Remittance inflows and economic growth in Rwanda

Abstract

This paper examines the impact of remittance inflows on economic growth in Sub-Saharan Africa (SSA) countries and Rwanda in particular for the period between 1980 and 2014. It explores whether the growth impact of remittances is conditional on the institutional and development factors in SSA countries. The analytical framework of this study is embedded in the debate between two dominant theoretical approaches about the growth effect of remittances; the national accounts and endogenous growth models. As baseline analysis, the paper employs a cross-sectional analysis of 45 SSA countries, follo\\wed by a more in-depth analysis of Rwanda as a case study. The findings reveal that the two theories are complementary but not mutually exclusive in explaining the growth effect of remittances. The cross-sectional analysis of SSA countries shows no statistically significant impact of remittances on economic growth in the region. But the remittance-growth impact is positively and statistically significantly conditioned by the country's level of development, financial development, and education, while the quality of institutional variables adversely affects the remittance-growth impact in the region. In contrast, the same findings reveal a positive and significant growth impact of remittances in Rwanda. The results of the country-level analysis reveal plausible evidence of long-run causality, running from remittances to GDP per capita in Rwanda, but not vice versa. The results demonstrate that the conditional marginal effect of remittances on GDP per capita in Rwanda increases with more remittance inflows to the country. These findings suggest that both the overall institutional environment and that of the financial sector specifically are imperative for enhancing the growth and development impact of remittances in the SSA countries and Rwanda in particular.