costs, thus making migration accessible to low income/unskilled
people as well. The long term inequality impact of migration
depends also on whether it triggers a brain drain, brain gain, or
brain waste. The cross country evidence (IMF 2004) shows that
remittances raise current consumption, reduce volatility and
improve the creditworthiness of the countries of origin, but do not
have a significant impact on the investment rate and GDP growth.
In light of all this, one would not expect that migrant remittances
played a central role in reducing income inequality, either directly or
indirectly.
(iii) Availability of external finance. Between 2004 and 2008, the
region recorded a rebound in capital inflows after their decline in
the early 2000s. The increase in capital inflows between 2002 and
2007 amounted to 2.4% of the region’s GDP (Ocampo 2008).
Portfolio flows to the private sector accounted for most of this
increase. The cost of such funds dropped markedly with the decline
of country spreads, i.e. from a regional average of 11.5% in May
2004, to less than seven percent in May 2007, and 7.3% in May
- This financial exuberance affected the region in several ways
(Ocampo 2009): first, the decline in international interest rates
exerted a downward pressure on domestic interest rates; second,
capital inflows led to an appreciation of the nominal exchange rate;
third, portfolio inflows mainly consisted of purchases of shares and
securities, generated a boom in regional stock markets and, as a
result, the stock market capitalization of the 7 largest regional
economies quadrupled in value between mid-2004 and the end of
2007 (ibid); fourth, the inflows facilitated the accumulation of
international reserves which reduced country spreads on
international loans. In contrast, the FDI stock stagnated at 22% of
the region’s GDP, after having risen from 8% to 22.6% of GDP
between 1995 and 2002 as a result of several foreign acquisitions of
privatized state assets (Unctad 2008).
Also in this case, it is difficult to trace the general equilibrium effect
of the 2004 to 2007 financial exuberance on inequality. As in the
case of rising terms of trade gains and remittances, it is likely that
these inflows affected growth (and therefore employment and
inequality) indirectly, via the relaxation of the balance of payments