INTRODUCTION
Introduction
Remittances play a vital role in global capital flows, encompassing both official and unofficial channels In 2013, the World Bank reported that official worldwide remittance flows approached $550 billion, highlighting their significance in the international economy.
2013) The unrecorded remittance flows is believed to be as large as 20 to 200 percent of total official remittance flows (Aggarwal et al., 2006; World Bank,
International remittance inflows to developing countries are projected to rise by 8.4 percent from 2014 to 2016, potentially reaching $516 billion by 2016, according to the World Bank (2013) This optimistic forecast is based on the anticipated GDP growth rates in major remittance-sending countries and historical remittance growth trends Furthermore, these remittance flows are expected to be three times larger than official development assistance and to exhibit greater stability than private debt and portfolio equity.
Figure 1: Remittances and other resource flows to developing countries Sources: Migration and Development Brief 22, World Bank
The significant rise in remittance flows has garnered the attention of academics and policymakers, who recognize the potential impact on the macroeconomic conditions of migrant-sending countries While concerns about brain drain and its effects on sustained economic growth persist, remittances are viewed as a vital source of income for low and middle-income households in developing nations, as well as a crucial financial resource for domestic investment Unlike other foreign currency inflows, remittances are sent directly to family and friends without government intervention, making them less volatile Additionally, they are expected to enhance consumption and lower the cost of capital in recipient countries, ultimately contributing to their economic growth.
Despite extensive research on the impact of remittances in migrant-sending countries, empirical studies often yield mixed results, primarily focusing on global or developing country contexts For instance, Vargas-Silva, Jha, and Sugiyarto (2009) found that a 10 percent increase in remittances as a share of GDP correlates with a 0.9-1.2 percent rise in GDP growth However, other scholars suggest that the effects of remittances on economic growth in recipient countries depend significantly on the utilization of these funds Even if households do not invest remittances, they can still generate a notable multiplier effect on the economy.
Research indicates that each dollar of remittance spent on consumption can boost retail sales and stimulate economic growth and employment (La Garza, 2000) However, heavy reliance on remittances may lead to continued migration of skilled workers, resulting in a welfare loss that cannot be offset (Straibhaar & Wolburg, 1999) Additionally, if remittances drive demand for goods and services beyond the economy's capacity, particularly for non-tradable goods, they can lead to inflation For instance, in Egypt, remittances contributed to a 600% increase in agricultural land prices between 1980 and 1986 (Adams, 1991) Moreover, remittances can negatively impact growth due to moral hazard issues, as increased income may lead individuals to reduce their work effort and labor supply (Chami, Fullenkamp & Jashjah, 2003).
This study investigates the impact of remittance inflows on economic growth in developing countries across Asia and the Pacific, focusing on their interaction with labor and capital Utilizing balanced panel data from 25 countries between 2000 and 2012, the findings reveal that population growth and remittances work together to enhance economic growth, while human capital development and remittances serve as substitutes in this process.
This paper is organized into several key chapters: Chapter 2 offers a review of current theories and past empirical research, while Chapter 3 outlines the analytical framework, estimation methods, and data descriptions Chapter 4 details the empirical findings, and the final chapter summarizes the conclusions and suggests policy recommendations.
Research objectives
To evaluate the impact of remittances inflows on economic growth in developing Asia and the Pacific countries.
To examine how remittances affect the impact of investment, population growth and human capital formation on growth in developing Asia and thePacific countries.
LITERATURE REVIEW
Remittance definition
Remittances take place when one or more family members live and work abroad send money back to their remaining family in the home country (Chami, Cosimano
& Gapen, 2006) IMF defined remittances in the fifth edition of Balance of Payments Manual (BPM5) as the sum of three items including worker’s remittances, compensation of employees and migrants’ transfer.
Worker's remittance refers to the money that migrant workers send back to their home countries This transfer is made by individuals who are either residents of another country or those who plan to stay abroad for over a year According to the Balance of Payments Manual (BPM5), these transactions are categorized as current transfers.
Compensation of employees refers to the gross earnings of nonresident workers who reside abroad for less than a year, such as border workers, seasonal employees, or local embassy staff This income is classified under the current account in the Balance of Payments (BPM5).
Migrants' transfer refers to the movement of financial assets by individuals relocating from one country to another This process is recorded in the capital account of the balance of payments, as outlined in BPM5.
The inclusion of migrants' transfers in remittance calculations has been criticized as a misrepresentation for two key reasons Firstly, remittances signify a change in wealth, while migrants' transfers merely involve the relocation of assets without altering ownership Secondly, the change in residence status does not necessitate actual financial flows, as these transactions are simply a reclassification of assets.
UN Advisory Experts Group in National Accounts particularly recommended to remove migrants’ transfers from capital account because of no change on ownership.
In response to the growing need for accurate measurement of remittance flows, a collaborative working group formed by the World Bank, IMF, and other international financial institutions was established This group aimed to refine the definition of remittances and offer guidance on the collection and estimation of remittance statistics Their recommendations were presented to the IMF Committee on Balance of Payments Statistics and the Advisory Experts Group in National Accounts.
Replacing workers’ remittances by personal transfers which focus on household transfer.
A new item, personal remittances, is created They will be measured as the sum of personal transfers and net compensation of employees.
Migrants’ transfer is removed from the balance of payments framework The assets’ transactions related to changes in individual’s residence will be recorded under other changes of assets and liabilities.
The concept of migrant is eliminated in the balance of payments because personal transfers’ definition is based on the residency rather than migration status.
Remittance in Growth model
Economic growth refers to the sustained increase in a nation's output and its capacity to produce goods and services over time Economists have long recognized the significance of economic growth in enhancing national health and improving living standards Many macroeconomists have made substantial contributions to the theoretical and empirical understanding of this field This section will focus on the model most pertinent to the study of economic growth.
Enhancing variables such as remittances, reforms, and globalization have a direct and lasting impact on growth, which can be analyzed using production functions However, empirical studies indicate that these effects are not easily estimated through annual data or short panels when regressing output growth rates on these variables Instead, the influence of remittances on total factor productivity is a more effective way to capture these effects (Rao & Hassan, 2011).
The augmented Solow model defines per worker output (y) as a function of technology stock (A) and capital per worker (k), utilizing a Cobb-Douglas production function that exhibits constant returns to scale.
The evolution of technology, as assumption of Solow model, is given by:
A0 is the initial stock of knowledge, T is time and g is the steady state growth of output per worker Thus, the production function for estimation will be modified as:
It is also plausible to assume that:
In this study, remittances are analyzed as a key variable influencing growth, alongside control variables including investment, labor, and human capital Additionally, trade openness serves as a measure of the economy's external orientation, while inflation and fiscal balance are employed to assess the overall macroeconomic environment.
The production function captures the effect of remittances and other variables on TFP are extended as:
The Solow model establishes the steady state level of income per worker (� ∗) as a function of the saving rate (s), growth rate (g), employment rate (n), and depreciation rate (d) This is represented by an extended production function.
In this equation, by making assumption on g and d, using data on s and n, and given α, the steady state growth rate can be:
With the assumption that the evolution of the stock of knowledge grows as constant rate, then:
However, the steady state will be extended as the assumption in equation (5):
In this equation, the growth effects trend and ignored variables are illustrated by
� 1 and growth effects of the variables in vector X are captured by � 2
Consequence of remittances
In principal, remittances can effect growth through three channels including capital accumulation, labor force growth and total factor productivity (TFP) (Chami, Dalia,
Remittances play a crucial role in capital accumulation, particularly in countries that struggle to access foreign funding for investment They serve as vital financial resources for domestic investment, especially when external sources are limited Additionally, from a microeconomic standpoint, remittances alleviate financial constraints faced by households, enabling them to invest more effectively Consequently, remittances contribute significantly to the accumulation of both physical and human capital.
Remittance flows significantly influence domestic investment by not only providing essential funding but also enhancing household collateral These inflows are anticipated to improve the creditworthiness of domestic investors, leading to a reduction in the cost of capital within the recipient country Recipients of remittances often gain greater trust from financial institutions, allowing them to secure additional borrowing for investments that may surpass the amount of remittances received during specific periods Consequently, remittance flows can serve as a primary source for servicing outstanding debts, ultimately increasing the size of household collateral.
Domestic capital accumulation can be influenced by remittance inflows, as they help reduce output volatility, leading to a more stable macroeconomic environment When stability increases, the risk premium associated with investments decreases, making domestic investment opportunities more appealing.
Remittances play a significant role in capital accumulation, but their impact is not universally positive Families with a high marginal propensity to consume may prioritize spending over investing, leading to limited use of remittances for investment purposes In cases of stable, ongoing remittance flows, households often allocate these funds towards increased consumption rather than savings or investment.
Remittance flows primarily enhance household welfare rather than driving overall economic growth Additionally, in economies that are well-integrated with global financial markets and possess advanced financial systems, the impact of remittances appears to be minimal.
Remittance flows significantly impact human capital accumulation by financing investments and enhancing the likelihood of children from recipient households remaining in school.
A young individual from a high-income family is not required to leave school to support themselves financially The impact on domestic economic growth hinges on whether this individual, after obtaining additional education, chooses to join the local labor market or migrate abroad for opportunities.
3.2Remittance and labor force growth
Remittance flows can impact economic growth by affecting labor input, particularly the participation rate of the labor force, assuming human capital levels remain constant Specifically, an increase in remittance receipts tends to correlate with a decrease in labor force participation, indicating that as economies receive higher remittance inflows, fewer individuals may engage in the labor market.
Households often replace labor income with remittance income, which can lead to significant moral hazard issues due to asymmetric information between the remitter and the recipient Monitoring and enforcing how remittances are spent becomes challenging, resulting in recipients potentially diverting funds towards leisure activities Consequently, this behavior may decrease their job search efforts and reduce their overall engagement in the labor market.
3.3Remittance and total factor productivity growth
Remittances significantly impact total factor productivity (TFP) growth by enhancing the efficiency of domestic investments and expanding the domestic productive sector However, the extent of these effects in recipient countries is influenced by various factors that differ across economies.
Remittances can significantly enhance domestic investment by improving the quality of financial intermediation within an economy When recipients invest rather than the remitters, the effectiveness of domestic investment relies on the decision-making skills of the agents involved For example, if less skilled family members deposit funds with domestic financial intermediaries instead of making direct investments, remittance flows transform into capital inflows, potentially increasing the efficiency of domestic investment Furthermore, remittances not only elevate the quality of domestic investments but also strengthen the financial system's capacity to allocate capital in the recipients' countries Since formal remittances are processed through the banking system, this mechanism can foster financial development and economic growth by enhancing economies of scale in financial intermediation and encouraging political reforms driven by recipients' pressure on the government.
In the later, remittances can effect TFP growth through Dutch disease; that means the effect operates through the influence of remittances on real exchange rate.
Empirical evidence indicates that significant and sustained remittance flows can increase the demand for domestic currency, potentially leading to currency appreciation and decreased export competitiveness in the global market (Amuedo-Dorantes and Pozo, 2004) However, this effect is not universal and depends on two key factors: the actual appreciation of the real exchange rate and the ability of recipient countries to produce traded goods that generate dynamic production externalities.
This discussion highlights the complex relationship between remittance flows and economic growth, indicating that their effects can be both positive and negative The theoretical perspective on how remittances influence economic growth remains ambiguous In the following section, we will review empirical research on the remittance-growth nexus to further clarify this relationship.
Factors effect economic growth
Numerous researchers have examined the impact of remittances on economic growth in recipient countries, leading to varying conclusions, including positive, negative, conditional, or negligible effects These discrepancies can be attributed to several factors, with endogeneity being a significant challenge faced by researchers in their analyses.
Two-way causality between remittances and economic growth can be attributed to two main factors Firstly, the level of remittance flows is influenced by the economic growth of recipient countries; for instance, countries with low economic growth often experience higher outward migration, leading to increased remittance inflows Secondly, both economic growth and remittances may be driven by independent factors such as poor domestic governance, the pursuit of higher education, or robust economic conditions in major destination countries for migrants Consequently, as migrant incomes rise in these high-growth countries, remittance levels also tend to increase.
The endogeneity problem is crucial when examining the impact of remittances on economic growth, yet researchers face significant challenges in addressing it due to a lack of consensus in the existing literature To tackle this issue, researchers commonly employ three primary methods: selecting an appropriate set of instrumental variables, utilizing conditioning variables, or applying specific estimation techniques.
In their 2003 study, Chami, Fullenkamp, and Jahjah pioneered the use of instrumental variables to analyze remittances, employing the ratios of a country's income to that of the United States and the country's real interest rate compared to the U.S real interest rate Their research utilized panel data from 113 countries, providing valuable insights into the dynamics of remittances.
Between 1970 and 1988, an analysis incorporating variables such as investment rates, inflation rates, net private capital flows to GDP, and regional dummies revealed that while domestic investment and private capital flows positively influenced economic growth, the ratio of worker remittances to GDP had an adverse effect This discrepancy is attributed to the moral hazard problem, which differentiates remittances from private capital flows in terms of motivation and impact, ultimately rendering them an insignificant source of capital for economic development The authors also explored alternative instrument variables using lagged right-hand-side variables but found consistent results.
The distance between migrants' home countries and their destination countries was analyzed in studies by the IMF (2005) and Faini (2006) The IMF utilized a dummy variable to determine if the home and destination countries shared a language, ultimately finding no significant impact of remittances on economic growth Similarly, Faini's research, which examined a sample of 68 countries from 1980 to 2004, differed from earlier studies by excluding domestic investment from its control variables While OLS regression indicated a positive and significant coefficient for total remittances-to-GDP, the regression using instrumental variables showed that the coefficient remained positive but was not statistically significant.
The World Bank (2006) employed a time-varying instrument by calculating the inverse distance between OECD countries (migrant destination countries) and recipient countries, correlating it with GDP per capita, GDP growth rate, and unemployment rates of OECD nations The study analyzed cross-country growth regression data from 67 countries between 1991 and 2005, controlling for initial GDP per capita, secondary school enrollment, inflation, trade ratios, real exchange rate overvaluation, government consumption, domestic credit, political risk, and time dummies Findings indicated that remittances-to-GDP positively influenced economic growth, although the significance of coefficients diminished without investment While the contribution of remittances to economic growth was noted, it was relatively small.
In their 2005 study, Giuliano and Ruiz-Arranz utilized lagged explanatory variables and SGMM techniques, alongside OLS and fixed effects panel regression, to address endogeneity issues while analyzing a dataset of 73 countries from 1975 to 2002 Their initial regression of per capita GDP growth on the total remittances-to-GDP ratio, controlling for variables such as initial GDP per capita, investment rates, population growth, fiscal balance, education years, openness, and inflation, revealed no significant impact of remittances on economic growth In a subsequent analysis, they explored the potential of remittances to stimulate growth by alleviating credit constraints, incorporating additional variables like loans-to-GDP and credit-to-GDP ratios Their findings indicated that remittances foster economic growth in countries with underdeveloped financial sectors, whereas the opposite effect was observed in countries with advanced financial systems Similarly, Ramirez and Sharma (2009) addressed endogeneity using fully modified OLS in their study of 23 Latin American countries from 1990 to 2005, corroborating Giuliano and Ruiz-Arranz's results.
Catrinescu et al (2009) investigated the relationship between remittances and economic growth using an internal instrument, lagged remittances, across a dataset of 114 countries from 1991 to 2003 Their study employed a dynamic panel method and enhanced previous research by incorporating institutional variables and control factors such as initial GDP per capita, gross capital formation, net private capital inflows, the United Nations Human Development Index, governance indicators, and political risk ratings The findings indicated a positive, albeit mild, correlation between remittances and economic growth.
A recent study by Barajas et al (2009) introduced a new method to address the endogeneity issue in remittance research They proposed that the transaction costs of remittance transfers negatively correlate with remittances while remaining uncorrelated with growth equation error terms, although these costs could not be observed directly To overcome this, they developed an instrument based on the ratio of remittances to GDP across other recipient countries, which reflected global transaction cost reductions and changes in microeconomic factors influencing remittance flows Additionally, they incorporated a control variable representing the trade-weighted average growth rate of real per capita GDP among the top 20 trading partners of the recipient country The regression analysis included variables such as initial GDP per capita, trade-to-GDP ratio, inflation rate, foreign direct investment ratio, fiscal balance, population growth relative to GDP, and the International Country Risk Guide political risk indicator Analyzing data from 84 countries spanning 1970 to 2004, the study found limited evidence supporting the impact of remittance flows on economic growth.
The impact of remittance flows on economic growth remains inconclusive due to varying approaches to addressing the endogeneity problem Additionally, discrepancies in measuring remittance data contribute to the diversity of results in the remittances-growth nexus While some researchers analyze multiple components of remittances, Chami et al (2008) argue that the balance of payments categories, such as compensation of employees and migrants' transfers, reflect different behavioral characteristics compared to workers' remittances Furthermore, the correlations between workers' remittances and compensation of employees within a country are often weak or even negative, indicating that workers' remittances offer a more precise definition that most researchers prefer.
Differences in selecting control variables for growth regression, the type of variation used to analyze the effects of remittance flows, and the specific time periods or countries considered can lead to varying conclusions While some researchers emphasize the significance of investment in driving growth, others disagree, potentially overlooking crucial conditioning variables that influence both remittances and economic growth Additionally, the impact of remittance flows on economic growth varies depending on whether financial development variables are included in the analysis.
In summary, previous research has explored the effects of remittance flows on economic growth, highlighting the significant challenge of addressing endogeneity issues Researchers have employed various instrumental variables, including the income ratio between a country and the United States, real interest rate comparisons, the distance between migrants' home and host countries, and the remittance-to-GDP ratio of recipient nations Some scholars argue that while distance instruments are exogenous, their time-invariance necessitates multiplication by the GDP of recipient countries to create time-varying instruments, potentially leading to a strong correlation with host country growth rates Despite ongoing discussions, a consensus on how to effectively address the endogeneity problem remains elusive, making the selection of suitable instrumental variables an area of continued research.
Investment is a crucial driver of economic growth, defined as the production source of goods that facilitate the creation of other goods Both neo-classical and Marxist economists agree that capital accumulation serves as the engine for economic expansion, with countries that allocate a significant portion of their GDP to investment experiencing rapid growth The primary objective of capital is to enhance the production of capital-intensive goods, leading to increased income through consumption.
1983) For this reason, the researchers used investment as one of the most parameters when investigating the rate of economic growth.
Investment encompasses various economic activities aimed at producing goods and services, including critical areas such as infrastructure, education, agriculture, and human capital In less developed countries, infrastructure investment is particularly vital as it introduces modern technology to producers, enhancing productivity Additionally, educational investments significantly benefit society by improving labor productivity and fostering knowledge, innovation, and technological advancements Furthermore, agricultural research investment enhances the dissemination of scientific findings, thereby boosting production and contributing to food security and poverty reduction This correlation underscores the importance of agricultural investment in combating hunger and promoting sustainable practices Lastly, investing in human capital increases the cost of raising children, which can lower fertility rates and elevate individual savings, ultimately driving per capita growth (Barro, 1991).
METHODOLOGY
Analytical framework
This study examines the influence of remittances on economic growth by analyzing their effect on total factor productivity Utilizing an econometric model grounded in the augmented Solow framework, the research aims to quantify this relationship through a specific equation.
(9) Moreover, it was extended by Giuliano and Ruiz-Arranz (2009) to included different control variables which determined economic growth The basic form of the relationship between remittances and growth is:
- ∆y is the growth rate of real per capita GDP,
- Rem is total worker’s remittances and compensation of employees received as a share of GDP.
- is matrix of control variables which determines the economic growth, including:
The initial per capita GDP, measured as the log of real per capita GDP in 2000, shows a negative correlation with economic growth, as indicated by the Solow and Ramsey models, due to diminishing returns on reproducible factors Specifically, wealthier nations tend to experience slower growth rates Researchers such as Imai et al (2014), Nyamongo et al (2012), Hassan and Rao (2011), and Giuliano and Ruiz-Arranz (2009) incorporated this variable into their models to facilitate the analysis of economic convergence.
Investment, represented as gross fixed capital formation to GDP in log form, plays a crucial role in economic growth While remittances are often seen as a significant channel for influencing this growth, Chami et al (2008) argue that their effect is more accurately reflected in total factor productivity rather than in capital accumulation when included in the production function.
Population (Pop): the growth rate of population Giuliano and Ruiz-Arranz
(2009), Chami et al (2008) and Hassan and Rao (2012) used population growth as a control variable to represent for human resource.
Inflation, represented by the natural growth in the Consumer Price Index, plays a crucial role in maintaining macroeconomic stability Research indicates that incorporating the inflation rate into economic models is essential, as it is expected to have a negative impact on economic growth (Giuliano & Ruiz-Arranz, 2009; Nyamongo et al., 2012).
Openness, defined as the logarithmic ratio of the sum of exports and imports to total output, varies among countries due to differing government policies and the size of the nation, according to Hassan and Rao.
(2011), Giuliano and Ruiz-Arranz (2009), Martinez, Cummings and Vaaler
(2014), Imai et al (2014) used this variable to capture the country’s degree of openness based on the restrictions on cross-border transactions.
Fiscal balance (Fisbal) refers to the ratio of the central government's fiscal balance to GDP While it does not directly impact productivity, it can distort private decision-making by reflecting government activities According to Giuliano and Ruiz-Arranz, understanding this relationship is crucial for analyzing economic dynamics.
(2009) used fiscal balance as a control variable to capture the macroeconomic environment.
Human capital formation (HCF), represented by the log of the secondary school gross enrollment rate, is anticipated to positively influence economic growth by enhancing productivity.
The measurement of variables in this study is provided in Table 1.
GDP per capita is determined by dividing the Gross Domestic Product (GDP) by the midyear population GDP represents the total gross value added by all resident producers within an economy, accounting for product taxes and excluding subsidies not factored into product value The data is expressed in constant 2005 international dollars.
World Development Indicators World per capita Real GDP per capita in 2000.
The level of personal remittances computed as a share of
GDP Data are the sum of two items: personal transfers and compensation of employees.
Gross fixed capital formation, expressed in constant dollars as a percentage of GDP, indicates the net increase in physical assets within an economy This metric excludes considerations for depreciation of fixed capital and land acquisitions, focusing solely on the growth of tangible assets.
Total revenue and grants of the central government minus total expenditure and net lending as a share of GDP.
The total value of exports and imports of goods and services, expressed as a percentage of GDP, reflects the economic interactions with the global market This metric encompasses all goods and services exchanged between a country and the rest of the world, highlighting the significance of international trade in the economy.
Inflation as measured by the Consumer Price Index (CPI) reflects the annual percentage change in the cost to the average consumer of acquiring a basket of goods and services.
The annual population growth rate for year t is the exponential rate of growth of midyear population from year t-1 to t, expressed as a percentage.
The secondary school enrollment rate measures the total number of students enrolled in secondary education, regardless of their age, compared to the population of the corresponding age group officially designated for that educational level.
The regression to be estimated is the following:
The model indicates that the growth of real GDP per capita is influenced by the stock of capital, remittances, and various control variables It highlights the significance of the coefficient � 2, where a positive value (� 2 > 0) suggests that remittances positively affect growth Conversely, if � 2 equals zero (� 2 = 0), remittances have no impact on growth, while a negative value (� 2 < 0) indicates that remittances could adversely affect growth.
To analyze the influence of remittances on the relationship between labor, capital, and economic growth, the study incorporates interaction terms between remittances and investment, population, and human capital formation A positive estimated coefficient for these interaction terms suggests that remittances complement investment, population, and human capital, while a negative coefficient indicates a substitutive relationship Each variable will be assessed individually in the regression equation to evaluate their interactions effectively.
� 7 ��� � + � 8 ����� � + � � �� � �� � �� ∗ � �� + � � (12c)Then, marginal impact of investment, population growth and human capital formation on growth is given by:
A positive β9 indicates that increased remittances in recipient countries correlate with a greater impact of investment, population growth, and human capital formation on economic growth.
Estimation technique
In order to evaluate the effect of remittances on economic growth, the study uses system Generalized Method of Moments model (sGMM) with three following reasons:
Endogeneity poses significant challenges for researchers examining the relationship between remittances and economic growth Among the four primary threats to endogeneity—omitted variable bias, measurement error, sample selection bias, and simultaneity—previous studies have identified simultaneity as the main contributor to this issue (Chami et al., 2003; Catrinescu et al., 2006).
R et al., 2008, Hassan, G M., & Rao, B B., 2011 & Nyamongo, E et al., 2012) In other words, that is the reverse causality between remittances and economic growth.
In this case, if OLS is used, it will yield biased and inconsistent coefficient estimates The GMM method is a solution for solving endogenous problem.
Instrument variables play a crucial role in addressing the endogeneity problem in research, yet identifying the most suitable variable remains a significant challenge for scholars Commonly utilized instrument variables include the ratios of a country's income to that of the United States, the real interest rates of both countries, the geographical distance between migrants' home countries and their primary destination, internal instruments, and the ratio of remittances to the GDP of recipient countries Each of these variables presents unique drawbacks, with internal instruments being the most widely adopted among researchers Consequently, this study employs the Generalized Method of Moments (GMM) technique, as introduced by Arellano and Bover (1995) and Blundell and Bond (1998), utilizing lagged values of the right-hand side variables as instrument variables to estimate the equation.
The Generalized Method of Moments (GMM) estimator, particularly the difference GMM and system GMM, has gained popularity due to its straightforward implementation and relaxed assumptions regarding instrument variables These estimators are particularly useful in panel data settings with a limited number of time periods and a larger number of individuals The difference GMM, known as the original estimator, utilizes first-difference transformations to eliminate fixed effects, making it more suitable when the number of individuals is relatively high However, a study by Blundell and Bond (1998) found that first-difference estimation can lead to significant bias and low precision in finite samples Furthermore, the effectiveness of difference GMM diminishes in cases of high persistency, where lagged levels exhibit weak correlation with first differences In contexts such as economic growth studies involving a small number of individuals and high persistency in variables like physical and human capital stock, system GMM demonstrates lower bias and greater efficiency compared to difference GMM.
To assess the consistency of the sGMM technique, two diagnostic tests are employed: the Arellano-Bond test for second-order autocorrelation in first differenced residuals and the J statistic Hansen test for over-identifying restrictions These tests evaluate the model's suitability, with the null hypothesis of the J statistic indicating that the instruments are exogenous, meaning they are uncorrelated with the error term A rejection of this null hypothesis suggests that the instruments fail to meet the orthogonality conditions required for valid results.
Data source
In order to test the influence of remittances on economic growth of receiving countries in Asia and the Pacific, the study uses an annual balanced panel data from
The study analyzes data from 25 countries in Asia and the Pacific, covering the period from 2000 to 2012, with a total of 239 observations due to missing values in some variables The countries included are Armenia, Azerbaijan, Bangladesh, Cambodia, China, Fiji, Georgia, Indonesia, India, Kazakhstan, Kyrgyz Republic, Lao PDR, Maldives, Mongolia, Malaysia, Nepal, Pakistan, Philippines, Papua New Guinea, Solomon Islands, Sri Lanka, Tajikistan, Thailand, Tonga, and Vanuatu, selected based on data availability The research utilizes the World Development Indicators database from the World Bank, along with additional data from the UNESCO Institute for Statistics and the Key Indicators for Asia and the Pacific published by the Asian Development Bank Detailed data descriptions and summary statistics can be found in the appendix.
EMPIRICAL RESULTS
Overview of remittances in developing Asia and the Pacific countries
Migration has significantly boosted remittance inflows to Asia and the Pacific, making it the highest region globally, followed by Latin America and the Caribbean Between 2000 and 2013, developing countries in Asia and the Pacific, along with Sub-Saharan Africa, experienced the most substantial growth in remittance inflows, increasing by 15.9%, with the Middle East and North Africa following closely In 2013, total remittance inflows to developing countries reached $414 billion, marking a 4.4% increase from 2012, with Asian countries contributing nearly 60% of the overall total.
- Middle East and North Africa 13 24 41 49 10.6
Table 2: Remittances to developing countries, 2010 -2013 (US$ billion)
In 2013, South Asia emerged as the leading region for remittance inflows in Asia and the Pacific, contributing nearly 50% of the total amount Southeast Asia and East Asia followed closely, accounting for approximately 24% and 22% of the remittance flows, respectively The primary countries sending remittances to the Asia-Pacific region include the United States, Canada, the United Kingdom, France, and Saudi Arabia.
South Asia Central Asia The Pacific Southeast Asia East Asia
Figure 2: Share of remittances by region in Asia and the Pacific countries, 2013
South Asia Central Asia The Pacific Southeast Asia East Asia
Figure 3: Growth rate of remittances by region in Asia and the Pacific countries Source: World Bank.
India China Philippines Pakistan Bangladesh
Vietnam Indonesia Uzbekistan Sri Lanka
Tajikistan Kyrgyz Republic Nepal Samoa Armenia Tonga
Marshall Islands Georgia Uzbekistan Bangladesh
India, China, the Philippines, Pakistan, and Bangladesh are the top five recipients of remittances in the Asia-Pacific region and rank among the world's top ten remittance-receiving countries In contrast, smaller nations such as Tajikistan, Kyrgyz Republic, Nepal, and Samoa have the highest remittance-to-GDP ratios, with remittances constituting over 20 percent of their GDP in 2013, significantly contributing to their national income.
Figure 4: Top 10 remittance-receiving developing countries in Asia and the Pacific, 2013Source: World Bank
Remittance flows in Asia and the Pacific face significant limitations due to inadequate data quality and coverage In countries like Malaysia, China, Thailand, and Vietnam, workers' remittances are often misclassified as other current transfers, leading to confusion with export revenue and tourism receipts Furthermore, weak data collection practices result in many remittance types, including those processed through post offices and money transfer operators (MTOs), going unrecorded Unofficial remittance channels, such as unregulated money transfer firms and cash transactions, are prevalent in the region, highlighting the challenges in accurately capturing remittance data.
75 percent of remittance recipients used informal channels to make transfer (Kendal et al, 2013) This means that if informal remittance flows are included, total remittances flows will be tremendous high.
Remittance costs in Asia and the Pacific are receiving special attention, as recent data from the World Bank's Remittance Prices Worldwide indicates a slight decrease in the global average total cost of sending approximately US$200, which has dropped from 8.9 percent.
Between 2013 and 2014, global remittance costs saw a decline; however, in the East Asia and Pacific region, these costs rose from 8.88 percent in 2013 to 9.00 percent in early 2014, diverging from the global trend Notably, in India and China, the world's largest remittance-receiving countries, costs were significantly higher than the global average, recorded at 8.57 percent and 11.72 percent, respectively, in the first quarter of 2014 As the cost of sending money is a critical factor influencing resource flows to developing nations, reducing these expenses remains a key priority for policymakers.
Remittances and growth
This paper aims to analyze the impact of remittances on economic growth using parametric techniques Prior to this analysis, it explores the issue through non-parametric methods.
Variable Obs Mean Std Dev Min Max
Table 3: Summary statistics of variables
GDP Remit IniGDP LnInv Pop LnOpen Inflat FisBal LnHcf
Figure 5: Scatter plot of growth and remittances
The study presents descriptive statistics of the variables, with a correlation matrix displayed in Table 3 Figure 5 illustrates a slight negative correlation between remittances as a share of GDP and GDP per capita growth from 2000 to 2012, indicating that higher remittance proportions may correspond to lower GDP per capita growth Additionally, the sample is divided into two groups based on remittance flow: Group 0 for countries with low remittance flow and Group 1 for those with high remittance flow The t-test results suggest that the mean GDP per capita growth is slightly higher in countries receiving lower remittance flows.
Remittances can have a detrimental effect on economic growth, yet the relationship between remittances and growth in developing Asia and the Pacific remains unclear The following section will explore this correlation using parametric techniques.
Before assessing the impact of remittances on economic growth in Asia and the Pacific, the study first evaluates the endogeneity of the variables involved The Durbin-Wu-Hausman test indicates that the remittance variable is endogenous, as discussed earlier Additionally, the Ramsey test reveals the presence of omitted variables and heteroskedasticity, confirming that the model is affected by omitted variables, which contributes to the endogeneity issues.
The empirical analysis of the impact of remittances on economic growth is presented in Table 4, utilizing a two-step system GMM approach The regression results are detailed in columns (2), (3), (4), and (5), corresponding to equations (11), (12a), (12b), and (12c), respectively The two-step estimator is employed due to its ability to maintain efficiency as the number of perfectly measured regressors increases, providing more asymptotic efficient estimates compared to the one-step method (Erickson & Whited, 2002).
The first regression analysis reveals a negative but statistically insignificant coefficient for remittances, indicating that their impact on economic growth is essentially neutral when treated as a standalone explanatory variable This finding contrasts sharply with previous research that identifies a significant relationship between remittances and economic growth Consequently, it prompts further inquiry into whether the influence of remittances on growth varies across different countries or is a result of the estimated specification used In subsequent regression analyses, the study incorporates additional interaction variables to investigate how remittances may affect the roles of labor and capital in fostering growth within recipient countries.
The analysis reveals that the estimated coefficient of remittance is negative in models (12a) and (12b), while it turns positive in model (12c) Conversely, the coefficients for interaction variables exhibit opposite signs, being positive in models (12a) and (12b) but negative in model (12c) Notably, the interaction between remittance and investment is statistically insignificant, indicating no support for the notion that remittances influence the effect of investment in recipient countries However, the results from model (12b) indicate a positive relationship between remittances and population growth, suggesting that these factors work together to foster economic growth, with increased remittances amplifying the impact of population growth on economic development.
Remittances and human capital serve as substitutes in fostering economic growth, indicating that the influence of human capital formation diminishes as remittance levels increase Specifically, human capital formation contributes significantly to growth in countries with lower remittance levels, while its impact is reduced in nations with higher remittances Additionally, while models (11), (12a), and (12b) exhibit consistent signs and estimated coefficients for remittances, model (12c) shows a contrasting direction and notable change in magnitude, highlighting its robustness Thus, remittance inflows are crucial for assessing the effect of human capital formation on economic growth.
Empirical evidence suggests that remittances do not directly influence economic growth or enhance the relationship between investment and growth This may be due to households allocating remittance funds towards increased consumption rather than investment However, remittances do play a role in moderating the effects of population growth and human capital on economic growth Specifically, they help mitigate the adverse effects of population growth by providing financial support to households Additionally, increased remittance inflows often correlate with higher rates of outward migration, which can reduce the labor force participation rate Consequently, while remittances offer financial relief, they may also weaken the positive effects of human capital on economic growth.
The regression analysis reveals that the estimated coefficients align with standard growth regression outcomes Specifically, the negative coefficient for initial GDP per capita supports the conditional convergence hypothesis, indicating that lower starting GDP per capita correlates with higher growth when other factors are controlled Additionally, the positive and significant coefficients for log investment and log secondary school enrollment (excluding model 12b) highlight their crucial roles in fostering economic growth, as suggested by growth theory Conversely, population growth negatively impacts economic growth, particularly in developing countries, where reducing population growth is a key macroeconomic objective Furthermore, a positive and significant coefficient for log openness in most models reinforces the idea that increased international openness enhances economic growth Interestingly, inflation is also found to promote economic growth, as evidenced by its positive and significant coefficient Lastly, while fiscal balance shows a positive coefficient, it remains insignificant in most models, indicating limited statistical evidence of its impact on growth.
The validity of the instruments is assessed using the Arellano-Bond test and the Hansen test The Arellano-Bond test evaluates different residuals with the null hypothesis stating there is no correlation In the context of system GMM, the AR(1) test typically rejects the null hypothesis, while the AR(2) test identifies first-order autocorrelation by not rejecting the null hypothesis of no correlation, as shown in Table 4 Meanwhile, the Hansen test's null hypothesis posits that the instruments are valid and uncorrelated with the error term In this analysis, the p-value of the Hansen test exceeds the conventional 5 percent threshold, indicating instrument validity.
1 Therefore, the Hansen test fails to identify any problem on instrument validity.
Notes: Dependent variable is real GDP per capita growth.
Robust standard errors in parentheses: * significant 10%, ** significant 5%, *** significant 1%