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International Remittances and Economic Growth in Africa
GLOBAL
DEVELOPMENT STUDIES
Copyright © 2009 International Development Options
All Rights Reserved
______________________________________________________________
Volume Five Winter 2008-Summer 2009 Nos. 3-4.
______________________________________________________________
INTERNATIONAL REMITTANCES AND
ECONOMIC GROWTH IN AFRICA*
John C. Anyanwu** Andrew E.O. Erhijakpor
Lead Research Economist Lecturer
Development Research DepartmentDepartment of Accounting,
African Development Bank Banking and Finance
Temporary Relocation Agency Delta State University
BP 323, 1002 Tunis, Tunisia Asaba Campus, Asaba, Nigeria
E-Mail: J.ANYANWU@AFDB.ORG E-Mail: erhijakpor@yahoo.com
ABSTRACT
Recently, there has been a considerable debate regarding the relative contribution
of international migrants’ remittances to sustainable economic development.
While the rates and levels of officially recorded remittances to developing
countries have increased enormously over the last decade, academic and policy-
oriented research has not come to a consensus over whether remittances contribute
to economic growth. This article investigates the impact of migrant remittances on
economic growth in African countries, using panel data over the period 1990-
2005. After reviewing the relevant literature on remittances, it analyzes the size
and significance of remittance flows to African countries. It highlights the
limitations in data and then outlines the research design for the empirical analysis
of the impact of remittances on economic growth. The results suggest that
remittances have a positive impact on economic growth in African countries. The
article then suggests some policy options to enhance these flows and maximize the
benefits to these countries.
* The views expressed in this article are those of the authors and in no way represent those
of their respective employers.
** Corresponding author.
John C. Anyanwu and Andrew E.O. Erhijakpor
INTERNATIONAL REMITTANCES AND
ECONOMIC GROWTH IN AFRICA
John C. Anyanwu Andrew E.O. Erhijakpor
African Development Bank Delta State University
I. Introduction
International remittances flowing into developing countries are attracting
increasing attention because of their rising volume and their impact on recipient
countries. In 2007, estimates indicate that the flow of remittances to developing
countries amounted to US$240 billion out of the global total of US$318 billion.
Though those flows are under-reported, a high proportion of the reported flows
went to Africa, indicating that the continent has been part of the overall rising
global trend. Between 2000 and 2007, remittances to Africa increased by more
than 141 percent, from US$11.2 billion to nearly US$27 billion.
The primary purpose of this article is to examine the impact of
international remittances on economic growth in African countries. In the past, a
number of studies have examined the effect of international remittances on
economic growth in specific village or country settings, but we are not aware of
any studies that explicitly examine the impact of this phenomenon on economic
growth in Africa as a whole (Sub-Saharan Africa and North Africa combined).
Few studies with marginal reference to the region use Sub-Saharan Africa
dummies and/or their interaction with the remittances variable. A key factor
relates to the nature of data on international remittances. Available data on
international remittances do not include the large (and unknown) sum of
remittance monies which are transmitted through private, unofficial channels. As a
result of these data problems, a host of key policy questions remain unanswered.
Exactly what is the impact of international remittances on economic growth in
Africa? This question has become very crucial given that economic growth is
critical for the attainment of the Millennium Development Goals (MDGs). African
countries therefore face major challenges: to raise growth and reduce poverty, and
to integrate themselves into the global economy. Economic growth rates are
still not high enough to make a real dent in the pervasive poverty and enable these
countries to catch up with other developing nations. What is needed is a sustained
and substantial increase in real per capita GDP growth rates in these countries,
coupled with significant improvements in social conditions. Average annual
International Remittances and Economic Growth in Africa
growth rate of per capita real GDP, which was negative through most of the 1980s
and –2.1 percent during the four-year period 1991–1994, rose to 3.7 percent
during the 2001-2007 period (see Figure 1). Estimates have shown that at current
trends, with the exception of North Africa and South Africa, few countries are
likely to meet the goal of reducing by half the number of people living in poverty
by 2015, for example, unless efforts are made to accelerate and sustain high
economic growth in the continent.
This article proposes to address the question relating to the impact of
international remittances on economic growth in Africa by using a data set
composed of 33 African countries. This data set includes African countries (Sub-
Saharan and North Africa) for which reasonable information on international
remittances and other key relevant variables could be assembled.
The remaining sections of this article are organized as follows: Section II
sets the stage by examining the inflow and characteristics of international
remittances to African countries; Section III reviews the findings of recent
empirical studies on the relationship between international remittances and
economic growth; Section IV then presents the method and data set; and Section
V describes the main econometric findings on the relationship between
international remittances and economic growth. The final section concludes with
policy implications, including suggestions on how to enhance the effectiveness of
remittances in Africa.
John C. Anyanwu and Andrew E.O. Erhijakpor
Figure 1: Africa - Real Per Capita GDP Growth Rates, 1981-2007
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Years
Percent (%)
International Remittances and Economic Growth in Africa
2. International Remittances to Africa
Recorded worldwide flows of remittances stood at US$297 billion in
2006 (Table 3), up from US$263 billion recorded in 2005. Of the 2006 amount,
remittances sent home by migrants from developing countries stood at US$221
billion, up from $191 billion in 2005 and more than double the level reached in
2000.
Estimates indicate that worldwide flows of remittances reached US$318
billion in 2007, out of which US$240 billion went to the developing world. These
amounts reflect only officially recorded transfers—the actual amount including
unrecorded flows through formal and informal channels is believed to be
significantly larger. Recorded remittances are more than twice as large as official
aid and nearly two-third of foreign direct investment flows to developing
countries. In particular, remittance flows to Africa are grossly underestimated,
with wide gaps in data reporting in many countries.
As Table 1 and Figure 2 show, Latin America and the Caribbean (LAC)
region remains the largest recipient of recorded remittances, followed by East
Asia and the Pacific region, South Asia, Europe and Central Asia, Africa
(courtesy of favorable North African inflows), and the Middle East, in that order.
Indeed, remittance inflows to North Africa continued to dominate those to Sub-
Saharan Africa on annual basis. For example, in 2006, flows to North Africa were
US$14.9 billion as against only US$10.3 billion to the whole of Sub-Saharan
Africa (Table 1). Figure 3 shows their percentage shares in 2007.
John C. Anyanwu and Andrew E.O. Erhijakpor
Table 1: Global Flows of International Migrant Remittances (US$ billion)
INFLOWS 2000 2001 2002 2003 2004 2005 2006 2007e
Change
2006-07
(%)
Change
2002-07
(%)
All Developing
Countries 85 96 116 144 161 191 221 240 8 107
East Asia and the
Pacific 17 20 29 35 39 47 53 58 10 97
Europe and Central
Asia 13 13 14 17 21 29 35 39 10 175
Latin America and
The Caribbean 20 24 28 35 41 49 57 60 6 115
Middle East 6.6 7.8 7.9 9.6 11.5 13.0 14.9 16.2 9 105
South Asia 17 19 24 30 29 33 40 44 10 81
Sub-Saharan Africa 5 5 5 6 8 9 10 11 5 116
Africa (SSA & North Africa) 11.2 12.5 12.9 15.6 19.5 22.3 25.2 27 7 109
Source: Authors’ Calculations from Ratha et al (2007) and Guinigundo (2007).
International Remittances and Economic Growth in Africa
Table 1: (Continued) Global Flows of International Migrant Remittances (US$billion)
INFLOWS 2000 2001 2002 2003 2004 2005 2006 2007e Change
2006-07
(%)
Change
2002-07
(%)
Low Income
Countries 22 26 32 39 40 46 56 60 9 88
Middle Income
Countries (MICs) 63 70 84 105 121 145 166 179 8 114
Lower MICs 43 48 55 68 76 90 102 112 10 103
Upper MICs 20 22 29 37 45 55 63 67 6
136
High Income
OECD 46 50 53 60 67 68 72 74 3 40
High Income
Non OECD 1 2 3 4 4 4 1 298
World 132 147 170 206 231 263 297 318 7 87
OUTFLOWS 2000 2001 2002 2003 2004 2005 2006 Change 2005-06
(%) Change 2002-06
(%)
All Developing
Countries 12 14 20 24 31 36 44 23 226
High Income OECD 76 83 88 100 113 124 136 10 64
High Income
Non-OECD 22 22 23 23 22 24 27 15 20
World 110 118 131 147 166 183 207 13 74
Source: Authors’ Calculations from Ratha et al (2007) and Guinigundo (2007).
International Remittances and Economic Growth in Africa
Figure 2: International Remittance Recipients By Region in 2006 (%)
East Asia & the Pacific
24%
Europe & Central Asia
16%
Latin America & the Caribbean
26%
Middle East
5%
South Asia
18%
Africa
11%
John C. Anyanwu and Andrew E.O. Erhijakpor
3. Review of the Recent Literature
3. 1. The Framework Linking International Remittances to the Macroeconomy
This section, which is based on extensive literature survey, primarily
describes the implications of remittances on the economy and society both on a
theoretical and empirical framework. In the literature, there are two contrasting
views regarding the effects of international remittances on the economy of the
labor-sending country: the optimistic view and the pessimistic view. The first one
views remittances as mechanisms for economic development while the latter, on
the other hand, perceives remittances as an “illness” that weakens the economy
(Cattaneo, 2008). Following Capistrano and Sta Maria (2007), the beneficial and
detrimental effects of migration and overseas remittances can be classified using
three perspectives: at the macro or national level, at the community level and at
the household level. At the macro/national level, one of the most significant
benefits of the inflows of remittances to a country is that they increase the foreign
Figure 3: Comparative Percentage of Recorded International Remittance Flows to SSA and
North Africa in 2007
Sub-Saharan Africa
40%
North Africa
60%
International Remittances and Economic Growth in Africa
exchange earnings of the labor exporting country (Ratha, 2003; Pernia, 2006). In
addition, workers’ remittances exert a positive impact on the balance of payments
of many developing countries and also promote economic growth through their
direct effects on savings and investment (human and physical capital) and indirect
effects through consumption (Cattaneo, 2008; World Bank, 2008) (see Figure 4).
Studies such as those of Hanson and Woodruff (2003) and Cox-Edwards and
Ureta (2003) have found evidence for “forward” linkages between remittances and
human capital formation in Latin America. Additionally, Ratha (2003) suggested
that remittances that raise the consumption levels of rural households might have
substantial multiplier effects because they were more likely to be spent on
domestically produced goods. However, countries with low GDP remittance
receipts can distort the functions of formal capital markets and also destabilize
exchange rate regimes through the creation of parallel currency markets
(Chimhowu, Piesse and Pinder, 2003).
Figure 4: Macro- and Micro-Impacts of Remittances:
Remittances
Source: Adapted
from Guinigundo (2007)
3. 2. Review of the Empirical Literature
The empirical evidence of previous studies of the impact of workers’
remittances on economic growth is mixed. Stark and Lucas (1988); Taylor (1992);
Faini (2002); and Solimano (2003) find a positive relationship between
Macroeconomic Impact
Strengthen BOP position
Raise international reserves
Increase domestic consumption
Contribute to financial sector
Household Impact
Alleviate poverty
Higher Human capital
investment
Improve living conditions
John C. Anyanwu and Andrew E.O. Erhijakpor
remittances and economic growth. Some recent studies, such as Chami et. al
(2003) and IMF (2005), found negative and no impact, respectively. The negative
impact found in the former is based on 113 cross-countries study while the latter
focuses on experience of 101 developing countries. Glytsos (2005) uses a
Keynesian econometric model to estimate short and long run multipliers of
remittances, and then determines the impact of remittances on growth in five
Mediterranean countries. He maintains that remittances can have a positive impact
on growth, whether they are directed towards investment or to increased
consumption and imports. In addition he finds great fluctuations across time and
countries for the effect of remittances on growth.
More importantly, these studies, except IMF (2005), are based on the
intercountry cross-sectional analysis. Cross-sectional regression analysis is based
on the implicit assumption of ‘homogeneity’ in the observed relationship across
countries. This is a very restrictive assumption because there are considerable
differences across countries in relation to various structural features and
institutional aspects, which have a direct bearing on the remittance-growth
relationship. Despite undertaking the panel analysis, IMF (2005) estimates are
very likely to be subject to the endogeneity problem because of the inappropriate
instrumental variables. Mundaca (2005) analyzes the effect of workers remittances
on growth in Central America countries, Mexico and the Dominican Republic
using a panel data set over 1970–2003. She finds that controlling for financial
development in the analysis strengthens the positive impact of remittances on
economic growth and concludes that financial development potentially leads to
better use of remittances, thus boosting growth.
Ziesemer (2006) examines the role of remittances, through contributions
to physical and human capital in economic growth, by using two different open
economy models. He uses a general method of moments with heteroskedasticity
and autocorrelation with pooled data for four groupings of countries receiving
remittances in 2003. He finds that the countries benefiting the most from
remittances are those with per capita income below $1,200. For these countries,
remittances contribute about 2 percent to steady state level of GDP per capita in
contrast to having no remittances. The effect of remittances on growth in richer
countries is found to be much smaller.
McCaffrey (2007) investigates the impact of migrant remittances on
economic growth in developing countries receiving remittances. The results
suggest that remittances have a positive impact on growth and that this impact
increases at higher levels of remittances relative to GDP. Additionally,
International Remittances and Economic Growth in Africa
remittances are found to have a more positive impact in countries with certain
characteristics: low domestic credit available, low capital formation, and low
inflation. According to the author, these results provide further justification for the
policy recommendations currently advocated by many in the development
community and suggest some new policies to increase the developmental impact
of remittances that fall into two broad categories: steering remittances toward the
most productive areas and creating a macroeconomic climate where remittances
can have the greatest impact.
Jongwanich (2007) examines the impact of international workers’
remittances on growth and poverty reduction in developing Asia-Pacific countries
using panel data over the period 1993-2003. The result suggests that, while
remittances do have a significant impact on poverty reduction through increasing
income, smoothing consumption and easing capital constraints of the poor, they
have only a marginal impact on economic growth operating through domestic
investment and human capital development.
Adelman and Taylor (1992) found that for every dollar Mexico received
from migrants working abroad, its GNP increased by $2.69 to $ 3.17, depending
on whether urban or rural households received remittances. According to them
rural households tend to consume more domestically produced goods and hence
generate larger multiplier effects than urban households.
However, there are at least two points of reservation regarding the effects
of remittances. One is the possibility that countries can face a situation similar to
the Dutch disease where the inflow of remittances causes a real appreciation, or
postpones depreciation, of the exchange rate. This has the effect of restricting
export performance and hence possibly limiting output and employment. The
second reservation relates to the argument put forward by Chami et al (2003) that
income from remittances may be plagued by a moral hazard problem, permitting
the migrant’s family members to reduce their work effort. Their panel regressions
support this view as they find remittances to be negatively correlated with growth
among a sample of developing and developed economies from the early 1970s. In
the same vein, Chami et al. (2005) find that remittances are negatively correlated
with growth. Although they acknowledge the endogeneity of remittances in their
countercyclical model, they do not correct for it. Another study (IMF, 2005) uses
an instrumental variables approach to examine the relationship of remittances to
growth and to control for endogeneity. The instruments employed are the distance
between the remittance-receiving country and the remittance-sending country with
the largest number of migrants and whether these two countries share a common
John C. Anyanwu and Andrew E.O. Erhijakpor
language. It finds no significant link between growth and remittances in the
general sample of countries or in a subset of “remittance-dependent” countries
where remittances account for more than one percent of GDP. Giuliano and Ruiz-
Arranz (2005) examine the impact of remittances and financial development on
growth and find that, although in general remittances do not have a significant
effect on growth, the impact is positive and significant in countries with low
financial development (measured in four ways – loans, deposits, credit, or M2 as a
percentage of GDP). They argue that this is evidence that agents compensate for
the lack of development of local financial markets using remittances to ease
liquidity constraints and to channel resources towards productive uses that fosters
economic growth.
According to Gupta et al (2007) the impact of remittances on growth
depends on how recipient households use them. Remittances can either be used
for consumption or investment. Cecera and Saca (2006) found that in El Salvador
remittances were accompanied by a sharp decline in savings, so that economic
activity actually contracted. Yet Woodruft and Zenteno (2001) estimated that
remittances accounted for about 20 percent of the capital invested in micro
enterprises in urban Mexico and that the impact is stronger for female – owned
business. Lucas (1987) found that any effect on rural output of the loss of labor
due to migration to South African mines from Botswana, Lesotho, and Malawi
were offset in the long run by investments in farm technology. However, Rozelle,
Taylor and de Brauw (1999) estimate that farm investments only partially offset
the decline in rural output due to migration.
In sum the impact of remittances on economic growth in cross-country
studies are so far inconclusive. Therefore, this study uses panel data over the
period 1990–2005, to investigate the impact of international remittances on
economic growth in Africa.
4. The Model and Data: Impact of Remittances on Economic Growth in
Africa
We use the cross-country data to analyze how international remittances
affect economic growth in Africa. Using the basic model suggested by Chami et al
(2005) as well as the frameworks posited by Dollar and Kraay (2002), Ghura,
Leite and Tsangarides (2002), Berg and Krueger (2003) and empirical works of
Giuliano and Ruiz-Arranz (2005), Catrinescu el al (2006), McCaffrey (2007), and
Jongwanich (2007), the relationship that we want to estimate can be written as:
International Remittances and Economic Growth in Africa
)1.......(),........,.....,1;,....,1()log(
)log()log()log(Relog
4
321
TtNiX
Invrgcemitg
itit
itititiit
==+ ++++=
εβ βββα
where g is the measure of real per capita GDP rate in country i at time t; αi is a
fixed effect reflecting time differences between countries; β1 is the elasticity of
growth with respect to international remittances (as % of GDP) (Remit); β2 is the
elasticity of growth with respect to government consumption expenditure as a
percentage of GDP given by gce; β3 is the elasticity of growth with respect to
investment rate (Invr); X is the control variables, including level of education
(primary school enrolment)(Primschool), population growth rate (Popgr),
conflicts, external debt-service ratio, inflation (Inf) and openness (Open); and ε is
an error term that includes errors in economic growth.
The coefficient associated with international remittances is ambiguous.
As the key factor inputs in growth process, we expect a positive impact of human
capital, openness, and investment rate on economic growth. In particular,
openness is desirable for promoting economic growth and helps to allocate
resources efficiently, to spur innovation and entrepreneurial activity resulting from
competition and access to larger markets, and to reduce the rent seeking activities
inspired by trade restriction so that we expect a positive relationship between trade
openness and economic growth (see, for example, Edwards, 1997; Ghura et al.,
2002; Dollar and Kraay, 2004). Also, investment contributes to positive growth,
so one would expect that the coefficient of this variable would be positive.
On the other hand, we expect negative coefficients relating to
government consumption expenditure, population growth, external debt service,
inflation, and conflicts. The government consumption is an approximate measure
of government spending in non-productive activities so that an increase in this
variable tends to generate negative impacts on economic growth. Population
growth is an approximate measure of size, increasing government spending in
non-productive activities so that an increase in this variable tends to generate
negative impacts on economic growth. Indeed, population growth mitigates gains
in GDP, and the coefficients for this variable are expected to be negative. Higher
inflation tends to reduce real money balances; thereby subjecting private agents to
larger transaction costs. In addition, higher inflation is often viewed as key
symptoms of macroeconomic instability, which reflects weakness in
macroeconomic management. Such instability hampers private investment and
saving decisions; thereby leading to an inefficient allocation of resources. Since
John C. Anyanwu and Andrew E.O. Erhijakpor
inflation weakens the value of investment, an increase in inflation tends to have a
negative impact on economic growth. Conflicts are a drain on productive
resources and destructive of existing human and physical capital and hence have
negative effects on economic growth.
The data series are from the World Bank's World Development
Indicators Online. Remittances are expressed as a ratio of the GDP of recipient
countries. The growth variable is real per capita GDP growth. The variables
are expressed in natural logarithm. Table 2 provides detailed descriptions
of the raw dataset while Figure 5 shows the scatter plot of international
remittances to Africa as a percentage of GDP.
Before proceeding to the regression analyses, it is instructive to present
bivariate relationships between key variables by using a simple scatter plot. Figure
6 shows clear and unambiguously positive relationship between international
remittances and per capita GDP growth rate in Africa.
Table 2: Descriptive Statistics of Regression Variables
Variable Observations Mean Median Standard
Deviation Range
Real Per Capita
GDP Growth 611 0.26 1.07 7.47 107.61
Government
Consumption
Expenditure to
GDP 632 16.34 14.30 7.81 52.83
Population
Growth rate 689 2.43 2.49 1.86 58.44
Investment Rate 585 35.7 20.8 88.8 81.84
Conflicts 496 0.35 0 0.48 2
Remittances to
GDP 598 3.76 1.62 7.18 69.55
Primary School
Enrolment 739 85.53 85 30.00 143.5
External Debt
Service-Export
Ratio 529 12.99 10.88 10.58 70.41
Inflation Rate 608 87.88 7.34 1006.64 23784.82
Trade Openness 644 7.00 6.00 4.0 2.6
Note: These are raw data before the log transformation.
Source: Authors' Calculations.
International Remittances and Economic Growth in Africa
Figure 5: Scatter Plot of International Remittances as % of GDP to African Countries, 1990-
2005
Algeria
Angola
Benin
Botswana
Burkina Faso
Cameroon
Cape Verde
Chad
Comoros
Congo, Rep.
Cote d'Ivoire
Djibouti
Egypt
Eritrea
Ethiopia
Gabon
Gambia,
Ghana
Guinea
Guinea-Bissau
Kenya
Lesotho
Madagascar
Malawi
Mali
Mauritania
Mauritius
Morocco
Mozambique
Namibia
Niger
Nigeria
Rwanda
Senegal
Seychelles
Sierra Leone
South Africa
Sudan
Swaziland
Tanzania
Togo
Tunisia
Uganda
Zimbabwe
0
5
10
15
20
25
30
35
40
45
Rem
ittan
ces
as %
of
GDP
John C. Anyanwu and Andrew E.O. Erhijakpor
5. Empirical Results
One possible problem with Equation (1) is that it assumes that all of the
right-hand side variables in the model—including international remittances— are
exogenous to economic growth. However, it is possible that international
remittances may be endogenous to growth. Reverse causality may be taking place:
international remittances may be increasing economic growth, but economic
growth may also be affecting the level of international remittances being received.
Without accounting for this reverse causality, all the estimated coefficients may be
biased. One way of accounting for possible endogenous regressors is to pursue an
instrumental variables approach. Therefore, to deal with this problem, we follow
Catrinescu et al (2006) and Aggarwal et al (2006) in estimating the equations
instrumentalizing the remittances variable with its first and second lagged levels,
using a two-step (IV) efficient generalized method of moments (GMM) estimation
method. Sub-regional dummies (North Africa and Sub-Saharan Africa) were
introduced to control for fixed effects.
Figure 6: Scatter Plot of Log Per Capita GDP Growth Rate and Log of International
Remittances as Percentage of GDP, 1990-2005
4.55
4.56
4.57
4.58
4.59
4.6
4.61
4.62
4.63
4.64
4.65
4.66
-4 -3 -2 -1 0 1 2 3 4
Log of Per Capita GDP Growth Rate
Log
of
Inter
nati
onal
Rem
ittan
ces-
as %
of
GDP
International Remittances and Economic Growth in Africa
Table 3 shows the first-stage results from the IV-GMM estimations. We
conduct and report two tests to show the validity of our instruments. First, we
present the F-statistic for weak instruments. This is a test of the significance of our
instruments in predicting remittances. The F-statistics is above the critical value,
at 1 percent significance, indicating that our estimates do not suffer from a weak
instruments problem. Second, we report the Hansen J test of over identifying
restrictions. The joint null hypothesis in this case is that the instruments are
uncorrelated with the error term and that excluded instruments are correctly
excluded from the estimated equation. Again, these tests confirm the validity of
our instruments.
Table 3: First-Stage IV-GMM Estimates for International Remittances to Africa
Variable Coefficient t-Statistics
Instruments
First Lag of Inflow of International
Remittances (ratio of GDP)
Second Lag of Inflow of International
Remittances (ratio of GDP)
Included exogenous variables
Government Consumption Expenditure to
GDP
Population Growth Rate
Investment Rate
Conflicts
Primary School Enrolment
Inflation Rate
Trade Openness
External Debt Service-Export Ratio
First lag of Real GDP Growth
Sub-Saharan Africa (ssa)
Constant
1.075***
-.127
.003
.043
2.167*
-.296
.002
-.0005
24.977
.004
-.023
-.127
-.759
12.25
-1.46
.13
.79
1.88
-1.44
.87
-.07
.63
.24
-1.21
-.09
-1.35
N
Shea Partial R-Squared
F-Statistics of excluded instruments
P-value
149
0.9380
1029.41
0.000
Tables 4 present the second-stage IV-GMM results. Regarding the
impact of remittances on economic growth, we find that they have a positive and
significant impact on economic growth in Africa.
Table 4: IV-GMM Estimates of the Effect of International Remittances on Economic
Growth in Africa
Variable Coefficient t-Statistics
John C. Anyanwu and Andrew E.O. Erhijakpor
Instrumented Endogenous Variable
Inflow of International Remittances (ratio
of GDP)
Exogenous Regressors
Government Consumption Expenditure to
GDP
Population Growth Rate
Investment Rate
Conflicts
Primary School Enrolment
Inflation Rate
Trade Openness
External Debt Service-Export Ratio
First Lag of Real GDP Growth
Sub-Saharan Africa (SSA)
Constant
.114**
-.141*
-.824***
7.883*
-.598
.016*
-.015
-22.177
.043
.122
-.741
2.092
2.33
-1.77
-2.99
1.66
-.70
1.63
-.53
-.17
.06
1.04
-.97
1.21
Centered R-Squared
Hansen J Statistic
p-Value
Pagan-Hall Statistic
p-Value
N
0.2008
0.176
0.67494
102.320
0.1582
149
The remittance variable has a positive and statistically significant impact
on economic growth. These results are consistent with those found recently by
McCaffrey (2007) for developing countries, though with lower coefficient. Other
important dimensions of our results relate to the negative and significant effects of
population growth rates and government consumption expenditures on economic
growth in Africa as predicted by economic theory. In the same vein, investment
rate and human capital are positively and significantly related to economic growth
in the continent as expected.
6. Conclusions and Policy Implications
This article has used a new data set on international remittances and
economic growth from African countries to examine the impact of international
remittances on economic growth in Africa. Some key findings and policy
implications emerge. First, international remittances have a strong, statistically
significant impact on increasing economic growth in Africa. Indeed, the results
International Remittances and Economic Growth in Africa
provide strong evidence of the growth -increasing impact of international
remittances to Africa. Two, population growth rate and government consumption
expenditures strongly reduce economic growth in Africa. Third, Investment rate
and human capital appear to increase economic growth in the continent.
Our findings point to some key policy recommendations. Specifically,
remittances-receiving countries of Africa need to develop a strategy to maximize
the benefits of remittances while minimizing their negative repercussions. As a
first step, governments (receiving and hosts of migrants) need to reduce the cost of
sending remittances. Lowering the transactions costs of remittances would help to
increase the poverty-reducing impact of international remittances and will also
encourage a larger share of remittances to flow through formal financial channels.
A recent survey by de Luna Martínez (2005) and others showed that senders
usually pay up to 13 to 16 percent in fees for remittance transactions below $300
dollars, which is the average amount migrants send every month to their home
countries. There is no doubt that reducing the costs of sending remittances would
increase the disposable income of migrants’ families and encourage them to use
the official banking channels. However, banking regulations in some sending
countries, in particular those related to anti-money-laundering, while necessary for
security purposes, remain unfavorable for remittances and are demanding on the
migrants, for whom sending money home may be the only contact with the
banking system. Therefore, encouraging partnership between the international
banking and postal services and money transfer operators would help reduce
remittance costs while preserving high security standards. In addition, since fees
are set by financial institutions in both source and destination countries,
authorities in African countries cannot foster the decline of fees alone.
Cooperation between financial authorities in sending and recipient countries is
required to address the high cost paid by consumers in their remittances
transactions.
Second, in addition to establishing a competitive environment that leads
to the reduction in remittance fees, there is a need to improve data on remittances
(by both national governments and international institutions like the AfDB, IMF
and the World Bank etc) and the regulation of money transfer companies, broaden
access of population to financial services by developing new products for
households receiving remittances on a regular basis, etc. To address all of these
challenges, African countries should establish national and regional policies and
strategies on remittances, instead of dealing with them on a piecemeal and ad hoc
basis. A national policy on remittances, for example, could provide the framework
John C. Anyanwu and Andrew E.O. Erhijakpor
under which the efforts of financial sector authorities, migration authorities,
poverty alleviation agencies, and ministries of foreign affairs, among others, could
be coordinated towards the achievement of common goals. Moreover, a national
policy on remittances could help place the issue of international remittances on the
national and regional development agenda, especially in countries where
remittances already represent a large percentage of their GDP.
Indeed, given the weaknesses of the infrastructure supporting
remittances, technological improvements in the banking sector could also
significantly reduce transaction costs. New banking technologies that can expedite
check clearance, reduce exchange losses, and improve disclosure, especially in
rural areas in developing countries, can be particularly helpful. New technology
would offer a potential for greater efficiency, lower costs, and extended outreach.
On a positive note, some countries have, in recent years introduced a wide range
of technological solutions such as satellite telecommunications and enhanced
management and wire transfer systems. Innovative financial products such as
debit cards and mobile telephony add-on services and pre-paid cards are new
additions with huge potential.
Finally, from a developmental perspective, one of the major challenges
for policy makers in Africa is to motivate senders and recipients of remittances to
conduct their money transfer operations through formal financial institutions. In
that way, remittances could become formal savings and deposits in financial
institutions and, thus have a multiplier effect in their countries. This could be
addressed by increasing the supply of financial services to both senders and
recipients of remittances. Products that could be offered to poor families receiving
remittances include deposit and savings accounts, consumer loans, mortgages, life
and non-life insurance products, pensions, etc. This would not only deepen the
financial system, but also more importantly help recipients of remittances improve
their living conditions.
Given our findings on the other determinants of economic growth in
Africa, the literature has identified a number of possible policy instruments,
including labour market training, greater access to health, nutrition and education
through increased social investments, affirmative action, and land and property
rights reforms. Improving access to education, for example, can reduce inequality
(and hence poverty) both by increasing individual productivity and by facilitating
the movement of poor people from low-paying jobs in agriculture to higher-
paying jobs in industry and services. These in turn contribute to increased
economic growth. More importantly, public spending on education (as well as on
International Remittances and Economic Growth in Africa
health and other human capacity), when targeted toward the poor, can produce a
double dividend, reducing inequality and poverty in the short run and increasing
the chances for poor children to access formal jobs and thus increase output and
break free from the intergenerational poverty trap. Increasing educational levels
(and its quality) should be accompanied by a strong investment climate to ensure
that productive jobs are created for the newly educated. Indeed, well-designed
policy interventions, especially those that improve education and infrastructure
and address other “behind the border” investment climate reforms, can lead to
increased economic growth in Africa.
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International Remittances and Economic Growth in Africa
