Remittances and economical implications in Latin America and the Caribbean: The effects on exchange rate and growth rates

Abstract

Remittances, in many Latin American and Caribbean countries, represented more than 10% of the national GDP in 2010 (Inter-American Development Bank, 2011); they have become an important source of financing in many of these economies, in fact, for countries, like El Salvador, Nicaragua, Guatemala, it is the second largest source of financing after Foreign Direct Investment (Multilateral Investment Fund, 2011). Although this is a significant aspect, it is also important to highlight other consequences. The study shows that increasing levels of remittances could cause an appreciation of the exchange rate; the effects could be even more damaging if these inflows are not managed correctly by public and private institutions, as remittances create a situation similar to the Dutch Disease paradigm. The paper suggests that there is not enough research on the study of migrants’ nature; this leads to contrary opinions about the effect of remittances on long term economic growth affecting the findings other authors have reached in this field. The paper concludes that well developped financial institutions can channel remittances inflows to investment projects leading to higher opportunities to promote long term economic growth. Additionally these institutions can offer better instruments to national companies in order to reduce exchange rate volatility.