Workers’ Remittances And Economic Growth In Selected, Sub-Saharan African Countries

ABSTRACT

Remittance flows to Sub-Saharan African (SSA) region has steadily been on the increase in recent history. Unlike capital inflows which generally create obligations for future outflows either in the form of debt servicing or investment income and other payments, remittance inflows do not as they are generally unilateral and unrequited. This thesis investigates the economic growth and developmental role of workers’ remittances in selected Sub-Saharan African (SSA) countries. Specifically, it seeks to determine the contributions of workers’ remittances to output growth in SSA, analyze the importance of workers’ remittances to the level of domestic investment in SSA, and determine the effects of remittances on trade balance in the selected SSA countries.

Within the framework of an extended standard neo-classical growth model, the system Generalized Method of Moments (GMM) estimation technique was employed in this thesis on a set of three linear dynamic panel data models. These models were then used to estimate the links between remittances and output growth, remittances and domestic investment, and; remittances and trade balance. There are usually two major and important complications arising from an effort to estimate dynamic panel data models using macroeconomic panel data. First, is the presence of endogenous and/or predetermined covariates and second, are the small time-series and cross-sectional dimensions of the typical panel data set. The Blundell and Bond (1998), extended version of the generalized method of moments (GMM) estimator, (also known as system GMM estimator) was applied to estimate the specified models. This estimator is widely believed to be adequate in overcoming complications that may arise from efforts to estimate the usual linear dynamic panel data models.

The findings are many and most instructive. However, the major findings which are quite striking include the followings. Workers’ remittances have an insignificant contemporaneous negative impact on output growth suggesting that a sizeable proportion of remittances inflow to SSA is channeled intentionally or unintentionally at some economically unproductive uses. Workers’ remittances also have a significant contemporaneous negative impact on domestic investment. For example, a 10 percent increase in workers’ remittances under the Blundell–Bond estimates, was found to explain negatively about 20.9 percent of the changes in domestic investment across the study group.  This clearly suggests that these financial flows do crowd-out domestic investment in SSA. In addition, workers’ remittances inflow has a significant contemporaneous negative impact on external trade balance (proxied by real external balance) in the recipient SSA economies. Contemporaneously, real external balance in the selected SSA countries decline by about 2.21 percent as workers’ remittance inflows into SSA rise by 10 percent. This suggests that workers’ remittance inflow depresses trade balance in SSA. These findings are rather shocking and disturbing but they all provided the basis for policy recommendations in this work.

No doubts, workers’ remittances are unarguably a vital source of finance for many individuals and families in developing countries. However, the full economic benefits of these flows to SSA countries can only be realized by formulation of appropriate policy measures to channel remittance flows into some more economically productive uses. The option of using Diaspora bonds to raise needed vital foreign exchange for development in these SSA economies may be considered by the various governments. However, this option will only be attractive to the Diaspora if the issues of good governance, transparency, the rule of law, etc are made sacrosanct by the various SSA governments. One other policy option that may help attract additional and significant remittance flows to SSA countries is a policy that facilitates investment by migrants in real estate. But the various governments must first create the initial infrastructure for such projects to be located in choice locations across each of the SSA countries.