Academic journal article Journal of Third World Studies

The Impact of Workers' Remittances on Economic Growth: Evidence from ECOWAS Countries

Academic journal article Journal of Third World Studies

The Impact of Workers' Remittances on Economic Growth: Evidence from ECOWAS Countries

Article excerpt

INTRODUCTION

Workers' remittances represent one of the most important sources of external flows of capital and foreign exchanges for many developing countries. They play an important role in the lives of their recipients. This is particularly the case in sub-Saharan African countries where resources are constrained and real output growth is often negligible. The impact of workers' remittances on real output growth can be positive or negative depending on how recipients use remitted funds. If recipients use remittances for productive investments rather than consumption or household expenditures, then, remittances should have a positive effect on real GDP growth. However, most of the studies in the literature (see next section) have found that the share of remittances that goes into uses that can be categorized as investment is often very small and are usually not productive in terms of the economy as a whole. Recipients mostly use remittances for consumption expenditures.

Since recipients of remittances often use remitted funds to further their standard of living by paying for consumption expenditures such as food, health care. education, and so forth, workers' remittances should not be expected to stimulate economic growth. Indeed, increase in consumption has a propensity of stimulating imports, especially in developing countries where the industrial sector is not well developed. Thus, remitted funds that are used for consumption are less likely to improve output growth in the recipients' countries. Moreover, there is a potential for a moral hazard problem between the remitters and recipients of remittances. Recipients of remittances might act in ways that can reduce their work efforts without the knowledge of the remitters.

In view of the belief that remitted funds are mostly spent on family expenses and given the existence of the moral hazard that reduces work efforts of recipients, we believe that workers' remittances are more likely to have a negative effect on GDP growth rate. We shall, thus, empirically test the hypothesis that workers' remittances are detrimental to the economic growth of recipients' countries. We use time series data on workers' remittances and the real GDP growth rate often sub-Saharan African countries, members of the Economic Community of West African States (ECOWAS). Data are from 1976 to 2007 for Benin. Burkina Faso, Cote D'Ivoire, Gambia, Ghana, Mali, Niger. Nigeria, Senegal, and Togo. Additional control variables such as the initial level of per capita income, gross domestic investment (gross capital formation), Foreign Direct Investment (FDI), and total external debt, are also included in the regression model. We found that workers' remittances do not stimulate economic growth in any of the ten ECOWAS countries. However, they seem to have a significantly negative impact on real output growth of Benin.

The second section of the paper examines the literature review on theoretical and empirical studies of workers' remittances and growth. The third section discusses the empirical model used in this study and the results of the regression analysis. The paper ends with a conclusion where some policy implications of the findings of this study are discussed.

LITERATURE REVIEW

Several theoretical studies of remittances in the literature found that only a small fraction of remitted funds is saved and used for investment while the rest is used for consumption expenditures. Studies by the African Development Bank (AfDB) in the cases of Mali, Senegal, Morocco, and Comoros, (1) Brown in the case of Western Samoa and Tonga, (2) Durand et al. in the case of Mexico, (3) Glytsos in the case of Greece, (4) Gilani in the case of Pakistan, (5) and Oberai and Singh in the case of India, (6) all found that a highly significant portion of remitted funds is spent on consumption in these countries. In addition, the AfDB's study of workers' remittances in Mall, Senegal, Morocco, and Comoros, (7) Adelman's paper on Pakistan, (8) Adams' study for Pakistan, (10) and Adams' study for Egypt, (10) found that the share of remittances that goes into uses that can be categorized as savings or investment is often very small and is usually not productive in terms of the economy as a whole. …

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