Remittances, finance and industrialisation in Africa

Abstract

The paper assesses how remittances directly and indirectly affect industrialisation using a panel of 49 African countries for the period 1980-2014. The indirect impact is assessed through financial development channels. The empirical evidence is based on three interactive and non-interactive simultaneity-robust estimation techniques, namely: (i) Instrumental Fixed Effects (FE) to control for the unobserved heterogeneity; (ii) Generalised Method of Moments (GMM) to control for persistence in industrialisation and (iii) Instrumental Quantile Regressions (QR) to account for initial levels of industrialisation. The non-interactive specification elucidates direct effects of remittances on industrialisation whereas interactive specifications explain indirect impacts. The findings broadly show that for certain initial levels of industrialisation, remittances can drive industrialisation through the financial development mechanism. Policy implications are discussed.

Remittances, the Diffusion of Information and Industrialisation in Africa

“…In accordance with Naude et al (2013) and Efobi et al (2019), industrialisation can be understood as a socio-economic process of quick transformation in the manufacturing sector with respect to a multitude of production avenues and work done within an economy. It consists of the added value in the manufacturing sector when the overall economic size is taken into consideration.…”

“…Accordingly, from an average perspective, since the year 2000, the inflow of remittances into SSA has been higher than 1.5% as a percentage of GDP. Conversely, corresponding remittance inflows into the other regions (Europe, East Asia and Central Asia) did not reach the threshold (Efobi et al, 2019). In the second strand, we show in Figure 2 that a positive relationship can be expected between remittances and industrialisation.…”

“…While remittances have fundamentally been considered as a form of altruism designed to play a role in social insurances (Kapur, 2004;Agarwal & Horowitz, 2002), the externalities of remittances go beyond household rewards (Efobi et al, 2019). According to the narrative, the wealth of literature on the subject documents the usage of remittances beyond final consumption demands.…”

“…Moreover, the relationship between remittances and characteristics of industrialisation has been established in the literature (Massey & Parrado, 1998;Woodruff & Zenteno, 2007;Efobi et al, 2019). Hence, the study builds on established evidence that remittances represent a source of new venture capital and the establishment of businesses in developing countries (Woodruff & Zentano, 2001;Efobi et al, 2019). In the study, ICT is considered as a policy channel through which the effect of remittances on industrialisation can be enhanced.…”

“…The intuition for this inquiry builds on the fact that, on the one hand, ICT has substantially facilitated remittance flows into developing countries (Munyegera & Matsumoto, 2016;Asongu & Nwachukwu, 2016a) and on the other hand, ICT also facilitates the doing of business and entrepreneurship (Efobi et al, 2018). Moreover, the relationship between remittances and characteristics of industrialisation has been established in the literature (Massey & Parrado, 1998;Woodruff & Zenteno, 2007;Efobi et al, 2019). Hence, the study builds on established evidence that remittances represent a source of new venture capital and the establishment of businesses in developing countries (Woodruff & Zentano, 2001;Efobi et al, 2019).…”