The impact of remittances on financial development in selected asian countries

UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM ERASMUS UNVERSITY ROTTERDAM INSTITUTE OF SOCIAL STUDIES THE NETHERLANDS VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE IMPACT OF REMITTANCES ON FINANCIAL DEVELOPMENT IN SELECTED ASIAN COUNTRIES BY HUYNH THI MY CHI MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, DECEMBER 2016 UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE IMPACT OF REMITTANCES ON FINANCIAL DEVELOPMENT IN SELECTED ASIAN COUNTRIES A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By HUYNH THI MY CHI Academic Supervisor: DR NGUYEN VAN NGAI HO CHI MINH CITY, DECEMBER 2016 DECLARATION “This declaration is to certify that this thesis entitled “The Impact of Remittances on Financial Development in Selected Asian Countries” which is conducted and submitted by me in partial fulfilment of the requirements for the degree of the Vietnam – The Netherlands Programme The thesis constitutes only my original works and due supervision and acknowledgement have been made in the text to all materials used.” Huynh Thi My Chi ACKNOWLEDGEMENTS I would like to express my greatest appreciation to persons who greatly supported and contributed to this thesis by supervision and encouragement First of all, I am deeply grateful to my supervisor, Assoc., Prof Nguyen Van Ngai, for his guidance, enthusiasm, support, dedication and invaluable comments and advices It was my privilege to have his supervision Without his encouragement and support, I would not have been able to complete this thesis I am also very obliged to Prof Nguyen Trong Hoai, Dr Pham Khanh Nam for their valuable comments and suggestions for my Concept Note and Thesis Research Design My special thanks to Dr Truong Dang Thuy for his encouragements, advices and enthusiasm to help me finish the thesis I would also like to thank all VNP staff for their diligent assistance I am thankful to my friends from VNP who supported, encouraged and shared experiences for my thesis completion Besides, my sincere thankfulness also goes to my company’s managers and colleagues who kindly and understandingly facilitated my master studying Finally, I am most grateful to my family for their endless support and encouragements to me all the way through my journeys ABBREVIATIONS FDI : Foreign Direct Investment FEM : Fixed Effect Model GDP : Gross Domestic Product GDPPC : Gross Domestic Product Per Capita GMM : Generalized Method of Moments ODA : Official Development Assistant REM : Random Effect Model ABSTRACT Although the impact of remittances on economic growth and poverty has always been a controversial problem for researchers and policy makers as remittance inflow have been becoming one of the largest external capital sources for many countries, its direct effect on financial development merely attract more attention after the financial crisis of 2007-2008 In an effort to contribute to empirical studies on this issue, this study utilizes fixed effect, random effect and system Generalized Method of Moments (GMM) to investigate the direct impact of remittances on two dimensions of financial development comprising the percentage of domestic credit to private sector by banks and broad money to GDP in thirty-seven Asian countries during the period 1990-2014 Furthermore, this study also examines whether there are different effects of remittance inflows in high, middle and low-income countries in this area The results show that an increase in remittances seems to have no impact on financial development in general while there are mix results regarding the different income groups of countries in Asia In particular, while no evidence on the impact of remittances on both measurements of financial development as the whole region are obtained in middle and low-income countries, there is a significant and positive effect of these flows on the ratio of domestic credit to private sector by banks to GDP despite an insignificant influence on broad money to GDP in high income countries Keywords: Remittances, Financial development, Asia, Income Group TABLE OF CONTENTS LIST OF TABLES LIST OF FIGURES CHAPTER 1: INTRODUCTION 1.1 Problem statement 1.2 Research objectives 1.3 Scope and data of the study 1.4 Structure of the study CHAPTER 2: LITERATURE REVIEWS 2.1 Theory of remittances and financial development 2.1.1 The concepts and channels of remittances 2.1.2 Definitions of financial development 2.1.3 The role of remittances in financial development 2.2 Empirical studies 10 2.3 Other determinants of financial development 15 CHAPTER 3: MODEL SPECIFICATION AND DATA 18 3.1 Model specification 18 3.2 Data sources 21 3.3 Estimation methods 23 3.3.1 Pooled OLS model 24 3.3.2 Fixed effect model 25 3.3.3 Random effect model 26 3.3.4 Tests for choosing sufficient model 26 3.3.5 The system generalized method of moment estimation 28 CHAPTER 4: THE IMPACT OF REMITTANCES ON FINANCIAL DEVELOPMENT IN ASIA 31 4.1 Overview of remittance inflows and financial development in Asia 31 4.1.1 Overview of remittance inflows to Asia from 1990 to 2014 31 4.1.2 Overview of financial development in Asia from 1990 to 2014 36 4.2 Empirical results 40 4.2.1 Descriptive statistic 40 4.2.2 Empirical results 45 CHAPTER 5: CONCLUSIONS AND POLICY IMLICATIONS 54 5.1 Conclusions 54 5.2 Policy implications 55 5.3 Limitations and further researches 56 REFERENCES APPENDIX I APPENDIX II: THE REGRESSION RESULTS LIST OF TABLES Table 3.1: The definition and expected sign of variables 22 Table 4.1: The summary statistics of variables .41 Table 4.2: The correlation between variables 44 Table 4.3: The results of tests for choosing models 45 Table 4.4: The results of FEM with robust .47 Table 4.5: The results of system GMM 49 Table 4.6: Summary of the impact of remittances on financial development in Asia and different income groups by FEM and system GMM .50 LIST OF FIGURES Figure 4.1: Remittances received by areas in the world from 1990 to 2014 (US$ billion) .31 Figure 4.2: Top 10 remittance recipient countries in 2014 (US$ billion) .32 Figure 4.3: Top 10 remittance recipient countries in 2014 (% GDP) .33 Figure 4.4: Remittances to areas in Asia from 1990 to 2014 (US$ billion) 34 Figure 4.5: Remittances received by income groups in the world from 1990 to 2014 (US$ billion) 35 Figure 4.6: Remittances received by income groups in Asia from 1990 to 2014 ($US billion) 36 Figure 4.7: Domestic credit to private sector by banks (% of GDP) in Asia from 1990 to 2014 37 Figure 4.8: Broad money as % of GDP in Asia from 1990 to 2014 .38 Figure 4.9: The average ratio of domestic credit to private sector by banks to GDP across income groups in Asia (%) 39 Figure 4.10: The average ratio of broad money as % of GDP across income groups in Asia .39 Figure 4.11: Correlation between domestic credit to private sector by banks (%GDP) and remittance inflows (%GDP) and other controlling variables 42 Figure 4.12: Correlation between broad money (%GDP) and remittance inflows (%GDP) and other controlling variables 43 ... negative impact of inflations on financial development in most of former studies, the influences of these determinants on financial development in Asia and different income groups of countries in this... of the most concerns in examining the impact of remittances on financial development since higher level of financial development might result in higher recorded remittances either since financial. .. (Nyamongo, 2012) 2.1.2 Definitions of financial development According to the definitions of World Bank, financial sector is the combination of institutions, instruments, markets, and the legal and regulatory