Remittances, Human Capital and Poverty: A System Approach

Abstract

Purpose: The purpose of this paper is to analyze the relationship between remittances and poverty through the human capital channel in developing countries, which has received less attention in the literature. Design/methodology/approach: The paper applied the system GMM developed by Arellano and Bond (1991) and Arellano and Bover (1995) containing 54 developing countries. This estimator is appropriate compared to a cross-section technique because it controls for the endogeneity of all explanatory variables, includes unobserved country-specific effects and allows for the inclusion of lagged dependent variables. Findings: The results suggest that, while remittances reduced poverty, the effect is moderated via education. A 1 percent increase in remittances reduces the poverty headcount by 0.47 percent, while the reduction is 0.33 percent via education. The marginal effect of remittances is negatively related to the level of education, indicating that education mitigates the effect of remittances on poverty. Practical implications: This paper includes the implications for the policymakers to justify the need for more effective approaches. It is useful to identify whether and how remittances and human capital interact in their effect on poverty when deciding the most desirable allocation of available resources between these two priorities. Originality/value This paper takes a step forward filling the limited evidence on the role of human capital in remittances-poverty relationship in developing countries. Different from the existing studies which have used the traditional panel estimators, this study utilizes the dynamic panel estimators such as system GMM to tackle the specification issues of endogeneity, measurement errors and heterogeneity.

Determinants of the remittances sent to Mexico 1980-2022: was there a structural change?

“…Based on the Gini coefficients calculated for each of these 5 years, the authors conclude that "…remittances contribute to improve the income distribution among household deciles, but in some cases, they reduce inequality in income distribution within deciles" (Salas-Alfaro and Pérez-Morales, 2006). Hassan et al (2017) survey includes Mexico, Guatemala, El Salvador and Philippines, where the authors confirm that remittances reduce poverty at the household level and improves educational and health outcomes for the family with one migrant member. For their own study, Hassan et al (2017) emphasize that remittances and poverty are endogenous and are jointly determined in a system.…”

“…Hassan et al (2017) survey includes Mexico, Guatemala, El Salvador and Philippines, where the authors confirm that remittances reduce poverty at the household level and improves educational and health outcomes for the family with one migrant member. For their own study, Hassan et al (2017) emphasize that remittances and poverty are endogenous and are jointly determined in a system. Therefore, they estimate the effect of remittances on poverty using a system of simultaneous equations with panel data from 37 economies.…”

Digital financial inclusion, international remittances, and poverty reduction

“…Against the backdrop of the remarkable increase in remittance inflows, several empirical studies have investigated the poverty-reducing effect of remittances in recipient developing countries (e.g., Adams and Page 2005;Jongwanich 2007;Gupta et al 2009;Portes 2009;Vargas-Silva, Jha, and Sugiyarto 2009;Anyanwu and Erhijakpor 2010;Serino and Kim 2011;Imai et al 2014;Majeed 2015;Hassan et al 2017;Masron and Subramaniam 2018;Abduvaliev and Bustillo 2020). These studies used multi-country panel data to estimate models with poverty indicators such as income level of the poorest, poverty ratio, poverty gap, and squared poverty gap as explained variables, and analyzed the existence and magnitude of the poverty reduction effect of remittance inflows to developing countries.…”

Testing cointegration between workers' remittances and human capital formation in Sri Lanka

“…Of these, education is considered as the most significant mechanism for human capital formation (Becker, 2007). Human capital formation and education are therefore interrelated factors that will ensure sustainable economic development in a country (Hassan et al , 2013).…”

“…Of the two kinds of financial inflows into an economy, namely formal and informal channels (Lucas and Strak, 1985), a greater portion of them enter into an economy through the informal channels. The actual amount of workers' remittances come through the informal channel might even be more than that which comes through the formal channel (Hassan et al , 2013). More than half of the total workers' remittances move globally through informal channels (World Bank, 2015).…”