The Relationship between Economic Growth and Remittances In The Presence of Cross-Sectional Dependence

Abstract

This paper reexamines the relationship between migrant remittances and economic growth using the most recent panel data (1977–2012) for some of the largest recipient countries of foreign remittances in the world namely, Bangladesh, India, Pakistan and the Philippines. A cross-sectional dependence test (CD) was employed which confirms the presence of cross sectional dependence in the panel. We employ CIPS panel unit root test that accounts for cross sectional dependence to test the stationarity of data. The long run relationship between economic growth and remittance was confirmed by the Panel Pedroni and Westerlund cointegration tests. Then, the Pooled Mean Group (PMG) regression technique was applied to estimate the short- and the long-run relationship between the two variables while controlling for country size and heterogeneity. The results indicate a highly significant long-run positive relationship between remittance and economic growth in these countries. However, there is an insignificant positive association between them in the short run. The error correction term in the short run is −0.037 suggesting that approximately 3% of the deviations in the short run from the long-run equilibrium are corrected each year. The overall results support the argument that remittances are playing increasingly important role for these countries' economies and as such, they should continue with their pro-remittance policies looking combined with diversifying their manpower exports. Although, the findings are consistent with most of the existing literature that support the positive role of migrants' remittances in spurring economic growth, scope exists for future research to identify various channels through which remittances impact not only growth but also other macro variables.