Importance of remittances is not understood by the common layman. Even though it has pivotal importance it is not given the right care. This might partly be due to some redundant literature or because papers written do not discuss causality and the effects of this transfer of money. Therefore, the context developed in this report bridges the gap between economic growth and remittances in a more cohesive way. Four data sets have been used that is GDP, Remittances, savings, education and the foreign direct investment. All this data has been directly extrapolated from the world bank site. Data has been used for developing countries to see the trend of and to see the impact remittances has on GDP. All have the same characteristics and share the same economic growth trend, so it makes it easier to be compared to. The tests that have been run are Panel least square data regression and Generalized methods of moments.
Remittance is more commonly known as the cash or any other monetary term sent by a foreign worker to their native country. These transfers are of great economic significance for both developed and developing countries alike. The main objective of this study is to analyze the impact remittances have on developing countries. Then primary question being answered here is that if GDP and Remittances have a direct relation. Secondary questions include which other variables should be kept in mind when making this analysis. Inflation has been also considered
When talking about the case of Pakistan we can see that remittances play a pivotal role in its GDP. Pakistan has a high number of people who have either migrated abroad for better opportunities or are planning to do so soon. This leads to money being sent back home. Data shows that most remittances are from the Middle East or other Arab countries. For example, in the late 1980’s foreign inflow of money was almost $2.4 billion which was almost 70% of the total exports. So, after taking a macro approach we can say that this inflow of money can be called a small catalyst for economic growth. Furthermore, taking into consideration present data we can easily foresee that remittances do alter our consumption and investment pattern. Because of this influx of money peoples consumptions pattern change and they start consuming more, fueling economic growth by a small percentage. If we talk globally there are approximately 200 million expatriates supporting 800 million of their family members in their home countries and Pakistan being one of them. This can also show the massive effect of Remittances on developing countries.
Most of macroeconomic literature on remittances and growth are intertwined with the Aggregate demand equation. They talk about how this inflow of money can be used to boost growth in terms of private capital gains, increase in real GDP and an increase in private investments. Most papers reviewed in this literature review can be seen circling the same point as made above. The first paper reviewed was of Shera and Meyer(2013). This paper revolves around the importance of Remittances in 21 developing nations and how it has impacted them throughout the years. Money sent from expatriates back to their home country constitutes to a very vital mechanism for the allocation of resources from developed to developing countries, like the case of United States. People from Pakistan living in the United States tend to send money back to their home country which acts as a catalyst for economic growth. In many cases it has also been noted that remittances exceed FDI showing the value of this transfer of money for developing economies.
Another strand of literature reviewed was Hrushikesh (2008). This paper portrays the impact of remittances on the economy and provides examples of how developed economies benefit from remittances. Using macroeconomic theory, he suggests that the effect of remittances is no different than income and they both have similar effects on the economy. It should also be noticed that the writer feels that remittances can have a negative impact on private investment while the growth rate of output somehow remains unaffected.
Chami (2003) can somewhat be called the main paper as it dwells upon the “Dutch Disease Effect”. This states that a large inflow of money can have a negative impact on the economy. He goes on to say name it as a “Moral Hazard”. This is because the recipient because of the knowledge of this unprecedented increase in money might decrease expected output damaging the economy on a whole in the long run. This is also further bolstered by the likes of “Yaseer Abidh, Jihad Dagher”(2010) as being a negative relation with GDP. They somehow drag all of this to government interference and to lack of governance that because the government has its own motives it does not put the nation in front of its own agendas. On the contrary it tends to use this influx of funds for its own causes thereby causing no effect on the economy.
The next strand of literature claims that how households in Pakistan utilize remittances and the impact of migration on the influx of money. (Najid, Arslan and Farhat) explore the effect on Pakistan’s economy. Statistics show that most of that money was used are for luxury goods going on to state that most of the remittances which were received in Pakistan were through illegal channels which as a result not recorded. A crucial factor which has been used by the author is the assumption that all the migrants will bring back all money in form of remittances to the economy whereas in reality they only send a minimal percentage back home. Therefore, the results could theoretically be irrelevant. It further proves that foreign remittances have a positive impact on the economic growth of Pakistan. One of the economical results of migration is remittances which is stated by (Anya Raza, 2008). This paper conducts more research on migrating families to analyze the impact on the economy.
Some authors have also talked about fiscal policy implications and how remittances heavily tend to shape fiscal policies. The “UN’s Conference of Trade and Development (2011)” published in their findings that remittances have a higher effect on fiscal policies and poverty alleviation than foreign direct investments. They compared mostly developing nations like India or even some least developed nations like Kenya. This strand of literature really comes close to our aim by using similar tests to come to the conclusion that for smaller nations the governance for remittances should be stricter as to monitor the money trail so it can be put to proper use.
The Gross Domestic Product is taken as a very important indicator for economic growth. In our study it is our main dependent variable on which our whole model is being made Its influence on economics can be seen from the fact that most economic indicators use this as a way of measuring economic prosperity. In layman terms it basically measures the total value of everything that is being made in the economy within its borders. The figure that we have used is GDP growth rate as to normalize the series so to compare it with the other figures we have used. For example, looking at developing nations we can see that their GDP growth rate is somewhat consistent. The graph below provides us in an insight into GDP growth rate and we can see that most nations have a 4-6% annual growth rate.
2. Foreign direct Investment.
This is our first independent variable. It is basically a form of a remittance but as the name suggests in the form of an investment. For example, if China invests in Pakistan and puts up industries etc all this inflow of money will be called the FDI. It is also a very important factor in determining economic growth as in most developing nations it has a very large amount. The graph below also explains this as we can see that as the years progress the value increases by a substantial amount by 2016 almost reaching to 4%. The value’s given below are in terms of GDP as to make regression easier for us.
The dependent variable for our model is GDP growth rate and the independent variables used are savings, FDI and remittances. Data has been taken since 1998 to 2016 and has been first differenced to make the analysis simpler. Furthermore, the analysis could have been further streamlined but due to the shortage of data it could not be done as for most countries the data is missing before 1998.
1. We have used a panel regression. First, we are using unbalanced panel data to hypothesize I.e. is GDP growth rate affected by Remittances.
The equation for our model is as follows:
(GDP growth rate) t = ? + ?(Rem % GDP)t + ?(Net Sav)t + ?(FDI)t + u(t)
Where u(t) is the error term.
2. Furthermore, we have also done OLS or the ordinary least square method. This method gives us a way to check the linear relationship between the given variables and the series. The equation for this model that we have made is as follows:
Y = ?0 + ?1X1 + ?2X2 + ?3X3 + ?3X3+?
Findings and conclusions.
According to our previously discussed hypothesis we can see that that GDP growth rate is somehow negatively affected by an increase in remittances. The coefficient in Appendix 1 below shows that GDP growth rate is -.02 and by looking at the p-value we can see that it is also significant. The results also come to show that the general nexus of the literature that talks about the “Dutch Disease Effect” is correct and cannot be called spurious. This is also happening in many developing countries like Pakistan where proper governance is not found. But looking at the p-coefficient we can see that the value is not accepted because it is not significant Net savings also has a negative effect on GDP. This can be shown from economic theory.
Also, when me made a pooled panel data test we found out that net remittances and GDP have a positive relationship. This can be seen in developing countries because of their high consumption rate. Most developing nations like Pakistan and India have a very large population who is mostly consumer based. Because of the lack of proper investments most of the economies propulsion is due to consumption. This leads to a multiplier effect on the GDP. Most of this money is from foreign remittances
Similar results have also been published by many other authors who also claim that in some cases remittances does not act in favor of economic growth and might not be the most important factor in increasing GDP.
Most developing countries take remittances to boost their economic growth and some even take it to increase their tax net. When looking at the figures we can see that the developing nations mostly have an increasing trend for remittances. Figures show that in those countries where there is a large influx of money there is a lower poverty incidence and higher consumption as the denizens have more money to use. This is all derived from the aggregate demand equation where consumption and investment drive the economy in many cases. The Dutch Disease effect in our case cannot be established as the value is not significant. Figure 1 shows a positive relationship which is also what economics say.
Since our model has shown that remittances can increase GDP and can be a driving force policies should be altered to take this into account. First of all:
• Governments should try to curb consumption patterns by increasing interest rates so people can save more. This will tackle the problem of conspicuous buying.
• By increasing investment in both human and natural capital.
• Putting remittances to good use by injecting it into the economy leading to higher investment and more job creation.
• Some larger nations like India can also tax this flood of money so it will help the economy and the government. Countries will be able to kill two birds with one stone.
MALLICK, H. (2012). INFLOW OF REMITTANCES AND PRIVATE INVESTMENT IN INDIA. The Singapore Economic Review, 57(01), p.1250004.
Matuzeviciute, K. and Butkus, M. (2016). Remittances, Development Level, and Long-Run Economic Growth. Economies, 4(4), p.28.
Raza, A. (2008). The Effect of Remittances on Employment in Pakistan. SSRN Electronic Journal.
Shera, A. and Meyer, D. (2013). Remittances and their impact on Economic Growth. Periodica Polytechnica Social and Management Sciences, 21(1), p.3.