Workers' Remittances, Capital Inflows, and Economic Growth in Developing Asia and the Pacific

• DOI: http://doi.org/10.1111/asej.12167
• Author: Archanun Kohpaiboon,Juthathip Jongwanich
• Date: 01 March 2019
• Published date: 01 March 2019

Workers’Remittances, Capital Inflows,

and Economic Growth in Developing Asia

and the Pacific

*

Juthathip Jongwanich and Archanun Kohpaiboon

Received 1 August 2016; Accepted 4 June 2018

This paper examines the impact of remittances on economic growth, using devel-

oping countries in Asia and the Pacific as a case study. Using data for the period

1993–2013, our results show that remittances only generate negative and signifi-

cant impacts on economic growth if they reach 10 percent of GDP or higher.

A remittances-to-GDP ratio of below 10 percent could still impact growth nega-

tively, but the effect is statistically insignificant. The present study finds some

degree of substitutability between remittances and financial development. Foreign

direct investment (FDI), but not other types of capital inflow, contributes signifi-

cantly to economic growth. Other traditional growth engines, including education,

trade openness, and domestic investment, are crucial in promoting growth in

developing Asian and Pacific nations.

Keywords: capital mobility, developing Asian countries, economic growth,

remittances.

JEL classification codes: F0, F2, F4, O35.

doi: 10.1111/asej.12167

I. Introduction

International remittance inflows have increased significantly in developing coun-

tries over the past few decades. For many developing countries, such remittances

constitute the largest source of foreign exchange ear nings, even exceeding

export revenues, foreign direct investment (FDI), aid and other private capital

flows. Remittances become, therefore, a relatively attractive source of foreign

earnings for developing countries. Policy-makers in many countries view remit-

tances as unrestricted private financial flows that contribute to investment and

consumption. In certain aspects, remittances are treated as similar to FDI and

*Jongwanich (corresponding author): Faculty of Economics, Thammasat University, 2 Prachan

Rd., Bangkok 10200, Thailand. Email: juthathip@econ.tu.ac.th. Kohpaiboon: Faculty of Economics,

Thammasat University, 2 Prachan Rd., Bangkok 10200, Thailand. The authors would like to thank

Wanissa Suanin and Kulica Rojanakanoksak for their research assistance and Professor Hal Hill and

Dr Jayant Menon for their valuable comments. The authors would like to thank referees for their use-

ful suggestions.

© 2019 East Asian Economic Association and John Wiley & Sons Australia, Ltd

Asian Economic Journal 2019, Vol.33 No.1, 39–65 39

other private international capital flows (United Nations, 2003; U.S. Department

of State, 2005). Hence, remittances are believed to have a similar effect on eco-

nomic growth as other types of private capital inflows.

However, findings from theoretical and empirical studies on the role of remit-

tances within economic growth are mixed. On the one hand, many scholars

argue that remittances have a positive impact on economic growth. By helping

to reduce credit constraints on household receipts, they potentially stimulate

entrepreneurial activity and private investment (Yang, 2004; Woodruff and

Zenteno, 2004). While there are both backward and forward linkages within

investment activities, an increase in the investment of one household could gen-

erate an increase in the income of other households. In addition, larger remit-

tance flows might help improve a country’s credit rating rank. This is another

way to increase both physical and human capital investment and promote eco-

nomic growth. Empirically, Acosta et al. (2008), for example, have revealed a

positive relationship between remittances and economic growth.

On the other hand, remittance inflows could adversely affect economic growth

if such remittances are used primarily for consumption instead of investment.

Remittances potentially also indirectly affect labor supply by encouraging some

remittance-recipient households to work less. This may well reduce not only

labor supply but also economic growth (Chami et al., 2003, 2005). In addition,

large and sustained remittance inflows could lead to the so-called ‘Dutch dis-

ease’problem (Amuedo-dorants and Pozo, 2004). Empirically, Chami et al.

(2005) and Barajas et al. (2009) uncovered a negative and statistically significant

relationship between remittances and economic growth.

Given these mixed results, the present paper aims to examine the impact of

remittances on economic growth, using a panel dataset for developing Asia and

Pacific nations during the period 1993–2013. Over the past two decades, these

countries have experienced a major increase in remittance inflows, and currently

account for the bulk of global remittance receipts compared with other regions.

For many of these countries, remittances constitute the largest source of foreign

exchange earnings and represent more than 10 percent of GDP. Thus, a better

understanding of such impacts could help policy-makers design appropriate

strategies concerning remittance flows.

This paper contributes to the existing literature in two ways. First, it closely

examines whether a nonlinear relationship exists between remittances and eco-

nomic growth. It is possible that the impacts of remittances on economic growth

are not equal. In particular, Chami et al. (2006 and 2009) and Abdih et al.

(2008) argue that only a high level of remittances can generate a negative and

significant impact on economic growth, by reducing the labor supply of

remittance-dependent households and slowing the process of appropriate

reforms. So far, only a few studies (e.g. Chami et al., 2006, 2009; Abdih et al.,

2008), have taken into account the possible nonlinear relationship between these

two variables. The nonlinear relationship in those studies is assumed to be only

continuous. In fact, it might be possible that such a nonlinear relationship would

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