Migrant Workers' Remittances And Economic Growth: A Time Series Analysis

Abstract

Remittances are a critical source of foreign exchange for developing countries. As the volume of remittance transfers to many countries surpasses that of foreign private capital and official development assistance (ODA), there is a consensus that remittances have been a key stimulant of economic growth in many developing nations. With data from 1970q1 to 2017q4, this paper analyzes the impact of remittances on Nigeria's economic growth. Remittances from Nigerians are estimated to reach $24.3 billion in 2018, ranking second only to oil exports as a source of foreign exchange. To determine the responsiveness of output growth to remittances (REM), the empirical model draws on Giuliano and Ruiz-Arranz (2009) and other studies which use gross fixed capital formation as a proxy for investment in physical and human capital, external sources of capital represented by foreign aid, FDI, and openness of the economy as measured by the ratio of the sum of imports and exports to GDP. For this study, the model is modified to include a vector of other control variables that affect real GDP [used as proxy for economic growth]. These variables include domestic investment (INV); openness (OPN), measured as the ratio of exports plus imports to GDP; FDI; and exchange rate (EXCH). Unit root tests were conducted on all the variables of interest and showed that the variables were nonstationary in their levels but stationary after their first difference at the 5% level of significance. Next, the appropriate lag length was determined, and an error correction model was estimated to account for the dynamics of the model. The variables included were four lags each of ΔGDPt, ΔREMt, ΔFDIt, ΔINVt, ΔEXCHt, and ΔOPNt. The study finds that worker remittances have a positive impact on economic growth in Nigeria, with a 1% increase in REM increasing RGDP by 0.0238%. Remittances in the short and long run are statistically significant and cointegrated with economic growth, but with low elasticities of 0.02 and 0.03, respectively. To fully harness the benefits of remittance inflows, the Nigerian government should reduce the costs of receiving funds sent by Nigerian emigrants overseas and also provide an environment conducive to investment.