Workers' remittances in Central America: where does the money go?

Abstract

PurposeThe purpose of this study is to examine two issues about remittances in Central American countries (Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua). First, whether the inflow of remittances impacts income in the long run. Second, what motivates migrants to send remittances? The first issue is analyzed in the context of a permanent income hypothesis, while the second is analyzed in the context of altruism versus self-interest motives.Design/methodology/approachA panel cointegration method is used to establish the long-run relationship between the variables under consideration. Further, this study uses the fully modified ordinary least squares method (FMOLS) to estimate the impact of remittances on income and consumption. The pooled mean group (PMG) estimation is used.FindingsThe test results indicate that remittances into Central American countries do not promote growth in the long run. Central American families may perceive remittances as a permanent income stream and will increase their current consumption. Additionally, the test results indicate that sending remittances of the Central American migrants is mainly driven by altruism. Their primary motive is to support left-behind families at times of economic hardship.Research limitations/implicationsFindings provide an important implication for these Central American countries, as they have potential to boost income by utilizing remittance money in productivity-enhancing activities. This study could also provide valuable information for the governments of labor-exporting countries around the world to encourage and incentivize remittance recipient families to utilize those funds for income-generating activities.Originality/valueIn Central America, this is probably the first attempt in the literature to analyze the impact of remittances in the context of permanent income hypothesis and the motivation of Central American workers to send remittances to their countries of origin.