1. INTRODUCTION
1.1 Background of the Study
Migrant’s remittances have assumed great importance over the last few decades in development studies. They represent a major vehicle for reducing poverty in the developing world. Remittances acts as a lifeline for the poor, increasing income for individuals and families. They are considered to be stable source of external finance for households in source regions (Ratha, 2003), remittances reduces transient and structural poverty (Kapur, 2004). They are source of foreign exchange and completely distinct from the other sources of capital inflow. Besides the monetary gains, remittances are associated with the expansion of human development outcomes such as health, education, and gender equality. They have positive spillover effects, with some of the expenditures and investments made by remittance receiving households accruing to entire communities. Unlike other monetary flows, remittances are countercyclical — family members abroad are likely to be even more motivated to give in times of hardship, even if their own financial situation has deteriorated as well. In this way, remittances are a form of insurance, helping families and communities against external shocks. Migrants pay transaction costs, on average 9 percent of the amount they remit. Increased competition among institutions that provide money transfer services has produced substantial progress in reducing these costs in high-volume remittance corridors. Remittances are spent partly on consumption and investment. A considerable part of literature argues that remittances are spent on consumption, housing, and real estate, and are not used for productive investment that would contribute to long run economic growth.
The inflow of foreign exchange from migrants increases the home country’s creditworthiness and may allow them to secure more favorable terms of debt service, as lenders perceive a lower risk of default. Since 2009, the World Bank has revised its analysis of how much debt a country can carry at various levels of risk to include remittances, so that countries with high remittances inflows can borrow more. It is evident from the World Bank estimates that migrants remittances accounts for US $401 billion in 2012, and projected that by 2015, this figure could reach to $114 billion. In some countries, remittances represent more than 20 percent of the gross domestic product (GDP). However, the actual amount of remittances may be much higher, as money sent through informal channels often goes unrecorded. To the best of our knowledge, there is no cross-country macroeconomic analysis about the effects of remittances on economic growth. This study is an attempt to fill the gap. The study tries to analyze whether there is a causal relationship between remittances and economic growth for a panel of four SAARC countries (Pakistan, India, Bangladesh and Srilanka) over the period 1980 to 2012.
1.2 Research Question
Is there any causal relationship between remittances and economic growth?
1.3 Objective of the study:
The main objective of the study is to carry out causality analysis between remittances and economic growth for a panel of selected SAARC countries.
1.4 Significance and scope of the study
This study will identify whether there is a causal relationship between remittances and economic growth for the period 1980 to 2012. This study will suggest whether remittances causes economic growth or economic growth causes remittances.
2. LITERATURE REVIEW
Remittances can influence economic growth and investment directly and indirectly. However, it is noteworthy that conditions that promote migration, such as low income and low productivity may discourage investment. The effects of remittances will therefore depend strongly on the government’s policy to organize and control flows of remittances and to promote an economic environment conducive to investment in productive activities that would encourage migrants to remit (Glytsos, 1997).
However, if remittances generate residents demand greater than the economy’s productive capacity and if this demand falls on tradable goods then as a result the import bill will rise and if this demand falls on non-tradable goods, then the relative prices increase. Remittances can consequently draw resources away from the traditional tradable sector and into the non-tradable sector, thereby creating Dutch disease effect. This can deteriorate economy’s Balance of payments position, which in turn worsens the welfare of society (McCormick and Wahba 2000, Reichert, 1981, Rivera–Batiz, 1982).
Chami et al. (2003) investigate the remittances as a source of capital development by using the panel data of 113 countries for the period 1970 to 1998. Regression results indicate negative and significant long run impact of workers’ remittances on economic growth. They concluded that remittances do not act as main source of capital for economic development and there are significant obstacles to transfer these resources into significant source of capital.
Fayissa and Nsiah, (2008) investigate the impact of remittances on economic growth by using the panel data over the period 1980 to 2004 on 37 African countries. Regression results indicate positive and significant relationship between remittances and economic growth. They concluded that remittances boost the economic growth in financially less developed countries through financing investment and help to overcome liquidity constraints.
Waheed and Aleem, (2008) investigate the impact of workers’ remittances on economic growth by employing annual time series data over the period 1981 to 2006. They used co-integration and error correction model for long run and short run relationship. Sensitivity analysis has also been done to check for the robustness of results. Results indicate positive and significant relationship between workers’ remittances and economic growth in short run. On the other hand, significant negative long run relationship is found between workers’ remittances and economic growth in long run.
Qayyum et al. (2008) empirically investigated the impact of workers’ remittances, economic growth and poverty reduction in Pakistan by using the ARDL approach for the period 1973 to 2007. Their results indicate positive and significant relationship between remittances, economic growth and poverty reduction.
Karagoz, (2009) investigates the long run impact of workers’ remittances on economic growth in Turkey using the co-integration technique for the period 1970 to 2005. Results of this study indicate the significant negative impact of workers’ remittances on economic growth in the context of Turkey.
Mohammed, (2009) investigates the impact of workers’ remittances on economic growth in seven MENA countries using panel data regression technique over the period 1975to 2006. They find positive and significant relationship between remittances and economic growth in MENA countries.
Fayissa and Nsiah, (2010) empirically tested the long run impact of worker’s remittances on economic growth for a panel of 18 Latin American countries (LACs) over the period of 1980 to 2005. Regression results of this study indicate the significant positive long run relationship between workers’ remittances and economic growth. They concluded that remittances are alternative source of financial investment in less developed countries.
Das and Chowdhury, (2011) empirically tested the impact of workers’ remittances on economic growth of 11 top remittance recipient developing countries using the panel data over the period 1985 to 2009. They used panel co-integration and pooled mean-group approach. Their empirical results indicate the existence of positive relationship between remittances and economic growth. They recommended that policy makers of developing countries should formulate policies to utilize the remittances into more productive sector.
Ahmed et al. (2011) empirically tested the long run and short run impact of workers’ remittances on economic growth in the case of Pakistan using bounds testing approach and error correction modeling framework using annual data for 1976 to 2009. The empirical results suggest the existence of positive and significant relationship between workers’ remittances and economic growth in Pakistan for long run as well as short run.
Siddique et al. (2011) investigated the causal relationship between workers’ remittances and economic growth in South Asian countries. They use annual time series data for the period 1976 to 2006. Granger causality test under the VAR framework has been used. Causality results indicate that there is no causal relationship existed between workers’ remittances and economic growth for India, unidirectional causality running from workers’ remittances to economic growth in Bangladesh and bidirectional causality is found between remittances and economic growth in Sri Lanka.
Yasmeen et al. (2011) investigate the impact of workers’ remittances on total consumption and private investment of Pakistan using the data from 1984 to 2009. Regression results indicate significant positive relationship of workers’ remittances with both private investment and total consumption. They recommended that developing countries like Pakistan may request to developed countries to adopt soft policies for work remittance in favor of their countries. This might boost total consumption and private investment which eventually boost up their economy.
Azam and Khan, (2011) investigated the relationship between workers’ remittances and economic growth in Azerbaijan and Armenia using the least square technique on annual timeseries data of period from 1995 to 2010 and obtained positive and significant relationship of workers’ remittances with economic growth. They recommended the formulation of appropriate and conducive policies that might encourage worker’s remittances.
2.2 Literature Gap
From the above cited literature it is clear that remittances and economic growth have a strong relationship. However, there is no cross country study available which consider the nexus between remittances and economic growth. This study will try to fill this gap by considering a panel of four SAARC countries to study the remittances and economic growth nexus.
3 PROPOSED RESEARCH METHODOLOGY
In this study we will examine the causal relationship between remittances and economic growth. Using Panel Granger Causality test to check whether remittances causing economic growth or economic growth causing remittances. Based empirical analysis, the study will suggest some policy implications for policy making.
3.1 Sample Design
For checking causal relationship between remittances and economic growth we will be using secondary data from 1980 to 2012. We are making a panel of four SAARC countries Pakistan, India, Bangladesh and Srilanka. The reason for selecting these four countries is that all are South Asian countries and their economic structure is more or less alike.
3.2 Variable Description
The variables included in this study are Remittances, Investment, Human development index and Trade openness. The focus of this study is on causal relationships between all these variables. I will be checking bi directional causality between all these variables.
