Remittances, Foreign Aid, and Economic Growth in Bangladesh: An Empirical Analysis 1

Abstract

This chapter addresses the issues of remittances, foreign aid, and economic growth of Bangladesh. In many developing countries, including Bangladesh, remittance inflows from emigrants and migrant workers and foreign aid play a significant role in their economic development. In terms of remittance flows and economic growth, Bangladesh is performing at the same or slightly better level than other countries in the region such as India, Pakistan, and Sri Lanka. During 2011–2015, on average, Bangladesh had received remittances US$14.1 billion per annum, which is equivalent to 2.7% in world total remittances, US$89.2 for every Bangladesh person (very much higher than India US$53.3 per person, slightly higher than Pakistan US$84.9 person, and many times lower than Sri Lanka USD$306.5 per person), and 9.2% of its own GDP (well above the other three countries in the region, India 3.5%, Pakistan 6.5%, and Sri Lanka 8.6%). In terms of foreign aid, Bangladesh also received US$2.2 billion (equivalent to US$14.3 per person) which is 1.5% of its GDP. Bangladesh is less dependent on foreign aid per person than Pakistan (US$16.3 per person) and Sri Lanka (US$23.6 per person). This chapter analyzes the causal link between remittances, foreign aid, and economic growth as well as other determinants of remittances in Bangladesh using annual time series data for the period 1980–2018 by employing the Granger causality test under a VAR framework. Granger causality results reveal that there is a uni-directional causality from foreign aid, GDP growth, human capital, and migration to remittances. The estimation results show that exchange rate, GDP growth, migration, and trade openness have a positive significant effect on remittance flows, while foreign aid, FDI, and political instability have a negative significant effect on remittances. This chapter also discusses several policy issues arising from the results of the analysis in relation to remittances in association with its determinants.