Growth effects of remittances : cross-country and time series analysis

Abstract

This thesis explores the growth effects of remittances by using some extensions to the Solow (1956) growth model. Using a recent approach popularised by Rao, we estimate an extended production function to analyse the long run growth effects of remittances with both the cross country and country specific estimation methods. Our cross country estimates use data from a panel of 40 high remittance recipient countries. In this process we found that, it is necessary to make a distinction between the direct and indirect growth effects of remittances. Existing studies do not make this distinction and estimate only the direct growth effects. Furthermore, they also fail to make a distinction between the transitionary and permanent growth effects of remittances although they clearly state that their main objective is to estimate the latter. We find that the direct growth effects of remittances, as in the existing studies, are insignificant or even negative. However, many development economists believe that the growth effects of remittances are positive and remittances are an important source of funds to invest in human and physical capital. Therefore, the findings by several econometric studies that the direct growth effects of remittances are negligible have become somewhat controversial. This controversy has become more acute because to the best of our knowledge development economists did not produce any econometric results that support their belief. To resolve this controversy, we made the distinction between the direct and indirect growth effects of remittances. Remittances may have large or small indirect growth effects through their effects on a few intermediate variables that have permanent growth effects. Examples of these intermediate channel variables are investment ratio, development of the financial sector, exchange rate and volatility in output etc. We find that such indirect growth effects of remittances are small but positive. However, these indirect growth effects may be country specific. Therefore, we also estimate these indirect growth effects with the country specific data. Remittances may also have other economic effects besides their growth effects. There is convincing and uncontroversial evidence that remittances are pro poor as they help to reduce poverty in the recipient economies. Therefore, we also estimate these welfare effects of remittances with alternative measures of poverty. Our results show that these welfare effects are significant. The thesis raises some methodological issues on estimating the growth effects of remittances or any other growth enhancing variables like trade openness and investment ratio etc. Although it is difficult to resolve these methodological issues in this thesis, the main contribution of this thesis is to show that Rao's approach for estimating the permanent growth effects is a pragmatic option. Needless to say, like all other methodological issues, this issue cannot be resolved to the satisfaction of all. Therefore, further analysis and research is necessary into these methodological issues, which is beyond the scope of a single contribution.

Date of Award	2011
Original language	English