Migrants' remittances, financial development, and economic growth

Abstract

By virtue of its growing trends, volume, and dependency, migrants’ remittances have proven to be an incredibly significant source of external finance in the international capital market in contemporary times. Even more so, the question of whether remittance has a substantial impact on the growth of economies as it interplays with other traditional influencers of growth such as financial development, is one of the most widely researched questions amongst scholars. This study was commissioned to observe the connexion between migrant remittances and the growth of economies as well as the combined effects on growth, of migrants’ remittances and the advancement of the financial sector. The question of whether remittance works with financial development as a complement or substitute was also explored. We utilized an up-to-date panel data set of 64 countries over a 30-year period whilst employing the system GMM approach to control for potential endogeneity. The results from the study indicate that on its own, remittance has a positive but slightly inconsequential effect on growth. However, the variable proved to be positively significant in its interplay with the advancement of the financial sector as evidenced by the positive coefficient on the interaction terms. These findings lend credence to the postulation of previous studies such as Mundaca (2009) and Bettin and Zazzaro (2012), both of which indicates a complementarity effect of remittance and financial development. We concluded that remittance’s relationship on the growth of economies is positive, and that it works complementarily with financial development to foster the growth of economies.