Remittances and economic growth: empirical evidence from bangladesh india and sri lanka



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6 Testing for Granger Causality
From the analysis so far, we found that both of the series, remittances and growth, are I(1) and are not cointegrated. Therefore they have no long-term relationship. They may nevertheless be related in the short-run. Their short-run fluctuation can be described by their first-differences, which are stationary. The interactions in the short-run fluctuations may therefore be described by a VAR system in first differences.

We determine the optimal lag length for the VAR system by using the Schwarz (1978) Criterion (SC) and the Akaike (1974) Information Criterion (AIC). We used a VAR system of k lags and estimate it for various lag lengths and found that the optimal lag lengths for both series, Growth and Remittances, to be 4 for Bangladesh and India, and 3 for Sri Lanka. Therefore the final system to be used is a VAR(4) for Bangladesh and India, and VAR(3) for Sri Lanka. We estimate the VAR(4) system in the following form with all variables in first-difference form and test various hypotheses.

Remt = 01 + 11Remt-1 + 21Rem t-2 + 31Rem t-3 +41Rem t-4

+ 11Growth t-1 + 21Growth t-2 + 31Growth t-3 +41Growth t-4 + e1t (1)

Growtht = 02 + 12Rem t-1 + 22Rem t-2 + 32Rem t-3 + 42Rem t-4

+ 12Growth t-1 + 22Growth t-2 + 32Growth t-3 + 42Growth t-4+ e2t (2)

We test whether Growth t-1, Growth t-2, Growth t-3 and Growth t-4 do not appear in the Remittancest equation to test Growth does not cause Remittances, and Remittancest-1, Remittancest-2, , Remittancest-3 and Remittancest-4 do not appear in the Growtht equation to test Remittances does not cause Growth. In the case of Sri Lanka, we use a VAR(3) model and similar arguments as above for VAR(4) are valid with 3 lags instead of 4.

Hence the null hypothesis to test ‘non-causality’ that ‘Growth does not cause Remittances’ is that

H0: 11 = 21 = 31 = 41 = 0.

Thus, a rejection of the null hypothesis H0 would indicate that Growth causes Remittances in the Granger sense.

Similarly the null hypothesis to test ‘non-causality’ that ‘Remittances does not cause Growth’ is that

H0: 12 = 22 = 32 = 42 = 0.

We perform the above estimation in SHAZAM and Table 6 presents the results. As can be seen from row 1 of Table 6, (for testing the null hypothesis, H0: Growth Remittances), the p-values are 0.59 for Bangladesh and 0.50 for India, which are greater than the level of significance, 0.05, and the p-value for Sri Lanka is 0.00 which is less than 0.05. Hence we are unable to reject the null hypothesis that ‘Growth does not cause Remittances’ at the 5% level of significance for Bangladesh and India, but reject for Sri Lanka. Looking at row 2 of Table 6 (for the testing of H0: Remittances Growth), the p-value for this test is 0.04 for Bangladesh, 0.39 for India and 0.01 for Sri Lanka. Therefore, we reject the null hypothesis H0: ‘Remittances does not cause Growth’ in favour of the alternative that Remittances cause Growth, in the Granger sense at the 5% level of significance for Bangladesh and Sri Lanka, but are unable to reject it for India.

Table 6. Results of Granger Causality Test between Remittances and Economic Growth





7. Conclusions and Policy Implications

In this paper we have investigated the causal relationship between remittances and economic growth in Bangladesh, India and Sri Lanka using data for the period 1976 to 2006. For this investigation we employed various time series econometric techniques such as unit root test, co-integration and causality. The analysis reveals that the two time series, remittances and economic growth, are both I(1) and are not cointegrated. We then investigated the causality between remittances and economic growth. The results show that there is only a one-way causal relationship from remittances to economic growth in Bangladesh; there is no causal relationship between growth in remittances and economic growth in India; but in Sri Lanka, a two-way directional causality is found. While our analyses in both series are stationary only in first difference and hence our findings are more valid in the short run, the results nonetheless hold important implications.

As we pointed out in the introduction, there is much debate on the role that remittances play in the economic development of less developed countries. Some argue against its impact due to conspicuous consumption. In Bangladesh’s case the majority of remittance payments are in fact used for consumption purposes as opposed to investment and savings. Indeed, the IMF (2007, p8), found that while there is a close and statistically significant correlation between remittances and consumption the correlation coefficient between remittances and investment is conversely not significant. Furthermore, Bangladesh’s current consumption in 2003 was estimated to comprise a large 50-60 percent of remittance spending while investment spending comprised a mere 10% (Demary, cited in Siddiqui and Abrar 2003). However, despite these facts, as the above Granger results illustrate, remittances do in fact contribute to economic growth in Bangladesh.

The causality of remittances on economic growth in Bangladesh could be due to a number of factors, including the multiplier effect, whereby injected capital through consumption indirectly contributes to economic development and growth through the flow on effect. Additionally, despite remittance spending on investment being low, even a small portion can help to alleviate liquidity constraints and directly contribute to growth. This is especially compelling for Bangladesh given that employment overseas helps somewhat in alleviating unemployment pressures at home. Our empirical results reveal therefore that appropriate policy to explore more foreign employment and more proficient use of remittances would help the economic development of Bangladesh. While a number of significant changes have been implemented already in promoting remittances, such as the floating of the exchange rate in 2003 and the increased pressure in cutting down the informal Hundi system of money transfer, it is evident that remittances are not yet being utilised in a manner conducive to maximum growth and development.

As indicated above, our results establish that remittances play a significant role in the promotion of economic growth in Bangladesh, although its importance to the economy of India is inconclusive. However, this does not undermine the importance of remittances to the economy of India. At the household level, injection of remittance income by the expatriates does significantly improve the economic wellbeing of millions of families which are not captured by a highly aggregated analysis like our study. The results regarding the link between remittance of income in the case of Sri Lanka is very convincing. There is a two way directional causality indicating that remittances promote economic growth and vice versa.

It cannot be denied that remittances are very important to the economies of Bangladesh, India and Sri Lanka. Unfortunately this important source of income and the expatriates who earn this income did not receive due attention from the policy makers. There are a number of important areas where improvements can be made and contributions from remittances to promote economic growth could be enhanced. Some of these areas are discussed below.



Transmission mechanisms and channelising the remittances

High fees charged by financial institutions, coupled with insufficient ATM’s are still pushing some workers into remitting money home through the Hundi system (D8 2008). While the Bangladesh Ministry of Finance made headway in curtailing Hundi transfer when they introduced strict time limits on official transfers and promoted electronic banking, competition within the banking sector needs to be encouraged to mitigate fees and harness a greater number of formal remittances. Currently Bangladesh Bank policy denies private banks from opening branches in cities abroad where nationalised commercial banks have branches (Siddiqui 2004, p32). In order to foster greater amounts of competition and efficiency in both the private and public banking sectors, such protectionism has to be reconsidered. This need for competition is displayed through a survey of 40 central banks which found central banks would not limit remittance fees unless in response to market competition amongst other financial institutions (World Bank 2005).

Formal financial infrastructure for remittances in Bangladesh, India and Sri Lanka is needed to allow poorer rural households access to finance without the use of money launderers, shopkeepers for credit, and other informal remittance services, which inflate the final in-country portion of the transfer (World Bank 2005). The need is for the development of reliable, rapid and low cost remittance transaction support. This support should endeavour to be easily accessible not only from centralised commercial areas but also households in rural areas. This would maximise remittances through formal channels, at the same time fostering growth in the more disadvantaged rural areas. One such recommendation by Lasagabaster et al. (2005) is allowing established financial institutions to provide services through postal networks as a cost effective financial expansion measure.

Gender Issues

There are also significant gender issues that must be addressed if migration and remittance payments are to be effectively utilised. Women are of particular concern in the workforce. Currently, women migrants are an immensely unutilised asset. This is largely due to government restrictions on the number of unskilled and semi-skilled women who can migrate. However, problems are also faced by those women who manage to migrate (whether legally or not), with many reported cases of exploitation. The United Nations notes that female migrants frequently face demands for higher payments from recruitment agents and are also often subject to assault by employers (UNIFEM 2003). Therefore, in order to capitalise on this untraditional market effectively the government must promote and empower women in the workforce. Restrictions on female migration should be lifted, and there should be strict enforcement of minimum labour standards that ensure protection of workers overseas. Governments should, in conjunction with active women’s agencies, educate and train women, thereby increasing their capacity to cope with potential exploitation while gaining additional skills that can be used in the workplace.



Regulation and Enforcement

Another point that warrants further attention is the amount of illegal migration that still occurs. With the creation of the Ministry of Expatriates’ Welfare and Overseas Employment (MoEWOE) in 2001, the Bangladesh Government attempted to curtail the amount of undocumented migration. India and Sri Lanka also have laws against human trafficking however the concern is the capacity for developing countries to enforce the laws effectively. Due to a number of loopholes and disjointed efforts among different anti-trafficking groups there is still insufficient regulation of recruitment agencies and human traffickers (Islam 2009). While promotion of formal remittances would likely help, the governments must show persistent vigilance against human trafficking through coherent and strictly enforced law. There should also be increased cooperation between origin countries and countries of destination so that there is a more coordinated and uniform effort in regulation of migration and enforcement of ethical practices and laws.


Investment and Savings Schemes

It is also important that institutions introduce new savings instruments as well as further opportunities whereby migrants can channel their remittance funds into productive sectors of the economy (World Bank 2005). Education in financial planning and business development/management would be effective in harnessing the development impact of remittances. As mentioned earlier, remittance income is used primarily for consumption purposes. While this is valuable to the economy via the multiplier effect, further economic progress would be expected if there was broader development. Migrant workers investing their remittances in business opportunities within their local towns would create employment and growth opportunities, however, for this to happen incentives need to be offered by the government. These incentives could include public infrastructure and development in region centres to encourage remittances investment in these areas, as well as tax incentives for certain projects deemed suitable for development.


Promotion and Education

As well as encouraging migration by women, a broader promotional regime endorsing migration by a greater portion of the Bangladesh, India and Sri Lankan populace is suggested. Additionally, given that the development of the banking sector and crackdown on the Hundi system has only in recent years come into effect, it comes as no surprise that migrant workers and their families would be unfamiliar with the formal remittance process. Financial education would help migrants in countries such as Bangladesh, India and Sri Lanka overcome misconceptions and social conditioning regarding the use of financial institutions and allow migrants to better manage their assets (Lasagabaster et al. 2005). Utilisation of the media and use of other means of disseminating information should be explored to promote best practice in relation to the migration and remittance processes. This would also increase awareness of, and confidence in, the formal systems.

There is some evidence to suggest households receiving remittances have greater access to financial resources to start with, compared to poorer households, creating more migration opportunities for such households. While it is clear that remittances improves welfare, it is the households that are better able to afford the initial cost of the overseas migration that benefit the most (World Bank 2007). Policy initiatives such as the expansion of social programs in microfinance and skills development, and the lowering of interest rates on pre-departure loan schemes (World Bank 2005) could provide the necessary help for struggling households not yet meeting the initial cost of migration. .

As of 2005 there were only 22 training centres in Sri Lanka to provide prospective migrant workers with the skills needed to successfully migrate and remain employed (World Bank 2005). Expanding these training institutions, especially beyond city boundaries would increase the skill base of prospective migrants as well as provide access to training for the more disadvantaged households on city outskirts. Similar initiatives in Bangladesh and India would also increase their remittance earning potential. Combined with policies encouraging remittance income to be spent on child education, an attempt can be made to curb perpetual educational imbalances. Working to eliminate these imbalances will result in an increase in skilled migration in the long term, thus reducing burden on publicly funded education initiatives over time.



References

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Appendix: The Data

Table A1: Remittances and Exports 1975 – 2006

Year

Remittances (Millions $US)

Exports (Millions $US)

Bangladesh

India

Sri Lanka

Bangladesh

India

Sri Lanka

1975

-

429

8.5

-

4355

569

1976

24

642

13

401

5548

572

1977

83

934

18

476

6378

761

1978

107

1165

39

548

6670

845

1979

172

1437

60

659

7806

981

1980

301

2757

152

759

8586

1067

1981

305

2301

230

791

8295

1094

1982

491

2618

289

769

9358

1030

1983

628

2660

294

724

9148

1066

1984

500

2295

301

931

9916

1451

1985

500

2469

292

999

9140

1293

1986

576

2240

326

880

9399

1215

1987

748

2665

350

1067

11298

1368

1988

764

2315

358

1291

13325

1479

1989

758

2614

358

1305

15846

1545

1990

782

2384

401

1671

17969

1912

1991

769

3289

442

1689

17727

1987

1992

902

2897

548

2098

19628

2455

1993

1009

3523

632

2545

21572

2859

1994

1154

5857

715

2934

25022

3208

1995

1202

6223

809

3501

30630

3798

1996

1355

8766

852

4249

33105

4095

1997

1525

10331

942

4832

35008

4639

1998

1599

9479

1023

5121

33437

4809

1999

1807

11124

1072

5497

35667

4594

2000

1955

12890

1166

6389

42379

5430

2001

2071

14273

1185

6080

43361

4816

2002

2848

15736

1309

6149

49250

4699

2003

3192

20999

1438

6990

58962

5125

2004

3584

18750

1590

8305

76427

5757

2005

4314

21293

1991

9297

99375

6347

2006

5485

25426

2349

11802

120254

6886
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