Effect of Remittances on Economic Growth in Sub-Saharan African countries: a Dynamic Panel approach (1980-2015)

Abstract

Remittance flows in Sub-Saharan Africa have increased for the past two decades. However; empirical literature fails to reach a consensus on the impact of remittances on economic growth, with many studies using aggregate data that suffers from aggregation bias. Given that there are different categories of remittances resulting from varying patterns of remitting, there was a need to specifically the effect of each component of remittances on economic growth. This will help in optimal resource allocation and formation of appropriate, efficient and unambiguous policies. This study therefore assessed the effect of remittances on economic growth on SSA countries spanning from 1980 to 2015 by specifically examining the effect of employees’ compensation remittances on economic growth, the effect workers remittances on economic growth and effect of profit remittances on economic growth using disaggregated data. The study was based on neoclassical framework for economic growth since it emphasizes on the need for saving to influence positive change in capital stock. A historical research design was employed. Secondary data was obtained from World Bank data base, Econstats and IMF. The model was estimated using System GMM estimation technique for dynamic panel. Compensation of employees’ remittances has a positive significant effect on economic growth but the contribution is relatively higher as compared to worker remittances. This may imply that temporary migrants remit with an obligation to support their families in their home countries. The results also revealed that workers remittances have a significant positive effect on economic growth. This implies that workers remittances are a vital source of income for many households in SSA countries. Profit remittances have a positive and significant effect on economic growth, suggesting the important role of remittances outflow through foreign direct investment in SSA economic growth. Therefore, this research is beneficial to researchers in adding to the existing body of knowledge. From the findings on compensation of employees’ remittances, policy makers are advised to redirected compensation of employee remittances towards productive projects including strengthening the infrastructure. The findings on workers remittances suggest that policy makers to formulate appropriate policies so as to stimulate additional workers remittances and efficient use of workers remittances. The findings on profit remittances suggest that a good environment for foreign investors be created through infrastructural development.