Remittances and Economic Growth in a Small and Volatile Economy

Abstract

This paper investigates the relationship between worker remittances and economic growth in a small country with volatile macroeconomic conditions (namely, Jordan). Previous research determines three main channels through which the impact of remittances can be transmitted: labor supply, capital accumulation and investment, and productivity. A historical behavior of these variables since 1976 to 2016 is analyzed and discussed in the context of the Jordanian economic structure. The Autoregressive Distributed Lag (ARDL) model that allows economic growth (measured by growth in per capita GDP) and financial development (measured by bank credit) to be affected by their lagged values and by current and lagged values of remittances (measured by remittances as percentage of GDP) is used to test for equilibrating and long-term associations between remittances and economic growth and financial development indicators. The results show that although Jordanian worker remittances represent a vital source of financial flows, they are not used to smooth consumption by receiving households and have no impact on economic growth or financial development. Instead, they lead to increase in imports and trade deficit. Thus, if reverse migration of Jordanian workers takes place, it will lead to sudden increase in skilled labor supply, which will exacerbate Jordan's unemployment problems.