Remittances, Human Capital Nexus: Exploring the Role of Exchange Rate in Asia

Abstract

This paper analyses the impact of remittances on human capital through the interaction of exchange rate in Asia. There is considerable debate regarding the relative contribution of international migrant’s remittances to sustainable economic development. Remittances are considered as temporary income. If exchange rate remains stable, then remittances will help in curtailing income hurdles of households as well as for government and helps to increase investment in education. Investment in education increases skill level of labor force and create an environment for long term growth. We use panel data of 54 Asian countries for the period of 1980-2020 and employ Hausman test and percentile analysis. The paper concludes that remittances have a positive and significant impact on human capital. However, the substituting relationship of remittances and exchange rate is observed in stimulating human capital in Asian countries. The developing countries having low growth, when exchange rate is overvalued (appreciate), it is not only pushing the economy further toward slower growth due to decrease in foreign competitiveness, increase in the current account deficit and increase unemployment but also cause to decrease main source of earning remittances growth in these countries. Therefore, this study suggests that the government of developing country implements such policies that helps in the stabilization of their currencies (manage floating exchange rate).