The non-linear impact of digitization on remittances inflow: Evidence from the BRICS

Abstract

Due to the impact of COVID-19, it is important now more than ever to analyze the relationship between the improvement in digitization and the flow of remittances in order to fill the void that has come as a result of stay at home and quarantine orders. Using a comprehensive measure of digitization that encompasses the commonly used proxies of financial technology (Fintech) and employing a System Generalized Method of Moments (GMM) panel estimation methodology on annual data over the period 2004–2018, this paper examines the impact of digitization, as a proxy of Fintech, on the inflow of remittances for a sample of 34 developed and developing countries. Our analysis provides an interesting case study on Brazil, Russia, India, China and South Africa (BRICS), known as five emerging markets with a great number of workers out of abroad but below the average level of digital transfers. Using the Digital Ecosystem Development Index developed by Katz and Callorda (2018), the results of the paper uncover a statistically significant nonlinear relationship between the improvement in digitization measures and the inflow of remittances with an exact threshold level. More specifically, our results indicate that improvement in digitization may initially increase the remittances inflow leading to an increase in the stock of remittances received. Nevertheless, once the digitization index reaches its threshold level further improvement in digitization tends decrease as penetration increases, giving rise to a decline in the rate of remittances inflow. This result implies that the marginal effect of the digital penetration is larger when at its lower level, before the threshold level. For countries such as the BRICS, with a level of digitization below the average of our sample, policy makers should apply more aggressive and comprehensive policies to recoup the maximum gains of a digital ecosystem. Hence, our policy implications are directed towards increasing the investments in developing human capacity including carrying different skill development training programs to prepare individuals for the information age, expanding the internet coverage and speed especially in educational establishments, encouraging the use and access of electronic banking by consumers, producers, and governments, and taking cyber security and fraud protection more seriously to encourage the flow of remittances, especially in light of its renewed utility due to the recent pandemic.