Remittances, Economic Growth, and the Role of Institutions and Government Policies

Over the past three decades, remittance flows accelerated and have grown to become an increasingly prominent source of external funding for many countries. Despite the increasing importance of remittances in total international capital flows, the role of remittances in development and growth is still not well understood. This study seeks to investigate the relationship between remittances and economic growth and studies one of the links between remittances and growth. In particular, this study examines how institutions and local government policies influence a country’s capacity to take advantage of remittances. To account for the inherent endogeneities in these relationships a Generalized Method of Moments (GMM) approach is used. The results of this study show that, at best, remittances have no impact on economic growth. When institutions are taken into account, this study finds evidence that remittances have a negative and significant impact on growth. This study also provides evidence that the most important part of remittances is consumed rather than invested, which may explain why remittances do not seem to promote economic growth