Do Remittances Promote Economic Growth and Reduce Poverty? Evidence from Latin American Countries

E M Ekanayake,Carlos Moslares

doi:10.3390/economies8020035

E M Ekanayake, Carlos Moslares

Open Access

https://doi.org/10.3390/economies8020035

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Journal: Economies	Publication Date: May 1, 2020
Citations: 25	License type: CC BY 4.0

Affiliation: Bethune-Cookman University, Ramon Llull University

Abstract

In this study, we explore the hypotheses that (a) workers’ remittances enhance economic growth in Latin American countries, and (b) workers’ remittances help reduce poverty in Latin American countries. In recent decades, workers’ remittances have become an important source of income for many developing countries and, as a global aggregate, workers’ remittances are the largest source of foreign financing after foreign direct investment. This paper analyzes the effects of workers’ remittances on economic growth and poverty in 21 Latin American countries. The study uses annual data covering all Latin American countries for the period 1980–2018. We employ panel least squares and panel fully-modified least squares (FMOLS) methods. In addition, we estimate the short-run and long-run effects of workers’ remittances on economic growth and poverty on individual countries with the Autoregressive Distributed Lag (ARDL-ECM) approach to co-integration analysis. The results reveal that workers’ remittances have a positive effect on long-run economic growth in the majority of the countries studied, but have mixed effects in the short-run. They also suggest that workers’ remittances tend to lower poverty rates in Latin America.

Highlights

In recent decades, remittances have become an important source of foreign capital for many developing countries
The motivation to conduct this study arose because there is no general consensus in policy debates on the impact of remittances on economic growth and poverty, and because the number of studies that have examined these issues in the Latin American region is relatively small
The growth model and the poverty model presented in Equations (8) and (9) were estimated using the panel least squares method and panel fully-modified least squares (FMOLS) method

Summary

Introduction

Remittances have become an important source of foreign capital for many developing countries. There is no general consensus in policy debates on the impact of remittances on economic growth and poverty, despite the increasing reliance of developing countries on private capital flows as a main source of funding. Remittances sent home by migrants from developing countries have maintained a steady and marked upward trend between 1980 and 2018, reaching US$424.2 billion in 2018 compared to US$12.0 billion in 1980 (see Table 1). Recorded remittances are more than twice as large as official aid and nearly two-third of foreign direct investment flows to developing countries. Workers’ remittances have become the second most important type of private external finance to developing countries after FDI

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