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A large body of literature has examined the determinants and impact of two external financial flows: foreign aid and remittances. Little, however, is known about the interlinking of the two flows, especially in South Asia. This study, using panel data from four South Asian countries for 1980-2015, examines the relationship between foreign aid and remittances and their links. Contrary to the traditional linear relationship reported in the literature, we find a quadratic (U-shaped) relationship between foreign aid and remittances. The results show that remittances initially fall when aid increases at the lower level of aid-dependency (aid-to-GDP); they then increase with rising aid at a higher aid-dependency level. The empirical findings also suggest that foreign aid's support of human capital increases remittances overall. Furthermore, we find that the foreign aid-led human-capital channel of migration (particularly of skilled people) reduces remittances, while the aid-led human-capital channel of economic growth increases remittance flows in South Asia. Moreover, the dynamic modelling estimation suggests that foreign aid positively affects (or complements) remittance flows in the short run but, in the long run, negatively affects remittances, indicating the substitutability of the two flows.

The purpose of this paper is to estimate the capital requirements for certain countries of South and SouthEast Asia. 1 The problem is in fact very complicatedwhat is presented in the following pages is an attempt to reach some rough estimates under very simplified assumptions. Such a study presupposes the possibility as well as the fruitfulness of a regional approach and attributes common properties to the region as regards the economic structure. Any region can be dealt with in terms of averages and aggregates only in case the component parts are economically similar units and result in meaningful economic variables. Looked from this angle, the region exhibits common characteristics affecting the, extent as, well as the sequence of economic development, consisting of a large population, a low level of incomes, population pressure in agriculture, disguised unemployment, low productivity, dearth of capital, low savings and a slow rate of economic development.