Abstract
This study examines the impact of workers’ remittances on financial development in 32 Sub-Sahara Africa countries. In this paper we employ dynamic panel GMM model to study the potential effect of remittances on financial development with emphasis on financial intermediation. While the study depends on credit to private sector as a measure of financial development, past level of financial development, inflation, globalisation, FDI, size of government economic and worker remittances were controlled for. Employing data from 1996 -2010, the study discovers that workers’ remittances affect financial development in a positive and significant way. This positive relationship suggests that remittances complements financial intermediation in SSA countries as exemplified by endogenous growth literature and the canonical intermediating model with the insights that remittances savings behaviour will generally influence equilibrium financial rates.
Highlights
Workers’ remittances by international migrants to their countries of origin have increased substantially during the last decades constituting the largest source of external finance for developing countries after foreign direct investment (FDI)
In this paper we employ dynamic panel Generalized Method of Moments (GMM) model to study the potential effect of remittances on financial development with emphasis on financial intermediation
While the study depends on credit to private sector as a measure of financial development, past level of financial development, inflation, globalisation, FDI, size of government economic growth and worker remittances were controlled for
Summary
Workers’ remittances by international migrants to their countries of origin have increased substantially during the last decades constituting the largest source of external finance for developing countries after foreign direct investment (FDI). Workers’ remittances proved to be resilient during the global financial crisis, fell only by 5.4 percent in 2009 compared to a 36 percent decline in foreign direct investment (FDI) between 2008 and 2009 and a 73 percent decline in private debt and portfolio equity flows from their peak in 2007(World Bank, 2011a; 2011b). It is not surprising; that the role of remittances on economic growth has received great attention in the literature. Other studies that conducts cross-country growth regressions with specifications similar to those of Chami et al with similar conclusion are IMF (2005) and Barajas et al (2009)
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