migrants from their households can dramatically change the estimated poverty impact of remittances. With data from Guatemala, Adams (2004) illustrates how the incorporation or not of this correction can lead to either positive or negative effects of remittances on poverty.

Remittances can also negatively affect domestic competitiveness lowering the expected returns on capital. For example, remittances can exert pressure on the exchange rate and lead to a real appreciation something that ceteris paribus would lower the profitability of the tradable sector (in a Latin American context see Amuedo-Dorantes and Pozo, 2004, for evidence in this regard). Similarly, remittances may raise reservation wages and negatively affect labor supply (Rodriguez and Tiognson, 2001). In both cases, remittances would affect the investment incentives of households and entrepreneurs and lower the rate of capital accumulation.

In other words, given the potential counterbalancing effects associated to a surge in remittances, it may be quite difficult to determine not only the magnitude of the potential development impacts of remittances but also even the direction of those impacts. Thus, empirical evidence is needed to ascertain the signs and orders of magnitude of the different economic consequences of remittances flows. The existing empirical evidence on the various development impacts of remittances is, however, still quite limited. True, there are a number of studies<sup>1</sup> which have analyzed the poverty impact of remittances<sup>2</sup> exploiting cross national databases (see for example Adams and Page, 2005, and Acosta et al. 2007) or exploring the issue in specific country settings (see for example Adams 2004, 2006 respectively on Guatemala and Ghana, Lopez-Cordova, 2005; and Taylor, et al., 2005, on Mexico; and Yang and Martinez, 2005, on the Philippines) concluding that in general higher remittances inflows tend to be associated with lower poverty indicators.

Yet there are a number of issues that have to be considered. First, cross country studies tend to offer global results but they do not fully exploit differences in country characteristics that may affect the development impact of remittances. In particular, their results can be misleading in specific country contexts if there are significant differences in migration patterns across countries and regions, and those are not taken into account in the analysis. Moreover, cross country studies usually take as counterfactual the hypothesis of no remittances without altering migration patterns rather than the more appealing counterfactual of no migration (i.e. they underestimate the costs of migration and hence may overestimate the benefits of remittances). For example, some of the estimates obtained using cross country analyses suggest that that a 10 percent increase in per capita remittances may lead to a 3.5 percent decline in poverty. Clearly, this estimate does not seem very realistic especially when

> 1 For comprehensive reviews see also the International Monetary Fund’s _World Economic Outlook 2005_ , the World Bank’s _Global Economic Prospects 2006_ , and the Inter-American Development Bank’s _Beyond Small Changes: Making Migrants Remittances Count_ all of which have as its central topic the economic and development implications of remittances and migration.

> 2 The existing literature has also focused on the impact of remittances on other economic variables and measures of development.  See for example the works of Yang (2006) for the impact of remittances on intertemporal consumption smoothing, Ruiz Arranz and Giuliano (2005) on growth; Amuedo-Dorantes and Pozo (2004) on risk management; Cox and Ureta (2003) and Hanson and Woodruff (2003) on education; Rodriguez and Tiognson (2001) on labor supply; Woodruff and Zenteno (2007) on entrepreneurship; and AmuedoDorantes and Pozo (2004) and Rajan and Subramaian (2005) on external competitiveness.

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