DC) significantly increased average remittances during periods when migrants were unemployed or underemployed.
  • COVID-19 cases in El Salvador consistently pushed up average remittances, supporting the altruism/insurance motive.
  • U.S. mobility (lower mobility reflected fewer work opportunities/cash sending) and Salvadoran government transfers (conditional cash/welfare) had negative but statistically significant effects. The government transfer likely reduced the average needed transfer amount or affected remittance timing.
• Robustness: Conclusions hold using different model formulations and variables.

Conclusions and Path Ahead

See detailed findings in VII, VIII (formerly V, VI). Summary points:

1. Strong Resilience & Growth: Despite pandemic fears, remittances to CAPDR and Mexico were highly resilient initially but then saw very strong growth driven by, in part, favorable host-country conditions unseen in past crises.

2. Limits of Traditional Models: Relying solely on U.S. Hispanic unemployment fails to capture the drivers of the strong rebound and continued growth post-pandemic onset (specifically factors like state unemployment relief, wage growth, and altruism).

3. Drivers: Growth since ~June 2020 is driven by:

   • Host Factors: Real wage growth in the U.S. (especially in hospitality sectors where migrants work), temporary work supports.
   • Home Factors: Increases in COVID-19 infections in recipient countries, tied to higher remittances.
   • Temporary Factors: Macronutrients.

4. Future Outlook: Remittances are expected to moderate slightly over the medium term but will likely continue their upward secular trend.

   • Growth in transaction volume is expected to be the primary driver due to ongoing moderate migration increases.
   • Growth in average remittances will depend heavily on sustained labor market gains and real wage developments for migrants in core sectors (e.g., hospitality, retail).
   • Altruistic motives will continue to play a role during hard times abroad.
   • Prevalence of digital remittances will likely continue to help aggregate flows.

5. Key Considerations: Any future crisis impact will greatly depend on the state of host labor markets, especially in destination sectors. Migrant stock is relatively unchanged by travel restrictions, meaning the ability to send affects who sends.

Key Takeaway: The IMF analysis highlights the unforeseen post-pandemic economic buoyancy in host countries and the significant impact of specific U.S. state-level pandemic support programs (like expanded unemployment eligibility) and growing hardships in recipient countries on remittance flows. These factors drove remittances up during a period many feared would dampen flows, explaining the unexpected resilience and growth momentum.