Remittances and Social Spending in Latin America

Remittances are a significant source of foreign exchange for Latin America economies. As of yet however, no study has explicitly examined the relationship between remittances and levels of social spending in Latin America. I argue that remittances, due to their compensation and insurance functions, dampen demand amongst recipients for 'safety-net' social transfers. As a result, over time, this results in a reduction in the level of social security and welfare spending in countries with high levels of remittances. I test this argument with an error-correction model on a cross-national, time-series dataset on social spending, with a sample of 18 Latin American states, over the period 1990 to 2009. The results of the statistical tests provide strong support for this argument. These results are robust to an instrumental variable analysis.