Remittances, investment and growth in sub-Saharan Africa

Abstract

Several studies have examined the impact of remittances on economic growth, yet the results remain largely inconclusive. I present an analysis of the relationship between remittances and per capita growth, and investigate whether the impact of remittances on growth is through capital accumulation or other mechanisms. Using data for sub-Saharan African countries and dynamic empirical models, I find that there is a positive relationship between remittances and growth, as well as a positive interaction effect between remittances and financial depth on growth. The findings also reveal threshold values for two main indicators of financial development, above which the total effect of remittances on growth is positive. The results further provide evidence for the existence of an investment channel through which remittances affect growth, and indirect evidence that remittances contribute towards a stable macroeconomic environment, and hence, growth, through a consumption smoothing effect.

Keywords:

• economic growth of open economies
• developing countries
• growth
• remittances
• panel data

JEL Classifications:

• F43
• O10

Notes

 1. Singh, Markus and Kyung-woo (2009) employ a fixed-effect two-stage least squares method to estimate their empirical models.

 2. All the figures and other estimates reported for remittances are based on workers' remittances and compensation of employees received, from the World Bank's World Development Indicators (WDI).

 3. The estimates represent the author's computations using data from WDI.

 4. The countries are Benin, Botswana, Burkina Faso, Cameroon, Cape Verde, Comoros, Republic of Congo, Cote d'Ivoire, Eritrea, Ethiopia, Gabon, The Gambia, Ghana, Guinea, Guinea-Bissau, Kenya, Lesotho, Madagascar, Malawi, Mali, Mauritania, Mauritius, Mozambique, Namibia, Niger, Nigeria, Rwanda, Sao Tome and Principe, Senegal, Seychelles, Sierra Leone, South Africa, Sudan, Swaziland, Tanzania, and Togo.

 5. The set of control variables for the growth equation is selected from a large set of variables used in the literature to explain per capita economic growth, while closely following Singh, Markus and Kyung-woo (2009). For the investment equation, the choice is made following Guliano and Ruiz-Arranz (2009) and Bjuggren, Dzansi and Shukur (2010). Detailed definitions of all variables are provided in the appendix.

 6. These estimators have been widely applied and discussed in a number of studies. See Arellano and Bond (1991) and Blundell and Bond (1998) for details on the GMM difference and system estimators.

 7. Private credit is the preferred measure, and is equal to the value of credit by financial intermediaries to the private sector only, and improves on other measures of financial development. In order to provide additional robustness checks, I choose to use bank assets, rather than M2/GDP, which arguably has some shortcomings (Levine, Loayza and Beck 2000).

 8. Following Bond, Hoeffler and Temple (2001), I use the one step GMM estimator with standard errors that are both robust and reliable for finite sample inference, and consider this to be the preferred estimator.

 9. To test the robustness of the results, I introduce the terms of trade and CPI inflation to replace trade openness and GDP inflation as control variables in specifications presented in columns 3 and 6 in Table 6.

10. The approach involves taking the derivative of the growth equation with respect to each of the two variables and setting it equal to zero. I use the model specifications in columns 3 and 6 of Table 6. The resultant equations are as follows: , and .

11. This would be consistent with the two main hypotheses on the motivation to remit; altruistically motivated remittances that tend to increase during recessions, and self-interested remittances that target investment opportunities (Acosta et al. 2009).

12. For example, financial development may lower domestic savings coming from domestic income, and hence decrease growth, but at the same time, because remittances supplement domestic incomes, the presence of a developed banking system could aid mobilization of these funds for growth enhancing purposes.

13. It should be noted that I use a different estimation technique which possesses a clear advantage in allowing exploitation of country-specific effects. The main financial development indicators I use also vary from those in Singh, Markus and Kyung-woo (2009). Moreover, the time period I consider (1990–2008) has three more observations per country relative to that study. The set of countries are identical, however.

14. Ball et al. (2008) study how exchange rate regimes matter for macroeconomic effects of remittances. There is also a vast literature on the effect of exchange rate regimes and growth. The effect of the interaction between exchange rate regimes, financial development and remittances in the sub-region would, therefore, be an interesting subject of research in the future.