« What I've Been Reading | Main | The incentives for violence in hockey »
NotSneaky on remittances
Will Wilkinson has the scoop. NotSneaky writes:
Bottom line is that most of the so called “gains from remittances” are straight up gains from IMMIGRATION. Or in other words, they are gains from the fact that some person from a poor household in a poor county has managed to make their way to a rich country and now has a richer income. Strictly speaking the gain from remittances is just the gain from INTER-HOUSEHOLD reallocation of income between the migrant and those who stay behind, not the overall increase in household income due to migration.
This is oh so tricky and of course we must refer back to the 1920s debates on the "transfer problem," involving Keynes, Ohlin, and others, so ably surveyed by Jacob Viner's Studies in the Theory of International Trade.
Let's say a Mexican in Texas sends pesos in his pocket back home. His family benefits and he gets the warm glow but for the nation as a whole that's just inflation and a redistribution of wealth. How about if he sends dollars back home? Well, he converts through pesos, the real Mexican exchange rate appreciates, and Mexican exporters are penalized, to some extent offsetting the family gains.
How different are the two cases? Ha! That would make a nice exam question.
Does it matter if the receiving family plans to spend the money on imports or does that not matter? Does it matter if the big hotels in Cancun -- tourism is Mexico's largest export sector -- are foreign-owned? The clock is ticking...
Ultimately NotSneaky has the correct intuition that the gains are to be found in the immigration itself, not the subsequent transfer. Beware double counting. Here is my previous post on remittances but please note the comments on this post are for remittance talk, not a general discussion of immigration.
Posted by Tyler Cowen on June 6, 2008 at 06:34 AM in Economics | Permalink
Comments
And how do remittances differ from foreign aid? As far as I can see, the same questions arise in both cases. Give a country $100m ...
Yes, remittances and aid should be spent on imports.
Jonathan Eaton has a good chapter on foreign capital flows in the Handbook of Development Economics.
Posted by: luis_enrique at Jun 6, 2008 7:55:24 AM
I'd say the gains result from improved allocation of the human capital where a Mexican can be more productive here versus there due to better capitalism.
If he sends pesos back to his family, everyone is better off if his family is more likely to obtain better return on investment than others.
I'm sure that answer would fail an economics test.
Posted by: Andrew at Jun 6, 2008 9:06:22 AM
Working in Mexico I can say that the net gains from remittances differs widely based on the location of the family. On a puebloe the money is almost certainly spent on local goods (even this is becoming increasingly less true). If the family lives in a more urban environment then the remittances could be spent on imports, or exports. /threadjack No companies from the US ship through Tijuana anymore. It is presently cheaper for me to send shipments from sacramento through laredo (by almost 60 percent) then through the much closer border entrance point. From what Ive been told this is do to rampant theft along the tijuana route.
Posted by: mdesus at Jun 6, 2008 10:19:15 AM
Tyler:
"Let's say a Mexican in Texas sends pesos in his pocket back home. His family benefits and he gets the warm glow but for the nation as a whole that's just inflation and a redistribution of wealth."
If I carried a share of GM stock with me to Mexico, and then one day mailed it back to relatives in the US, that would not cause 'inflation' of GM stock. A monetary theory that says that inflation is affected by which side of the border a dollar happens to be on is a monetary theory that needs to be discarded for something better.
Posted by: Mike Sproul at Jun 6, 2008 10:47:23 AM
1) A mexican in texas with pesos in his pocket? Where did the pesos come from?
American wages? that would be in $. Carried with him from Mexico? Then they were already part of the mexican money supply. Whether he mails them home or carries them back will have 0 effect. Either he or a member of his family will spend or save them. The inflation already occured when the pesos were printed. The pesos were already in the family's possession. If the family is the basic unit then there is no change. If the individuals making up the family are the basic unit then the change is which pocket the pesos reside in within the family.
No wealth was redistributed between families or among families.
2) A person in Texas sends dollars to a person in Mexico. Why? Are dollars legal tender in Mexico? Which party can obtain the better legal exchange rate?
If one can obtain more pesos for a dollar in Mexico than one can in the USA, then by all means send the dollars. If the better exchange rate is found in the USA then change the dollars here and send pesos.
Posted by: CK at Jun 6, 2008 1:13:47 PM
"His family benefits and he gets the warm glow but for the nation as a whole that's just inflation and a redistribution of wealth."
I think you're making this much too complicated. Consider two cases:
1) X sends a remittance to Y in another country and Y sends X warm wishes, maybe via a letter, phone call or even videotape. Both are happier.
2) X sends money to Y in another country and Y sends X a book, music recording, or DVD. Both are happier.
Are these cases materially different? If case 2 (aka exports and imports) makes both countries richer, why wouldn't case 1 (aka remittances) do so as well?
Posted by: a student of economics at Jun 6, 2008 3:12:33 PM
If Central Bank officials have rational expectations, then they should foresee the inflationary effects of remittances, adjust and issue less local currency. In that case, what seems to be changing is who gets the seignorage.
I know its probably more complicated than this... but the story above seems to be assuming naive central bankers...
Posted by: DA at Jun 6, 2008 6:23:00 PM
As CK pointed out, every remittance is effectively in dollars because that's what the sender earns. So to the extent that a recipient spends (rather than hoards) a remittance, he can either (a) buy something with dollars, or (b) buy pesos with dollars then buy something with pesos.
Assuming minimal restrictions on cross-border trade, in case (a) any effects on the local money supply are diffuse, and we can assume that type (a) spending leads to importing more goods (through a chain leading back to the USA), or perhaps earning some investment income (in dollars) which act effectively like increased remittances. Increasing imports puts downward price pressure on local substitutes but in the long run may contribute to increased overall demand as the local capital stock gets built up, enabling local productivity gains. Middlemen (and tax collectors) will reap some of the gains from remittances redeemed for imported goods.
In case (b) the central bank can either (1) print more pesos to sell for dollars, or (2) leave the peso supply alone. Only path (1) is inflationary, where inflation means devaluing pesos the way John Law devalued assignats. On path (1) everyone in the peso country gets penalized except for those privileged to spend the central bank's forex reserves (generally on imported luxuries-- see below; though sometimes politicians blow forex reserves on imported weapons--Hugo Chavez bought some jet fighter planes!).
The effects of path (2) depend on the extent to which trade is restricted. In general path (2) will cause the peso to appreciate slightly (against tradable goods and perhaps other currencies); that will please peso earners and creditors but not debtors or exporters. If carried to extremes path (2) gets labelled "deflation." However, if trade is fairly free then importers use pesos to buy the dollars that remittance recipients sell, trade those for goods, and case (b) turns into case (a)! Given free trade and path (2) (no fiat-money inflation) the effects on the peso will be modest and good for most people in the peso country. If imports are restricted, path (2) pushes up the value of pesos as forex reserves which cannot be redeemed for goods accumulate.
If trade is restricted, the central banker who wishes to avoid either inflation or deflation may try to "sterilize" the reserves it gains from exchanged remittance money (which look a lot like forex reserves from FDI). The history of sterilization schemes isn't pretty. Many of them will produce some kind of central-bank surplus (since the forex the central bank is trying to dispose of can be redeemed for imported goods) for which rent-seekers will gleefully compete. Sterilization schemes often degenerate into schemes to provide luxurious lifestyles for politicians and cronies (who buy luxuries overseas or who are personally exempt from import restrictions-- look at the Wa-Benzi tribe(s) of Africa). Sterilization schemes like selling peso bonds to soak up circulating pesos don't work very well-- they either nullify themselves by attracting more FDI or produce a kind of slow-acting fiat-money inflation (since the bonds may substitute for currency). Selling peso bonds tends to produce fiat money inflation in the end because any shock to the influx of forex leaves the central bank with obligations to pay interest it can meet only by printing money.
Sometimes import restrictions are manipulated to produce a kind of quasi-sterilization which holds down the value of the peso by transferring excess wealth to rent seekers outside of central bank operations. For example, some crony capitalist will be given a monopoly on importing some broadly-consumed good (like sugar to the USA). Peso holders will buy the that good at a ripoff price, keeping the peso down (and peso holders poor) by transferring the excess value to the monopoly holder's pocket (to be spent (wasted) on luxuries overseas or luxury imports).
The history books are just full of case studies of the monetary and economic effects of FDI and foreign-aid spending causing foreign currency (dollars) to enter a recipient (peso) country. Remittances have similar effects. The results depend almost entirely, in my view, on the degree to which the recipient country restricts imports. In most historical cases trade has been greatly restricted to benefit rent-seekers in the recipient country. When such restrictions are coupled with large forex inflows, peso inflation and/or hugely wasteful rakeoffs for politicians and cronies invariable ensue. When imports are not restricted, monetary effects (of remittances, on pesos) are modest, and most people in the recipient country gain--though owners of inefficient local industries do less well relative to their neighbors and typically try to bribe recipient-country politicians to impose import restrictions.
Posted by: Mark Seecof at Jun 6, 2008 8:07:48 PM
There are cases from India where the remittences were used to buy lands, real estate, education, start hotels, industries, businesses etc which stimulated the economy. In some places like coastal A.P. that I enquired, many people (not the government) attributed the take off mostly to remittences from USA.
Posted by: gaddeswarup at Jun 7, 2008 2:11:57 AM
Mark Seecof:
"the central bank can either (1) print more pesos to sell for dollars, or (2) leave the peso supply alone. Only path (1) is inflationary, where inflation means devaluing pesos the way John Law devalued assignats."
The assignat inflation happened about 70 years after John Law's inflation. Same country though.
More importantly, when money is backed by the assets of the central bank, an issue of 100 pesos in exchange for 100 pesos worth of dollars will increase the central bank's assets exactly in step with its issue of pesos, so there would be no inflation
Posted by: Mike Sproul at Jun 7, 2008 6:39:11 PM
This post makes me happy I just finished my micro comprehensive exam a few weeks ago. No more ticking clock :)
Posted by: Adam at Jun 8, 2008 1:59:27 AM
Mike Sproul: Thanks for the correction on assignats. Ah, the vagaries of memory.
Posted by: Mark Seecof at Jun 8, 2008 2:20:32 AM
Mike Sproul: If by writing "money backed by assets of central bank" you mean the pesos are to be redeemable on demand in dollars (like, say, US treasury bills could at one time be exchanged for gold), then the exchange would not be inflationary. However, I think that sort of central banking is vanishingly rare nowadays. When a central bank prints pesos to buy dollars which it will not sell back for pesos at par... that is inflationary.
Posted by: Mark Seecof at Jun 8, 2008 2:38:08 AM
Mark Seecof:
I really did mean to say that paper pesos are backed by the assets of the mexican central bank, and I'll add that paper dollars are backed by the assets of the Fed. For starters, there is more than one kind of convertibility. Physical convertibility means the bank will buy back its pesos with something physical (gold, wheat, etc). Financial convertibility means the bank will buy back its pesos with something denominated in pesos (bonds, etc.) In many cases, financial convertibility can make physical convertibility irrelevant, so the mere lack of physical convertibility is not proof that money is not backed. After all, try naming a central bank that holds no assets.
Posted by: Mike Sproul at Jun 8, 2008 11:44:27 AM
Mike Sproul: We may soon see a major central bank without assets ;-) as the US Federal Reserve appears to be close to divesting its assets (chiefly US Treasury securities) by loaning them, without other security, at close to par for mortgage-backed securities and so-forth which the market-- for good reasons-- values at much less! Even in normal times the Fed's assets are a tiny fraction of the value of dollar currency in circulation and the value of dollars is not determined by the value of Fed assets. Furthermore, only the government and its cronies have any access to those assets.
Anyway, I still think you're confusing propaganda for reality. Consider: if I fire up my desktop publishing software and trusty color laser printer to whip out some "banknotes," then offer to trade them to you in return for dollars (with no promise to redeem, so they aren't just IOU's for a loan), you're gonna laugh until your sides hurt. The only advantage the (typical modern) peso issuing central bank has over me is that its newly-printed pesos resemble those already accepted as currency in the real economy, and legal-tender laws along with banking regulations coerce most people in the real economy to accept those pesos as money. Of course, by issuing more pesos, the central bank dilutes the value of those already in circulation. In effect, by printing pesos to buy dollars the central bank pays for those dollars by confiscating a smidgen from everyone in the peso-denominated real economy.
I invite you to read this nice article from the IMF which explains "sterilizing capital inflows." I don't agree with it completely (it steers the reader around some important issues with artful misdirection), but it explains why printing pesos to buy dollars is inflationary even in the intended- for- public- consumption view of a modern central banker.
Posted by: Mark Seecof at Jun 8, 2008 12:58:47 PM
Mark Seecof:
The Fed's assets are a small fraction of M1, M2, and M3, but of all those kinds of money, the only kind backed by the fed is the only kind issued by the fed and the only kind recognized by the fed as its liability: green paper dollars (also fed funds, but I'll run with paper). The fed's assets are obviously adequate to buy back every green paper dollar in circulation. (The checking account dollars that make up M1 are also backed, but by the assets of the bank that issued them.)
If you fired-up your laser printer, you would probably not put your name on the dollars, would not recognize them as your liability, and would not stand ready to buy them back with your assets. The fed does all of those things, and so is clearly different from a counterfeiter. On the other hand, if you put your name on the paper dollars you issued, recognized them as your liability, and stood ready to buy them back with your assets, then your 'mark dollars' would be a legitimate financial instrument that could be used as money.
I also have a nice article for you, called "There's No Such Thing as Fiat Money", which you can find by clicking on my name above.
Posted by: Mike Sproul at Jun 8, 2008 3:05:24 PM
What Mark Seecof said. And thanks.
Posted by: notsneaky at Jun 8, 2008 6:25:18 PM
notsneaky: Thank you for the kind notice.
Posted by: Mark Seecof at Jun 9, 2008 12:37:09 AM
Mike Sproul: I hope you won't mind, but although I read your stuff about the "Real Bills Doctrine" and even wrote a long response, I'm not going to post it here for fear that our gracious host Tyler Cowen will get annoyed. Let me instead just point out that your theory collapses if banks issue notes without good security, and I put it to you that government banks around the world have frequently done just that (remember the Ostmark?).
(Oh, and I suggest you convert your papers to HTML or PDF because some people don't have MS-Word and others refuse to open MS-Word files which may contain macro viruses or other malware.)
Posted by: Mark Seecof at Jun 9, 2008 1:44:59 AM
Mark Seecof:
The real bills doctrine specifically implies that money loses value when it is issued without good security, so it doesn't collapse. It is confirmed. The RBD says that the value of money is equal to the value of the assets backing it. Thus, if the money supply rises 10%, while the assets of the issuer rise 10%, then the ratio of assets to money is unaffected, and there is no inflation. But if the money supply rises by 10% and assets rise by 5%, then money outruns assets and there is inflation.
By analogy, if GM stock is selling for $60/share, and if GM issues a new share in exchange for assets worth $60, then that last share of GM stock was issued on good security, and the price of GM stock will not change. On the other hand, if the new share were issued for assets worth only $10, then that share was issued on insufficient security, and GM stock would fall in price.
Feel free to email me your long reply, and I'll get to work converting word files to pdf.
Posted by: Mike Sproul at Jun 9, 2008 10:45:30 AM
So much for the real bills doctrine: Zimbabwe issues 100 Billion Dollar banknote.
Posted by: Furschlugginer at Jul 28, 2008 5:28:32 PM
A person on her own luggage, leaving the noise of the city, into the 花蓮民宿 arms. To savor the refreshing nature of the original. In Taiwan, as long as a departure from the flow of downtown, everywhere in the garden-like 宜蘭民宿 you, they like their own home Like a warm and comfortable. Taiwan's Lodge 室內設計, the two luxury five-star hotel suite as if the presidential suite general Wah. It is there away.
Posted by: 清境民宿 at Dec 9, 2008 1:51:33 AM
Last chaos Gold
Buy Last Chaos Gold
Cheap Last Chaos Gold
Posted by: aion kina at Mar 18, 2009 9:59:49 PM
