Personal Remittances and Financial Development for Economic Growth in Economic Transition Countries

Abstract

This study investigates the effect of personal remittance inflows and financial development on the economic growth of 29 economic transition countries for the period of 2000–2015. Dynamic panel system GMM estimation results show that there is a positive relationship between remittance inflows and economic growth. It also shows that remittances and the level of financial development have a substitute relationship in promoting economic growth. So the remittance inflows have a positive effect on economic growth for the countries with low levels of financial development, but they have a negative effect on such growth for countries with moderate to high levels of financial development.

KEYWORDS:

• Transition economies
• remittance
• financial development
• dynamic panel system GMM

JEL Classifications:

• F24
• F43
• O16
• O47

Acknowledgements

This paper was presented at The Association of Korean Economic Studies2018 Annual Domestic Conference, Seoul, Korea, November 2018. Also, this paper is based on part of the Ph.D. thesis ofShijun Cao in Economics at Korea University and was supported by Korea University grants (K1710061). We thank the editorand the two anonymous referees for their insightful comments that helped improve the quality of the paper.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

1 In Giuliano and Ruiz-Arranz (2009), 72 developing countries were included in the study, but only 14 of them were economic transition countries. These are China, Colombia, Croatia, Egypt, Estonia, Hungary, Jordan, Poland, Romania, Russia, Slovenia, Tunisia, and Turkey, respectively. In Bettin and Zazzaro (2012), only 13 of the 66 developing countries were economic transition countries. These are Turkey, Croatia, Hungary, Estonia, Tunisia, Poland, Slovenia, Romania, Jordan, Egypt, Slovakia, China, and Russia. In Sobiech (2015, 2019), only 11 of 61 developing countries were economic transition countries. These are Albania, China, Cyprus, Czech Republic, Egypt, Jordan, Morocco, Poland, Romania, Tunisia, and Turkey, respectively. In Chowdhury (2016), including 33 developing countries with the highest rates of remittance, with only three economic transition countries included. These are Egypt, Morocco, and Tunisia, respectively.

2 Giuliano and Ruiz-Arranz (2009) and Bettin and Zazzaro (2012) include credit for the public and private sectors, but since the remittances mainly take place in the private sector, this study only uses the credit index for the private sector.

3 With the country classification by World Bank (2016a), Appendix Table A1 describes the rankings of remittance inflows and Appendix Table A2 lists the countries by the ranking of remittances inflows to GDP ratio.

4 Panel unit root tests are analyzed by three methods: the Levin-Lin-Chu test (Levin et al., 2002); the Im-Pesaran-Shin test (Im et al., 2003); and the Fisher-type test (Choi, 2001). All three tests present a null hypothesis that all the panels contain a unit root. The test results for the dependent variable, natural log of real GDP per capita (PPP), are as follows. (1) From 1990 to 1995, there are many missing data, so the tests cannot be conducted. (2) From 1995 to 2015 and from 1999 to 2015, only the Levin-Lin-Chu test (Levin et al., 2002) is statistically significant at the 1% significance level, and all other tests are insignificant. (3) From 2000 to 2015, all three tests are statistically significant. Therefore, the final period of analysis is set as 2000–2015.

5 Appendix Table A3 describes correlation coefficients of variables used in this study.

6 According to the World Bank (2016b), in 20 of 29 economic transition countries with observable data, the number of personal remittance inflows exceeded US$ 1 billion each in 2015. The ratio of remittances to GDP was more than 1% in 24 countries and for Tajikistan, Kyrgyz Republic, and Moldova, it was exceptionally high: more than 20%.

9 Apart from the Sobiech (2015, 2019), most of the papers on the impact of remittances and financial development on economic growth have not specifically explained the marginal effects and turning points of remittances on economic growth.

7 Additionally, we have added the overall score of the Index of Economic Freedom published by the Heritage Foundation to the empirical model and found the results are consistent with Tables 4 and 5.

8 See Figure 1 and Appendix Table A2.

Additional information

Notes on contributors

Shijun Cao

Shijun Cao is an assistant professor at the College of Economics and Management, Yanbian University.

Sung Jin Kang

Sung Jin Kang is a professor at the Department of Economics, an adjunct professor at KU-KIST Green School and a director of the Institute for Economic Research, Korea University.