Remittances and the sources of growth

Abstract

This article studies the effects of remittances on economic growth and the sources of growth:capital accumulation and Total Factor Productivity (TFP) growth. This approach is different from previous studies, in that, it focuses on the transmission mechanism instead of the impact of remittances on economic growth. We find that remittances have conflicting effects on the two sources of growth: capital accumulation and productivity growth. Remittances have a significantly positive impact on capital accumulation while the impact on TFP growth is insignificant. These findings suggest that while remittances enhance investment and contribute to physical capital accumulation, the lack of efficiency enhancing effect or possible adverse impact on TFP growth would make the net effect on economic growth ambiguous.

Keywords:

• remittances
• investment
• TFP growth
• economic growth

JEL Classification:

• F22
• F43
• O15
• O47
• O50

Acknowledgements

I thank participants of the 2011 Annual Western Economic Association International Conference for their insightful comments and suggestions. Special thanks are due to Dr. Eskander Alvi and the anonymous referees of this journal.

Notes

¹ , where y is real GDP per capita, k is physical capital stock per capita, and h is stock of human capital per capita. We assume that physical capital's share of income, is 0.3. Subsequent to Mankiw et al. (1992), we also assume that human capital's share is 0.3. Following Caselli (2005), we construct human capital data from the Barro and Lee's (2010) data set of average years of schooling in the population over 25 years old using a piecewise linear function.