5 - Workers’ Remittances, Capital Inflows, and Economic Growth in Developing Asia and the Pacific Countries

Summary

This chapter examines the impact of remittances on economic growth, using developing Asia and Pacific countries as a case study. Using data for the period 1993–2013, our results show that remittances only generate negative and significant impacts on economic growth if it reaches 10 per cent of GDP (gross domestic product) or higher. A remittances-to-GDP ratio below 10 per cent can still contribute negatively to growth, but the effect is statistically insignificant. This study finds some degree of substitutability between remittances and financial development. Foreign direct investment (FDI), but not other types of capital inflows, contributes significantly to long-term economic growth. Other traditional growth engines, including education, trade openness, and domestic investment, are crucial in promoting growth in developing Asian and Pacific countries.

INTRODUCTION

International remittance inflows have increased significantly in developing countries over the past few decades. For many developing countries, such remittances constitute the largest source of foreign exchange earnings, even exceeding export revenues, foreign direct investment (FDI), aid, and other private capital flows. Remittances become, therefore, a relatively attractive source of foreign earnings for developing countries. Policymakers in many countries view remittances as unrestricted private financial flows that could contribute to investment and consumption. In certain aspects, remittances are treated as similar to FDI and other private international capital flows (United Nations 2003; U.S. Department of State 2005). Therefore, remittances are believed to have a similar effect on economic growth as other types of private capital inflows.

However, findings from theoretical and empirical studies on the role of remittances on economic growth are mixed. On the one hand, many scholars argue that remittances have a positive impact on economic growth. By helping to reduce the credit constraint on household receipts, remittances could allow entrepreneurial activity and private investment to increase (Yang 2004; Woodruff and Zenteno 2004). While there are backward and forward linkages in investment activities, an increase in the investment of one household could generate an increase in the income of other households. In addition, it would be possible that the larger remittance flows could help improve a country's credit rating rank. This is another way to increase both physical and human capital investment and promote economic growth. Empirically, Acosta (2006), Vargas-Silva, Jha, and Sugiyarto (2009), and Catrinescu et al. (2009), for example, find a positive relationship between remittances and economic growth.