Migration, Remittances and Economic Growth in South Asian Countries: A Macroeconomic Study

Abstract

The study examines the macroeconomic relationship among migration, remittances and economic growth in South Asian countries using dynamic panel data ranging from 1976 to 2012. It applies Blundell-Bond system Generalized Method of Moments (SGMM) techniques along with pooled Ordinary Least Squares (OLS) model, Fixed Effects model (FEM) and Random Effects Model (REM) estimation techniques. The study addresses two basic hypotheses to explore the relationship among migration, remittances and economic growth.

To test the first hypothesis which states that remittances in South Asia are mostly determined by home and host country’s economic conditions, number of emigrants and macroeconomic variables of home country, we empirically estimate the model of the macroeconomic determinants of remittances within the framework of additive utility function of representative migrants. Empirical results of the macroeconomic determinants of remittances model indicate that remittance inflows in South Asian countries are positively related with the ratio of migrants to population, financial development and political rights index of home countries; and negatively related with economic condition and inflation rate of home countries. Though host countries’ economic condition show a positive determinant and home countries’ official exchange rate a negative determinants, their coefficients are found to be statistically insignificant. The negative and statistically significant coefficient of home countries’ economic condition implies that remittances in South Asian countries are compensatory in nature and they are altruistically motivated. Positive and significant coefficient of migrant population ratio implies that the more the countries send its migrants abroad the more remittances it receives. So, intensive cooperation is needed between the origin and destination countries to reap the maximum benefits from international migration.

The second hypothesis of this study states that remittances do not promote economic growth in South Asian countries. We test this hypothesis with the model of remittances -growth nexus within the framework of neo-classical growth model. Empirical results from the remittances-growth model reveal the evidence of statistically significant positive growth effects of remittances in South Asian countries. This implies that increasing volume of remittances contribute positively to economic growth in this region. Among the set of other control variables of the model of macroeconomic impact of remittances on economic growth, we find that gross fixed capital formation, official development assistance, government final consumption expenditure and official exchange rate show positive impact; and inflation rate and foreign direct investment show negative impact on economic growth in South Asian countries.

On the basis of our empirical results, we can conclude that there exist a significant relationship among migration, remittances and economic growth in South Asian countries. The macroeconomic determinants of remittance model confirm that migration is a significant factor of remittance inflows and the remittance-economic growth model shows that remittances significantly and positively impact economic growth in this region. This confirms that migration, remittances and economic growth are statistically and significantly interlinked with each other and the most visible outcome of migration which impact on economic growth is remittances. Therefore, right and effective policies are very important to accelerate the pace migration from South Asian countries to the rest of the world so that more remittances can promote economic growth in this region. In this context, migration friendly policy formulation by reducing migration cost and remittance transfer cost, building vibrant financial system in the home country, and creating conducive investment environment for the migrants and their families can increase the development potential in South Asian countries.