Academic journal article Journal of Economic Cooperation & Development

Relationship between Remittances, Exports, Foreign Direct Investments and Growth in South Asia: A Panel Cointegration and Causality Analysis

Academic journal article Journal of Economic Cooperation & Development

Relationship between Remittances, Exports, Foreign Direct Investments and Growth in South Asia: A Panel Cointegration and Causality Analysis

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1. Introduction

Every economy strives to achieve the higher level of economic growth. There are many macroeconomic factors that contribute towards the economic growth of a country and they have also received much attention in the literature. Workers' remittances, exports expansion, and FDI are few among others. Workers' remittances and net FDI inflows emerged as important components for the purpose of external financing for developing countries (World Bank, 2009). FDI as a net inflow of investment presents a way to acquire management interest in an enterprise of any economy. This management interest is usually of lasting nature (voting stocks of 10 percent or more). FDI stimulates economic growth primarily through work force and knowledge/technological transfer effect as growing number of literature proves the positive impact of FDI on the economic growth of the host countries. For instance, see Rao and Hassan (2011), Cooray (2012), Azam et ah, (2013), Imai et ah, (2014), Hassan et ah, (2014), Shakar and Aslam (2015).

The second largest source of foreign funding is remittance. Remittances of foreign employed workers or migrants are the current transfers as these migrants have intentions to remain employed for more than one year and are considered residents of the that economy (WDI, 2014). The remittances-growth literature is divided into two schools of thought. One school of thought supports the positive impact of remittances on the economic growth i.e. Catrinescu et ah, (2009), Marwan et ah, (2013), Azam et ah, (2013), Kumar and Stauvermann (2014), etc. However the other school of thought argues that remittances either have a negative influence on the economic growth of a host country or there is no relationship. Rao and Hassan (2011) selected a sample of 40 countries having remittances to GDP ratio of one percent or more and found that remittances did not have any significant direct impact on growth of these countries. Moreover, Rao and Takirua (2010) found the negative impact of remittances on growth for Kiribati. The negative effects are attributed to the Dutch Disease effect and decrease in the quality of governance being carried out in the host country.

This study focuses on exploring the impact of workers' remittances and FDI along with exports and the two basic conditioning variables, capital (K) and labor (L), on the economic growth of South Asian countries. Export is one of the major determinants of the economic growth. Literature provides mixed/ambiguous result on its impact on economic growth. Some studies support that exports lead to higher economic growth; for example, Rao and Takirua (2010), Marwan et al. (2013), Ullah et al. (2009), Aditya and Acharyya (2012). Others do not support the export-led growth hypothesis (see, for example, Mah (2005) and Pazim (2009)). Bilquees and Mukhtar (2012) argue that exports instability has a potential impact on economic growth in case of Pakistan. The present study empirically analyze the relationship between economic growth, FDÍ, workers' remittances and exports using Solow model (1956) and its extended version for South Asian countries. It is relatively unexplored area for the South Asian countries including Bangladesh, India, Pakistan, Sri Lanka and Nepal. This paper uses the extension of Solow model used by Mankiw et al. (1992) in which the Cobb-Douglas production function as a basic neoclassical model is amplified with the help of the shift variables. Summaries of the previous empirical work conducted on international and country specific level is provided in Table 1.

There are three types of empirical limitations that are worth considering in the light of the past studies. First, there are few studies focusing on the causal relationship among export, remittances, FDI and economic growth in the South Asian countries. Second, the literature indicates the presence of cross section dependence in a panel setting due to unobserved common factors, macro-economic and regional linkages, externalities and unaccounted residual interdependence. …

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