Why would remittances be important to a country

A small violation of the main assumptions of the instrumental variable will result in a biased estimation of IV even if the sample size is large [ 24 ]. In this paper, the sample size is not too small, but it is not large enough to use IV or GMM estimator.

The behavior of core regression coefficient estimates can be checked by adding or removing regressors to the main regression as a sensitivity test. Few experiments are provided with additional or fewer control variables. The model is re-estimated after excluding countries one by one with replacement. In each case, most of the estimates are largely unaffected in sign, size, and significance. So, most coefficient estimates of fixed effects model are less sensitive to such changes.

There is no multicollinearity among the explanatory variables for the fixed effects model. No first-order autocorrelation in the residuals and no heteroscedasticity of residuals are also confirmed. Different regression specifications imply the same conclusion of the negative relationship between remittances and the economic growth as the core model.

Thus, this model can be considered as a robust model. The same testing procedure is done for the dummy variable interaction model where pooled OLS is chosen. Inclusion and exclusion of control variables and exclusion of countries in turns do not affect largely most of the coefficient estimates in size, sign, and significance and are less sensitive to changes of regression specification.

Robust standard errors can fight against heteroscedasticity and provide unbiased estimators. There is no multicollinearity and first-order autocorrelation in this model. This model is a robust model as again results get the same finding of the core model.

After conducting different tests, a negative relationship is found between remittances and economic growth across four South Asian emerging countries. This relationship is statistically significant. In Bangladesh, the impact of remittances on economic growth is also negative and statistically significant.

Unproductive use of remittances may lead to negative economic growth. It may reduce labor supply also, as few families are getting money in the form of remittances without any work.

Sometimes remittances come through the improper channel and account for any a smaller amount than the original. These types of constraints are also responsible for adverse effects of remittances in the South Asian economy.

By increasing the use of the proper channel and the productive use of remittances, these four countries may enhance their economic growth. The main purpose of this research is to analyze how remittances affect per capita GDP growth in four countries of South Asia using the annual panel data over the period — The regression results express a negative relationship between remittances and economic growth in South Asian countries except in India.

The negative result suggests that a larger portion of remittances are used for non-productive purposes like consumption. This tendency of spending indicates the altruistic motive of remittances rather than profit driven. In India, remittances are used for productive purposes. Thus, it reflects profit-generating activities regarding remittance inflows.

Other control variables such as FDI growth and exchange rate growth are statistically significant and negatively related to economic growth, while growth in exports and gross capital formation are also significant but have a positive impact on per capita GDP growth. Remittances can raise domestic consumption and reduce poverty which is beneficial for the South Asian countries.

The inflow of remittances may raise the income level of the poor people and help to reduce the poverty. Thus, remittances are more beneficial in case of poverty reduction rather than the economic growth [ 35 ]. Besides these, there are some adverse effects of migration. Brain drain effect depresses the average level of skilled and educated workers in worker sending countries.

Thus, higher migrating countries reflect slow economic growth compared to countries with lower migration rates [ 49 ]. The moral hazard problem may be created by remittances which could weaken the incentive to work for recipient families. This tendency may reduce economic activity. Policymakers should convince both remitters and the recipients to invest a larger portion of the remittance flows for the productive purpose [ 10 ].

Remittance inflow appreciates the real exchange rate and decreases international trade competitiveness of a country, which in turn deteriorates the economy. Thus, the inflow of remittances affects inversely the economy of a country through this process known as Dutch disease.

By raising the trade competitiveness, the government can reduce the adverse Dutch disease effect of remittance flows [ 31 ]. Dummy variable interaction model creates additional insights into this paper, as this helps to separate the country-specific individual impact of remittances. To search and estimate remittances through informal channels and its contribution to economic growth are beyond the scope of this paper.

For further studies, datasets for an extended period and more countries may give a better and more robust analysis. In addition, more control variables could be included that have a specific impact on economic growth such as variables related to human capital, migration and brain drain. Identification and estimation of remittances through informal channels may give a clear idea about the actual amount of remittances. In the future studies, researchers should focus on informal channels of receiving remittances.

Governments and policymakers of these South Asian emerging countries should put more emphasis on migration policies, and require amendment for the proper implication of these policies and the productive use of remittances to secure economic growth. Abbas, F.

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Skip to main content. Search form Search. Subscribe Write for GlobalDev. International Youth Blog Compe How do we make research more u Improving the quality of educa Welcome to our blog site supported by GDN. All rights reserved. Remittances and Developing Nations Many developing countries have difficulty borrowing money, just as a first-time home buyer might have difficulty obtaining a mortgage. Developing nations — the sort that are most likely to rely on remittances — tend to have less stable governments and are less likely to repay the debt or not go into default.

While organizations such as the World Bank can provide funding, these funds often come with strings attached. For governments in the developing world, this may simply be too much of a step on sovereignty, especially if power is being held by a thread. Remittances give countries the ability to fund development their own way; however, like a teenager flush with cash from a first job, developing countries first have to understand just what it takes to effectively use remittance funds.

If it is to efficiently use these funds the country must first develop policies that promote smart, stable growth, and to ensure that growth is not solely concentrated in the cities. Country Effects It is difficult to track how remittance funds are spent because they are private transfers.

Some economists believe that recipients use the funds to purchase necessities such as food, clothing and housing, which ultimately won't spur development because these purchases are not investments in the strictest sense buying a shirt is not the same as investing in a shirt production factory.

Other economists believe that funds from abroad help develop a domestic financial system. While remittances can be sent through wire transfer businesses, they can also be sent to banks and other financial institutions. Depending on restrictions on the movement of capital around the country, these funds can not only help individuals pay for the consumption of goods and services, but can also be used to make loans to businesses if they are saved rather than spent.

Some banks may even seek to establish branches abroad to make the transfer of remittances easier. Research has also shown that migrants returning from working abroad have a higher propensity for developing their own business. The inflow of money from remittances has been compared to the windfall that countries with high-demand resources, such as oil, receive.

The governments of these countries, flush with cash, often spend lavishly on social programs or poorly-planned projects, and find themselves in trouble when demand for a particular commodity slows down. Remittance Problems While remittances are an important lifeline in many developing countries, they can also foster a dependency on outside flows of capital instead of prompting developing countries to create sustainable, local economies.

The more a country depends on inflows of funds from remittances, the more that it will be dependent on the global economy staying healthy. Remittance flows can be negatively impacted by a downturn in the global economy. Workers employed abroad may lose their job if they are in heavily- cyclical industries , such as construction, and may have to stop sending remittances.

This has a two-pronged effect. First, the home country may see a significant portion of its income dry up, and thus not be able to fund projects or continue development. Second, workers who moved abroad may move back home, exacerbating the problem by increasing the demand for services on an already strapped economy. Macroeconomic Effects Large inflows in foreign currency can cause the domestic currency to appreciate, often referred to as Dutch Disease.

Because the domestic currency is valued higher, consumption of imports begins to rise. This can snuff out the domestic industries of developing countries.