Academic journal article Journal of Economic Development

Financing Growth: Comparing the Effects of Fdi, Oda, and International Remittances

Academic journal article Journal of Economic Development

Financing Growth: Comparing the Effects of Fdi, Oda, and International Remittances

Article excerpt

The world-wide emergence of remittances, in conjunction with challenges surrounding public foreign aid and the theoretical division regarding the development of FDI, prompt important questions as to whether international remittances outperform foreign aid and FDI as a determinant of a country's economic growth. Using panel data from 1990-2006 and applying System-Generalized Method of Moments (GMM) approach, we show that international remittances, FDI, and ODA are positively and significantly associated with the economic growth rate of low income countries. Specifically, we find that the impact is greater with international remittances. Moreover, international remittances prove to be a greater contributor of economic growth than ODA and FDI even when countries are highly dependent on FDI. We conclude by stressing the need for policy and business responses to stimulate the flow and create an appropriate distribution of international remittances to make full use of international remittances developmental potential.

Keywords: International Remittance, Complement Public Foreign Aid, FDI, Social Welfare, OLS Regression

JEL classification: F24

(ProQuest: ... denotes formulae omitted.)

1. INTRODUCTION

In the "The Mystery of Capital," Hernando De Soto postulates about the mysteries of missing information, capital, political awareness, and legal failure. His main thesis is the world's poor already possess an enormous quantity of savings. Although available, much of this savings is found in "dead capital," or capital which is not recognized by the government. Governments overlook this "dead capital" for two main reasons: lack of evidence and deficiencies in domestic property laws (De Soto, 2000, p. 11). International remittances, often characterized as individual transfer payments from expatriates to home countries, are a primary example of "dead capital." This "dead capital" is explicitly exposed to hazards of the informal market and the underground economy. International remittances have been neglected or underestimated as a potential development tool.

There is a growing consensus in the field of economic development regarding the importance of international remittances on home country development and poverty alleviation (Bourguignon, 2006; Adams and Page, 2003). In recent years, governments and transnational organizations have started to show an active interest in this potential source of external finance. This is largely due to four major developments. First, international remittance flows into developing countries have grown rapidly. This growth has been significant mostly in poor and lower middle income countries despite considerable restrictions on international migration (Griffin, 2000, p. 103). Second, for many developing countries, international remittance flow exceeds public foreign aid and foreign direct investment (FDI). It represents a large percentage of their GDP (Meyers, 2002; Government Accountability Office (GAO), 2005). Third, improvements in international remittance statistics, although modest, have increased governments' awareness of the potential of international remittances significantly contribute to poverty alleviation, economic growth, and development. Fourth, the flow of public foreign aid continues to decline (Kim and Shaw, 2003; GAO, 2005), pressuring poor countries to look for alternative source of development financing.

In contrast to international remittances, public foreign aid programs and, to a lesser extent, FDI, are being challenged on a number of fronts. Many analysts argue that the system of foreign aid in the last few decades has proven counterproductive and failed to accomplish development objectives (Bauer, 1991; Bandow and Vásquez, 1994; Easterly, 2006). Foreign aid, it is argued, has fueled corruption, economic failure, and aid dependency in many poor countries.

On the other hand, a number of FDI theorists have been reticent about the true effect of FDI on host countries. …

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