Growth Effects of Remittances in Bangladesh: Is there a U‐shaped Relationship?
| Author | Mamta Chowdhury,Gazi M. Hassan,Mohammed Bhuyan |
| Date | 01 October 2016 |
| Published date | 01 October 2016 |
| DOI | http://doi.org/10.1111/imig.12242 |
Growth Effects of Remittances in Bangladesh:
Is there a U-shaped Relationship?
Gazi M. Hassan*, Mamta Chowdhury** and Mohammed Bhuyan***
ABSTRACT
This article shows that the effect of remittances on economic growth involves a U-shaped pat-
tern, which is negative initially but later becomes positive. The analysis differs significantly
from earlier studies in that it examines important methodological issues on the specification
and estimation of the long-run growth effects of remittances by estimating their impact on total
factor productivity (TFP) rather than on the growth rate of GDP, using time series data from
Bangladesh. The use of single-equation cointegration methods shows that remittances’effect
on long-run growth in Bangladesh is negative and falling until the remittances-to-GDP ratio is
roughly eight per cent. The benefits of remittances receipts outweigh their costs and their net
effects start to become positive when the ratio exceeds 14 per cent.
INTRODUCTION
Remittances from immigrant workers are an important source of funds for many developing coun-
tries and inflows have been rapidly growing. During 2007 and 2008, the growth rate in remittances
was 15 per cent
1
. The magnitude of workers’remittances is more than three times the value of
Official Development Assistance (ODA) worldwide and second only to foreign direct investment
(FDI) flows in developing countries. Workers’remittances to developing countries were estimated
at US$47 billion in 1980 (constant 2011 dollars). By 2010 the figure had risen to US$325 billion,
and was expected to grow to US$374 billion by 2012.
Remittances provide a number of benefits to recipients, including the reduction of poverty, allevi-
ation of credit constraint, and improvements in the educational and health outcomes of the recipient
households (Adams and Page, 2005; Cox-Edwards and Ureta, 2003; Frank and Hummer, 2002;
Gupta et al., 2009; Hanson and Woodruff, 2003; Hildebrant and Mckenzie, 2005; Page and Plaza,
2006; Quartey and Blankson, 2004). Remittances are instrumental in generating savings and accu-
mulation of productive assets by removing investment constraints and deepening the financial sec-
tor within the recipient economy (Ahamada and Coulibaly, 2011; Bettin and Zazzaro, 2011;
Mundaca, 2009; Arun and Ulku, 2011; Chiodi at al., 2012). Inflow of remittances can thus lead to
accelerated investments in physical and human capital, remove households’credit constraints, and
contribute towards long-run growth (Adams, 2005; Borja, 2014; Jouini, 2015; Giuliano and Ruiz-
Arranz, 2009; Rao and Hassan 2011; Catrinescu et al., 2009; Feeny et al., 2014; Siddique et al.,
2012). Remittances are compensatory flows generating countercyclical behaviour enabling recipi-
ents to smooth their consumption (Chami at al., 2008 and 2009; Chami et al., 2005; Combes and
* University of Waikato, New Zealand
** University of Western Sydney, Australia
*** University of Wollongong, Australia
doi: 10.1111/imig.12242
©2016 The Authors
International Migration ©2016 IOM
International Migration Vol. 54 (5) 2016
ISSN 0020-7985Published by John Wiley & Sons Ltd.
Ebeke, 2011; Kurosaki, 2006; Mishra, 2005; Sayan, 2006). Countercyclical remittances can work
as automatic output stabilisers and reduce income volatility (Chami et al., 2008, 2009; Yang and
Choi, 2007).
The inflow of remittances does, however, pose several development challenges, specifically in
terms of controversial effects on economic growth (Chami et al., 2003; World Bank, 2006; IMF,
2005), and the capacity of remittances to appreciate the real exchange rate, causing a Dutch disease
effect (Amuedo-Dorantes and Pozo, 2004; Acosta et al., 2007; Chami et al., 2008; Hassan and
Holmes, 2013; Montiel, 1999). Stahl and Arnold (1986) showed that savings from remittances are
primarily used for consumption, while Chami et al. (2003) showed that remittances can reduce
labour force participation. A strikingly pessimistic view is that remittances make little positive con-
tribution to economic growth because there is no example of a country in which remittance-led
growth contributed significantly to development (Barajas et al., 2009). The implication of this find-
ing is that other policies can be used to increase the long-run growth rate instead of depending on
increasing the receipts of remittances alone. This is contrary to what is expected by some develop-
ment economists, who believe that remittances are similar to FDI and private capital inflows in
their effects on growth. Therefore, additional studies based on different country and data sets, alter-
native specifications and estimation methods would be useful to examine whether remittances have
any significant growth effects.
This article examines only the direct growth effects of remittances, although there may exist
intermediate variables through which remittances could affect growth indirectly (see Rao and Has-
san, 2012a). This investigation differs significantly from earlier studies in that it examines important
methodological issues relating to the specification and estimation of the long run growth effects of
remittances, which are also applicable in estimating the growth effects of any such growth-enhan-
cing variable. In doing so, it provides an alternative view on the debate surrounding the growth
effects of remittances by recognizing that such effects can be non-linear. To be specific, we pro-
pose that a U-shaped relationship exists between remittances and long-run growth, where the
growth effects of remittances are initially negative but become positive later on. This is because in
order to meet the initial costs associated with the migration process, a migrant’s family often incurs
a debt. The migrant member usually starts sending money back home after settling down in the
destination country. Remittances mostly finance consumption by the migrant family, and the
remainder is usually used to repay the migration debt (Rahman, 2013). Thus savings, which are
understood as investible funds, tend to be negative in a relative sense. It is often in the later period
of the migration cycle, when the debts are repaid, that the savings from remittances receipts start to
become positive and available for productive investment. Thus a U-shaped relationship between
remittances and economic growth is expected, which is further elaborated in Section 3.
We chose Bangladesh as our case study. In 1976 the Bangladesh government started actively
engaging with Middle Eastern countries to exploit the employment opportunities offered by the
Middle Eastern resource boom. Bangladeshi labourers soon started to migrate to Middle Eastern
countries to meet the demand for construction workers. This trend later continued in East and
Southeast Asia. As a result, Bangladesh is now among the top ten remittance-receiving (measured
in terms of current US dollars) and manpower-exporting countries in the world (World Bank,
2011). Initially only a few hundred million US$ equivalents in remittances were sent back by these
migrants, but these figures rose to a staggering US$10 billion (see Section 2) in 2010, representing
more than ten per cent of the real GDP of Bangladesh. After the mid-1990s the size of these remit-
tance receipts far exceeded other forms of financial inflows, including foreign investments and
overseas aid (see Figure 1). At this level remittances may have sizeable growth effects in a low-
income and financially less developed country like Bangladesh because remittances are strongly
growth-enhancing in financially underdeveloped countries (Giuliano and Ruiz-Arranz, 2009). There-
fore we have chosen Bangladesh as an ideal laboratory in which to test our hypothesis, using time
series data over the period 1976–2012.
106 Hassan, Chowdhury and Bhuyan
©2016 The Authors. International Migration ©2016 IOM
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