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.

CHAPTER ONE 
INTRODUCTION 
Background to the Study 
Many developing countries are still undiversified since they depend largely on few sources of economic growth and thus face major constraints towards sustainable growth. This has made economists for long to debate about sources of economic growth for developing countries ranging from labor (classical), physical capital, foreign aid, technological change and Foreign Direct Investment (FDI), human capital and Research and Development (R&D) (Romer, 2012; Bett, 2014; Simwaka, 2014). 

Economic growth in developing countries has experienced fluctuating trends. Although these countries have reported an improvement, not all regions have made significant progress. Figure 1.1 below shows regional comparison of the growth trends with Sub-Saharan Africa (SSA), Latin America and Caribbean (LAC) and Middle East and North America (MENA) slightly lagging behind.

The slow progress in economic growth of SSA may be linked to the problem of resource gap that is more pronounced than in other regions of the world. Resource gap refers to a situation where there is gap in domestic savings and foreign savings. According to (Okudua, 2012) successful industrialization and growth are underpinned by rising saving rates, investment and exports. 

UNCTAD (2001) poses that though African countries have experienced surges in investment and growth in the past; they have not been able to establish a virtuous circle of investment, savings and exports. SSA has low domestic savings to finance capital investment, saving at 17.51% of the Gross Domestic Product (GDP) as compared to 45 % in East Asia and Pacific and 35% in South Asia in 2014 according to (WDI, 2014). 

Shortages of foreign exchange in addition, hinder consistent finance of imports of consumer goods and services. The region exported 29.58% of GDP in goods and services that is equivalent to 5.0 Billion USD and in return imported 32.37%, 4.8 Billion United Nations Dollar (USD) according to WDI (2014). As a result the region cannot cater for its Balance of Payment (BOP) requirement through foreign exchange due to current account deficit. 

SSA current account deficit grew from 2.6% in 2014 to 3.2% in 2015 with more than 15 countries having a deficit in excess of 10% of GDP (Hutchinsun, 2015). A stable remittances inflow therefore, can fill this gap since remittance are sources of foreign exchange and raise income and savings above the level constrained by export earnings. 

The international financial organizations including World Bank (WB) and International Monetary Fund (IMF) and African International Migration recognize remittances as an important source of development finance (Straubhaar and Vadean, 2005; Oucho, 2008). Remittances flows can positively influence economic growth by augmenting savings and investment in health and education as well as their effect on aggregated demand and output through consumption (Karagoz, 2009; Okudua, 2012; Ratha, 2013; Lubambu 2014). In addition, by increasing foreign exchange reserves of the recipient country, they reduce current account deficit thus improve BOP position. Consequently they improve a country’s credit worthiness as well as reducing dependence on external borrowing, (Abdus and Zafar, 2005; Karagoz , 2009; Javid et al., 2012; Simwaka, 2014). 

The emergence of Poverty Reduction Strategy Paper (PRSP) in 1990 and Millennium Development Goals (MDGs) in 2000 increased interest on the linkages between remittances and economic growth through poverty eradication in Africa (Oucho, 2008). More (2005) posits that remittances are gifts without a counter flow and therefore the best means of achieving the MDGs in particular poverty reduction and improving human capital. The MDGs have been replaced by the Sustainable Development Goals (SDGs) whose deadline is 2030 with the aim of fighting the crucial constraints to the development in SSA that include low capital formation stemming from low savings due to vicious circle of poverty. 

The United Nations and a high panel of experts has recognized financing resulting from alternative sources combined with local resources as the core in the achievement of SGDs (UNDP, 2011). Remittances can be used to finance budget deficits in most developing countries in the current environment of a severe crisis of confidence in debts markets. This is crucial especially in developing countries where they experience difficulties in obtaining private financing by the traditional financial instruments. In such situations, diaspora bond can be issued to enable the state borrow funds from its expatriate communities thus bridge the short term and long term financial gaps. This will enhance long-term growth and employment generation in SSA which has limited access to capital. Diaspora bonds are, therefore, stable and cheap source of external finance for countries especial in times of financial stress (UNDP, 2011; Lubambu, 2014). Remittance inflows to developing countries have increased over the past two decades. The World Bank estimated USD 420 billion in global remittances in 2009, this included USD 316 billion to developing countries, down from USD 336 billion in 2008 (OECD and GMG, 2010). Figure 1.2 shows the growth in remittances from 1980 to 2011 for the six regions...

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Item Type: Kenyan Material  |  Attribute: 56 pages  |  Chapters: 1-5
Format: MS Word  |  Price: KSh900  |  Delivery: Within 30Mins.
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