Effects of Workers' Remittances and its Volatility on Economic Growth in South Asia
| Author | Syed Tehseen Jawaid,Syed Ali Raza |
| Date | 01 April 2016 |
| Published date | 01 April 2016 |
| DOI | http://doi.org/10.1111/imig.12151 |
Effects of Workers’Remittances and its
Volatility on Economic Growth in South Asia
Syed Tehseen Jawaid* and Syed Ali Raza*
ABSTRACT
This study investigates the effect of workers’remittances and its volatility on economic growth
of five South Asian countries by employing long time series data from 1975 to 2009. Cointe-
gration results confirm a significant positive long run relationship between remittances and
economic growth in India, Bangladesh, Sri Lanka and Nepal, but a significant negative rela-
tionship in Pakistan. Conversely, the volatility of workers’remittances has a negative and sig-
nificant effect on economic growth in Pakistan, Indian, Bangladesh and Sri Lanka, but a
negative but insignificant impact in Nepal. All sensitivity analyses confirm that the results are
robust. A less volatile inflow of workers’remittances is growth-enhancing for all countries. It
is suggested that policy makers should make policies to reduce the transaction cost to welcome
remittances into the region. Furthermore, countries like Pakistan should make the policies to
discourage voluntary unemployment.
POLICY IMPLICATIONS
•This study show the positive effect of remittances on economic growth in India, Bangla-
desh, Sri-Lanka and Nepal. These countries should create friendly policies to reduce the
transaction cost to ensure the continuous inflows of workers’remittances.
•Results indicate a negative effect of remittances on economic growth in Pakistan. Remit-
tances are considered an uninterrupted source of income, which may increase voluntary
unemployment, leading to decreased economic growth. The government should make poli-
cies to discourage this voluntary unemployment.
•Policymakers should create effective systems to ensure this inflow comes through formal
financial channels for better control.
INTRODUCTION
South Asia has been an important source of migrant workers for countries suffering from labour
shortages. Simultaneously, migrant workers’remittances have become an increasingly important
source of income for the South Asian region. Remittances sent by migrant workers to their home
countries have played an important role in promoting economic development in these countries
(Siddique et al., 2010). Due to its relatively stable nature, remittance is different from other external
capital inflows, such as foreign direct investment, foreign loans, and aid (Shahbaz and Aamir,
2007). Similarly, remittances tend to go up when the recipient economy suffers an economic
* IQRA University, Karachi, Pakistan
doi: 10.1111/imig.12151
©2014 The Authors
International Migration ©2014 IOM
International Migration Vol. 54 (2) 2016
ISS N 00 20- 7985 Published by John Wiley & Sons Ltd.
recession as result of financial crisis, natural disasters, or political conflicts, as migrants send more
home during hard times to help their compatriots (Orozco, 2003).
A sufficient amount of foreign exchange reserves is very much needed to pay the import bills;
shortages of foreign exchange reserve is a main problem for developing countries. Remittances pro-
vide a main source of foreign exchange earnings in developing countries. Increases in the inflows
of remittances provide an opportunity to minimize the problem arising from shortage of foreign
exchange reserves. Most of the empirical studies use the cross sectional and panel data to analyse
the impact of workers’remittances on economic growth (Faini, 2006; Fayissa and Nsiah, 2010;
Chami et al., 2003; Mohammed, 2009). Furthermore, some time series empirical studies have also
been conducted (Karagoz, 2009; Azam and Khan, 2011; Waheed and Aleem, 2008). Mostly empir-
ical studies found positive impact of workers’remittances on economic growth (Fayissa and Nsiah,
2010; Faini, 2006; Azam and Khan, 2011). Some empirical studies, however, found negative
impact of workers’remittances on economic growth (Waheed and Aleem, 2008; Chami et al.,
2003; Karagoz, 2009; Jawaid and Raza, 2012).
From Table 1 it is clear that there has been a significant increase in inflows of remittances in
South Asian countries in the last ten years. One possible reason for this increase may be the mas-
sive increase in the immigration of peoples from developing countries to developed countries in last
two decades (World Bank, 2007).
Motivation of the Study
In many studies mentioned in Section 2, cross country data have been used to analyse the relation-
ship between workers’remittances and economic growth. The use of panel data may be suitable
for answering larger questions on average. It provides only the aggregate average results of a sam-
ple but it fails to explain the effect on each individual country for formulating and managing
domestic policies. This article make a unique contribution to the literature on South Asia, being a
pioneering attempt to investigate the impact of workers’remittance, and its volatility, on economic
growth there by using the long annual time series data from the period of 1975 to 2010 and by
applying more rigorous econometric techniques. Our study is different from the past studies on a
remittances-growth nexus in four novel ways.
First, this study is a pioneering attempt to analyse the volatility of workers’remittances on eco-
nomic growth in South Asia. South Asia has been an important source of migrant workers for
countries suffering from labour shortages. Simultaneously, migrant workers’remittances have
become an increasingly important source of income for the South Asian region. Workers’remit-
tances are a main source of foreign capital inflow for developing countries. The developing coun-
tries depend greatly on such foreign capital inflows; and volatility in these foreign capital inflows
TABLE 1
DECADE WISE SUMMARY STATISTICS
Countries
Worker’s Remittances
1970’s 1980’s 1990’s 2000’s
Pakistan 1.023 2.322 1.518 4.971
India 0.921 2.481 6.317 29.021
Sri-Lanka 0.027 0.295 0.735 2.143
Bangladesh 0.096 0.571 1.265 5.475
Nepal 0.021 0.045 0.052 1.397
Note: All figures are in billion US Dollar.Source: Author’s Construction
Effects of Workers’Remittances on Economic Growth in South Asia 51
©2014 The Authors. International Migration ©2014 IOM
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