Do remittances promote human development? Empirical evidence from developing countries

Abstract

Purpose The purpose of this paper is to analyse the impact of remittances on human development in developing countries using panel data from 1980 to 2014 and to address the critical question of whether the increasing trend of remittances has any impact on human development in a broad range of developing countries. Design/methodology/approach Usual panel estimates, such as pooled OLS, fixed or random effects model, possess specification issues such as endogeneity, heterogeneity and measurement errors. In this paper, we, therefore, apply dynamic panel estimates – System generalised method of moment (Sys-GMM) developed by Arellano and Bond (1991) and Arellano and Bover (1995). This estimator is able to control for the endogeneity of all the explanatory variables, account for unobserved country-specific effects that cannot be done using country dummies due to the dynamic structure of the model (Azman-Saini et al., 2010). Findings The effect of remittances is statistically significant with positive coefficients in developing countries. The significant coefficient of remittances means that, holding other variables constant, a rise in remittance inflows is associated with improvements in human development. A 10 per cent increase in remittances will lead to an increase of approximately 0.016 per cent in human development. These findings are consistent with Üstubuci and Irdam (2012) and Adenutsi (2010), who found evidence that remittances are positively correlated with human development. Practical implications The paper considers implications for policymakers to justify the need for more effective approaches. Policymakers need to consider indicators of human development and to devise public policies that promote income, health and education, to enhance human development. Originality/value The question of whether remittances affect human development has rarely been subject to systematic empirical study. Extant research does not resolve the endogeneity problem, whereas the present study provides empirical evidence by utilising dynamic panel estimators such as Sys-GMM to tackle the specification issues of endogeneity, measurement errors and heterogeneity. The present study provides a benchmark for future research on the effect of remittances on human development.

The Impact of International Remittances on Poverty Alleviation in Bangladesh

“…Remittances from abroad are found to have a statistically significant and positive impact on poverty alleviation only for upper middle-income countries (Azam et al (2016) while Simiyu et al (2018) found that there were significant welfare and poverty level differences between remittance recipient and non-recipient households. Besides, Huary and Bani (2017) found that a 1 per cent increase in remittances decreases the poverty headcount by 0.41 per cent. Waheed et al (2013) found that a 10 per cent increase in domestic remittances decreased poverty incidence, poverty gap and squared poverty gap by 1.80 per cent, 1.60 per cent and 1.60 per cent while 10 per cent rise in foreign remittances reduced poverty incidence, poverty gap and squared poverty gap by 0.86 per cent, 0.62 per cent and 0.62 per cent respectively in rural Nigeria.…”

Effectiveness of Fiscal Federalism for Poverty Reduction in Nigeria: An Analysis of Federal and State Governments’ Expenditures

“…This implies that increasing government expenditure will significantly reduce the proportion of individual below poverty line by about percent. The findings of these five studies is however inconsistent with Huay et al, (2019), Kaidi and Mensi (2019).…”

“…Applying System generalized method of moment (Sys-GMM), Huay et al, (2019) 2019, Kaidi and Mensi (2019) found that one percent growth in government consumption expenditure leads to a 0.10 percent decline in private consumption in examined ECOWAS countries. This is an indication of crowing out effect in the long-run and short-run periods.…”

Effectiveness of fiscal federalism for poverty reduction in Nigeria: an analysis of federal and state governments’ expenditures

“…This implies that increasing government expenditure will significantly reduce the proportion of individual below the poverty line by about 7%. The findings of these five studies are however inconsistent with Huay et al (2019) and Kaidi and Mensi (2019).…”

“…Applying the system generalized method of moment (Sys-GMM), Huay et al (2019) investigated the impact of remittances on human development in 66 developing countries from 1980 to 2014 by incorporating government expenditure in the model. The significant but negative coefficient of government expenditure means that, when other variables are held constant, increased government expenditure rather than serve as a human development catalyst reduces it.…”