Discussion Paper

No. 2019-46 | August 12, 2019
Do remittances worsen export diversification?

Abstract

The paper explores the impact of workers’ remittances on the level of export diversification. The hypothesis is that significant inflow of remittances causes overvaluation of real exchange rate, which in turn deteriorates diversity of export. The theoretical base is in line with the Dutch disease phenomenon. The paper uses annual cross-national panel data over 2000–2016 period and System GMM methodology. The evidence suggests that indeed large inflow of remittances is associated with less diversified export. The economic intuition behind is that remittance-caused real exchange rate appreciation unevenly suppresses export of goods: some goods “suffer” more than others do. In terms of the number of product-names, a percentage point increase in remittances to GDP sent home “reduces” variety of export by approximately five active lines. There are other interesting findings as well. An improvement of government effectiveness facilitates overall export diversification; terms of trade improvement and rise of real exchange rate volatility mostly increase export concentration rather than alter number of exported product-names.

Data Set

JEL Classification:

F14, F24, F31

Assessment

  • Downloads: 364

Links

Cite As

Erik Vardanyan (2019). Do remittances worsen export diversification? Economics Discussion Papers, No 2019-46, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2019-46


Comments and Questions


Anonymous - Referee Report 1
August 15, 2019 - 08:25

Referee Report for “Do remittances worsen export diversification?”

The paper aims to show empirically that countries that receive remittances become less diversified, through the appreciation of the exchange rate channel. As the authors suggest, this is similarly/same as a Dutch Disease effect on diversification.

My main first comment ...[more]

... comes from that and relates to the contribution. The paper cited by the authors, Bahar and Santos (2018) exactly looks at that question: Dutch disease and export diversification. They find that indeed having an external shock (increase in price of natural resources in their case, but increase in remittance in this paper’s) results in less diversification. It is not clear to me what is then the contribution of this paper beyond that.

My second main comment is with respect to the interpretation of the coefficients, and particularly its economic significance. The coefficient of interest is the interaction between remittances and REER. But that’s quite confusing. That does not necessarily mean that remittances are creating a currency appreciation that is in turn causing lack of diversification. Those results suggest that when the two things are happening at the same time, is when you see less diversification; but not following the theory of change posed by the author. Moreover, the coefficients are quite small, even if statistically significant. I’m unsure how big these effects are. The author claims that a “percentage point increase in remittances to GDP sent home costs approx. five active lines”. Not sure how they arrived to that conclusion, but Column 6 of Table 2 (and 3) show a positive point estimate (not statistically significant) for active lines of that interaction term.

Lastly, though the authors claim that the GMM system solves the endogeneity problem, I’m not sure it does and it is not explained why is that. I think that it is ok to show correlations and acknowledge it, but it is less ok to claim they are causal effects.

The paper needs to be edited and rewritten. Often citations are in parenthesis at the beginning of a sentence, without years, or many typos and grammar issues.


Erik Vardanyan - Comments to the Referee Report for “Do remittances worsen export diversification?”
August 19, 2019 - 09:45

Thank you for your valuable Report.
You are right, Bahar and Santos (2018), as well as myself, are investigating the Dutch disease and export diversification relationship. In the first study, the disease-causing factor is the sizable export of natural resources, while for my case, this is the so-called 'export' of ...[more]

... the labor force. I believe, that those two factors have inherent economic differences. The economic impact of remittances may be different depending on the nature and characteristics of receivers. In other words, whether remittances are causing Dutch disease or not is an open question worth analyzing. In short, Bahar and Santos (2018)are asking to what extent the concentration of a country's non-resource export basket is determined by their exports of natural resources. While I am asking, to what extent the concentration of a country's overall basket is determined by remittances inflow they face. I believe, those questions sound similar but possess enough differences to be asked as separate research questions.
Regarding the second comment, I believe that it is not just a coefficient of the interaction term that we should look at. Primarily, I am interested in the coefficients of remittances and the interaction term altogether. One may look at the partial derivative of the export diversification equation with respect to remittances (the overall marginal effect of remittances).

Thank you.


Anonymous - Referee Report 2
December 05, 2019 - 08:22

see attached file