Do Remittances Matter for Economic Growth?

Abstract

Remittances represent one of the most important money flows into the developing world comparable to, and often exceeding, earnings from exports of goods and services and foreign direct investments. Even though importance of remittances in poverty reduction has been documented, impact of remittances on economic growth remains under-investigated mainly due to a strong endogeneity of remittances with respect to both level and growth rates of GDP. We provide detailed look into this endogenous relationship and discuss possible instruments which can help to remedy this problem in IV-estimation. In order to establish a link between economic growth and remittances we use range of instrumental variables encompassing geographical, microeconomic-based and internal instruments. By interacting remittances with other determinants of economic growth we provide evidence that remittances are especially important source of growth in poor countries not because of low level of development per se, but because the effect of remittances on growth is stronger providing level of human capital and savings rate are low and financial markets are underdeveloped.

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“…In addition to being a poorly researched topic, this area also exhibits a multitude of contradictory research outcomes. In the current literature, some authors argue for the positive effects of remittances on economic development (Eggoh et al, 2019;Islam, 2022;Singh & Mehra, 2014), while some authors (Matuzeviciute & Butkus, 2016;Dujava & Kalovec, 2020;Yadeta & Hunegnaw, 2021;Chirila & Chirila, 2017) claim that remittances have no impact on economic growth. There is also a third opinion, according to which authors claim that remittances have a negative impact on economic growth (Karadag et al, 2019;Didia et al, 2018;Bird & Choi, 2020).…”