Remittances and Economic Growth: Empirical Evidence from Bangladesh, India and Sri Lanka

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Remittances and Economic Growth:Empirical Evidence from Bangladesh,India and Sri LankaAbu Siddique a , E. A. Selvanathan b & Saroja Selvanathan ba Department of Economics , University of Western Australia ,Australiab Griffith Business School , Griffith University , Queensland ,AustraliaPublished online: 05 Jul 2012.

To cite this article: Abu Siddique , E. A. Selvanathan & Saroja Selvanathan (2012) Remittancesand Economic Growth: Empirical Evidence from Bangladesh, India and Sri Lanka, The Journal ofDevelopment Studies, 48:8, 1045-1062, DOI: 10.1080/00220388.2012.663904

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Remittances and Economic Growth: EmpiricalEvidence from Bangladesh, India and Sri Lanka

ABU SIDDIQUE*, E.A. SELVANATHAN** & SAROJA SELVANATHAN***Department of Economics, University of Western Australia, Australia, **Griffith Business School, Griffith University,

Queensland, Australia

Final version received July 2011

ABSTRACT In many developing countries, remittance payments from migrant workers are increasinglybecoming a significant source of export income. This article investigates the causal link between remittancesand economic growth in three countries, Bangladesh, India and Sri Lanka, by employing the Granger causalitytest under a Vector Autoregression (VAR) framework (Granger, C.W.J. (1988) Some recent developments inthe concept of causality. Journal of Econometrics, 39, pp. 199–211). Using time series data over a 25-yearperiod, we found that growth in remittances does lead to economic growth in Bangladesh. In India, there seemsto be no causal relationship between growth in remittances and economic growth; but in Sri Lanka, a two-waydirectional causality is found; namely economic growth influences growth in remittances and vice-versa. Thearticle also discusses a number of policy issues arising from the causality results.

1. Introduction

Inward remittance flows to developing countries have grown steadily over the past 30 years, andamounts to about $100 billion on average per year. Global remittance inflows grew five-foldbetween 1980 and 2003 to reach $91 million and rose thereafter to $325 million by 2010 (WorldBank, 2011). Some of the key economic determinants of remittances are, number of workersfinding employment abroad every year, type of employment, GDP growth at home and hostcountries, economic conditions at home and host countries, money transfer facilities, exchangerate and oil price. The size of emigrant stocks is arguably the most important determinant ofremittances (see Freund and Spatafora, 2008; Lueth and Ruiz-Arranz, 2008; Ratha and Shaw,2006; and Singh et al., 2011). There are also others who argue that the skill composition ofmigrants matter for remittances, but evidence of this phenomenon is mixed. While Niimi andOzden (2006), Faini (2007) and Adams (2009) using cross-country data find that countries thathave a larger proportion of high-skilled emigrants receive less remittances – perhaps becausethese emigrants are also more likely to settle in the host countries and reunite with their families –studies based on micro-level survey data find the opposite result. South Asia has been animportant source of migrant workers for countries suffering from labour shortages and migrantworkers’ remittances have become an increasingly important source of export income for thisregion. Within South Asia, Bangladesh, India, Pakistan and Sri Lanka have been the mainsuppliers of migrant workers who are spread over almost all over the world. Remittances sent

Correspondence Address: Saroja Selvanathan, Economics and Business Statistics, Griffith University, 170 Kessels Road,

Nathan, Brisbane 4111, Australia. Email: [email protected]

Journal of Development Studies,Vol. 48, No. 8, 1045–1062, August 2012

ISSN 0022-0388 Print/1743-9140 Online/12/081045-18 ª 2012 Taylor & Francis

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by these migrant workers to their home countries have played an important role promotingeconomic development in these countries. This article is a modest attempt to examine the impactof remittance income on economic growth in three South Asian countries, namely, Bangladesh,India and Sri Lanka.1 Columns 2–4 of Table 1 reveal that remittance income in Bangladesh,India and Sri Lanka has increased significantly in the last 30 years, with some minor fluctuations.All three countries show three periods where their remittance activities increased substantially,the periods surrounding 1980, post 1993 and 2001.Figure 1a shows the remittances received by the top 30 remittance receiving countries and

Figure 1b shows the number of emigrants by the top 30 emigration countries, in 2010. India andBangladesh continued to be within the top 10 remittances receiving countries and emigrationcountries in the last decade. Increases in remittance flows have greatly assisted many countries,especially developing countries, to minimise the problem arising from shortages of foreignexchange reserves which are badly needed to pay their import bills. It is undeniable that duringtheir earlier stage of development, developing countries like Bangladesh, India and Sri Lankaneeded the scarce foreign exchange to pay for their import requirements. The immense

Table 1. Remittances, exports and GDP, 1975–2006

YearRemittances (Millions $US)

Remittances as a percentage ofexport income

Remittances as a percentageof GDP

Bangladesh India Sri Lanka Bangladesh India Sri Lanka Bangladesh India Sri Lanka(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

1975 – 429 9 – 9.9 1.51976 24 642 13 6.0 11.6 2.31977 83 934 18 17.4 14.6 2.4 0.8 0.8 0.51978 107 1165 39 19.5 17.5 4.6 0.9 0.9 1.41979 172 1437 60 26.1 18.4 6.1 1.1 1.0 1.81980 301 2757 152 39.7 32.1 14.2 1.9 1.5 3.81981 305 2301 230 38.6 27.7 21.0 1.9 1.2 5.21982 491 2618 289 63.8 28.0 28.1 2.9 1.3 6.11983 628 2660 294 86.7 29.1 27.6 3.7 1.2 5.71984 500 2295 301 53.7 23.1 20.7 2.5 1.1 5.01985 500 2469 292 50.1 27.0 22.6 2.3 1.1 4.91986 576 2240 326 65.5 23.8 26.8 2.7 0.9 5.11987 748 2665 350 70.1 23.6 25.6 3.1 1.0 5.21988 764 2315 358 59.2 17.4 24.2 2.9 0.8 5.11989 758 2614 358 58.1 16.5 23.2 2.8 0.9 5.11990 782 2384 401 46.8 13.3 21.0 2.6 0.7 5.01991 769 3289 442 45.5 18.6 22.2 2.5 1.2 4.91992 902 2897 548 43.0 14.8 22.3 2.9 1.2 5.61993 1009 3523 632 39.6 16.3 22.1 3.0 1.3 6.11994 1154 5857 715 39.3 23.4 22.3 3.4 1.8 6.11995 1202 6223 809 34.3 20.3 21.3 3.2 1.7 6.11996 1355 8766 852 31.9 26.5 20.8 3.3 2.3 6.01997 1525 10331 942 31.6 29.5 20.3 3.2 2.5 6.11998 1599 9479 1023 31.2 28.3 21.3 3.6 2.3 6.31999 1807 11124 1072 32.9 31.2 23.3 3.9 2.5 6.72000 1955 12890 1166 30.6 30.4 21.5 4.2 2.8 7.02001 2071 14273 1185 34.1 32.9 24.6 4.5 3.0 7.32002 2848 15736 1309 46.3 32.0 27.9 6.0 3.1 7.52003 3192 20999 1438 45.7 35.6 28.1 6.1 3.5 7.52004 3584 18750 1590 43.2 24.5 27.6 6.3 2.6 7.62005 4314 21293 1991 46.4 21.4 31.4 7.1 2.6 8.12006 5485 25426 2349 46.5 21.1 34.1 8.8 3.0 7.6

Source: World Bank (2007b).

1046 A. Siddique et al.

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increase in remittance payments over this period may be attributed to two significant factors.First, immigration between developing and developed countries has increased dramatically in thepast 20 years (World Bank, 2007a). Second, transaction costs have declined as technologicalimprovements have allowed for faster, lower cost mechanisms for the international transfer ofpayments between individuals (Guiliano and Ruiz-Arranz, 2009). Other factors, such asremittance costs, also play a role in influencing remittance flows. In a survey of Tongan migrantsin New Zealand, Gibson et al. (2007) find that remittances sent would rise by 0.22 per cent ifcosts fell by 1 per cent. Freund and Spatafora (2008) report that recorded remittances dependnegatively on transfer costs and the parallel market premium, as migrants may prefer to sendmoney through informal channels when transfer costs are high or when the official exchange rateis unattractive.

As discussed above, whether or not remittances are linked to economic growth is an importantissue of debate among economists. Those that believe remittances do not contribute to economicgrowth point to their expenditure on conspicuous consumption (Rahman et al., 2006) and thatany savings are being spent on consumption rather than for the accumulation of productiveassets (Stahl and Arnold, 1986), and the theoretically low marginal propensity to consume out oftransitory income. Those that argue for the positive developmental effects of remittances focus

Figure 1. (a) Remittances received (US$billion), top 30 remittance-receiving countries, 2010, (b) Number ofemigrants (in millions), top 30 emigration countries, 2010

Remittances and Economic Growth 1047

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on the multiplier effects of consumption (Stahl and Arnold, 1986), development of the financialinstitutions that handle remittance payments (Aggarwal et al., 2006), use of remittances asforeign exchange (Ratha, 2005), and the role of remittances as an alternative to debt that helpsalleviate individuals’ credit constraints in countries where micro-financing is not widely available(Guilamo and Ruiz-Arranz, 2009). These arguments may be separated into the classicalopposing camps of development economists; those who believe in a top-down approach topoverty alleviation placing primary focus on the development of institutions, and those whoargue for a bottom-up approach in which the individual is first lifted out of the poverty trap fromwhich point society follows.Many studies have attempted to address the impact of remittances on economic growth and

poverty alleviation. Pradhan et al. (2008) find that remittances have a small, positive impact ongrowth in a 36 country cross-sectional study using a linear regression model in which remittancesform one of five variables. Aggarwal et al. (2006) conducted a study of 99 countries over theperiod 1975–2003 and find that remittances have a positive effect on bank deposits and credit toGDP. The authors then interpolate the positive effect on development by invoking existingstudies showing the positive impact of these two variables on economic growth. Taylor (1992)and Faini (2001) also find a positive association between remittances and economic growth.Taylor (1999) find that every dollar Mexican migrants send back home or bring back home withthem increases Mexico’s GNP from anywhere between US$2.69 and US$3.17. In contrast,Spatafora (2005) finds that there is no direct link between per capita output growth andremittances. Meanwhile, in one of the larger cross country surveys, Chami et al. (2005) concludethat remittances have a negative effect on economic growth across a sample of 113 countries.Several other published studies in relation to remittances have focused specifically on thealleviation of poverty rather than overall economic growth (for example, see Adams and Page,2003).With the increase in remittance income, practitioners in development economics have shown

curiosity in examining its impact on economic growth in both the host and country of originof the expatriate workers. With regard to its impact on economic growth in the country oforigin of the expatriate workers, opposing views have emerged. Some argue that remittanceshave a positive impact on economic growth (see Adelman and Taylor, 1990; Durand et al.,1996; Faini, 2007; Glytsos, 1997; Ruiz and Vargas-Silva, 2010; and Vargas-Silva and Huang,2006); while others (such as Chami et al., 2005; Ekanayake and Halkides, 2008; and Spatafora,2005) hold the opposite view. Even though there is a disagreement about whether there is apositive or negative impact of remittances on GDP, it is well understood that remittances havea significant impact on economic growth. On the other hand, past research studies also showthat a country’s economic growth can impact on remittances (see Barajas et al., 2010;Glytsos, 1997; Swamy, 1981; and Vargas-Silva and Huang, 2006). For example, at leastseven studies have documented that remittances respond positively to an increase in the hostcountry GDP and to a decrease in the home country GDP (Adelman and Taylor, 1990;Durand et al., 1996; Ekanayake and Halkides, 2008; Faini, 2007; Glytsos, 1997; Ruiz andVargas-Silva, 2010; and Vargas-Silva and Huang, 2006). At least six studies have also foundthat the home country economic conditions affects the amount of remittance it receives(Clarke and Wallsten, 2004; Charmi et al., 2005; Mohapatra et al., 2009; Ratha, 2005;Spatafora, 2005; and World Bank, 2005). For example, a high level of unemployment in ahome country would increase the number of its citizens looking for jobs in a host country.Alternatively, when the income level increases, people can now afford to travel overseas tolook for better-paid jobs and this in turn would increase remittances to the home country.For all the above reasons, we could argue that economic growth would have an impact onthe level of remittance income.The purpose of this article is to examine the impact of remittances on the economies of

Bangladesh, India and Sri Lanka. Together, Bangladesh, India and Sri Lanka have remained animportant source of expatriate workers. The number of expatriate workers has increased


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significantly over the years. In the process, remittance income has emerged as one of dominantsources of foreign exchange earnings for these nations. Thus, these three countries offer a uniqueopportunity to examine the linkages and the direction of causality between remittance incomeand economic growth.

The organisation of the article is as follows. Section 2 looks at the motivation behind ourarticle and introduces our research mechanism while section 3 examines the importance ofremittances to Bangladesh, India and Sri Lanka. In section 4 we present a preliminary time-seriesdata analysis of remittances and economic growth data in these three countries, and in section 5we investigate the direction of causality under a VAR framework. In the final section we presentour concluding statements.

2. Motivation for the Current Study

In most studies mentioned in Section 1, the null hypothesis has been a statement of correlationand not causation. The question itself is framed around whether remittances are a statisticallysignificant factor in determining economic growth. Another important question in relation toremittances and economic growth should be that of causation. Such a question asks whethereconomic growth causes remittances or vice-versa. In addition, the results from the above studiesare also based on panel-data consisting of a number of countries. This may be suitable foranswering greater questions on average, but is of little consequence to individual countriesseeking to manage domestic policy. Such policy questions include the opportunity costattributable to the emigration of skilled workers, the financial treatment of recipients ofremittances, the composition of domestic institutions for the transmission of remittances andthe style and placement of investment incentives targeting remittance recipients. Furthermore,most of the other studies have qualitatively considered the impact of remittances on an economyin terms of social measures such as education, health and democratisation (for example, seeRahman et al., 2006), and development budget increases. Nor has any quantitative analysis onthe causality between remittances and economic growth been conducted. We believe that thisstudy will help to fill such a gap.

With the above aim in mind, the main objective of this article is to employ the GrangerCausality Framework (Granger, 1988) in order to investigate the directional linkage betweeneconomic growth and remittances in the context of Bangladesh, India and Sri Lanka. The benefitof the use of such an approach lies in its ease of application for policy-makers in developingcountries and the demonstration of (non-)causality for an individual country given time series ofonly two variables; remittances and economic growth.

As mentioned above, together remittance income has emerged as one of the dominantsources of foreign exchange earnings for the three countries under our consideration, namelyBangladesh, India and Sri Lanka. It will therefore be very interesting to examine whether ornot there is a link between remittance income and economic growth and vice versa. We areof the view that the findings of the study have important policy implications not only forthese three countries, but also for other developing countries that depend on remittanceincome.

3. Importance of Remittance in the Economies of Bangladesh, India and Sri Lanka

In this section we examine the importance of remittances in the three economies under ourinvestigation. For the sake of brevity we discuss the importance in three areas in theseeconomies: (a) growth in remittance income, (b) the importance of remittances as a source ofexport income, and (c) the link between economic growth and growth in remittances. We useannual time series data for the period 1976 to 2006 for the two variables, per capita remittancesand economic growth in Bangladesh, India and Sri Lanka. The data is collected from variousissues of the World Bank (2007a).


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(a) Growth in Remittance Income

Columns 2–4 of Table 1 present the trends in remittances in Bangladesh, India and Sri Lanka,while Figure 2 presents the growth in remittances in these three countries during 1977–2006.Table 2 presents the average growth rates for various sub-sample periods, calculated from thedata in columns 2–4 of Table 1. As can be seen, the remittance growth rate fluctuates from timeto time but is almost a constant during some periods. Growth in remittances across thesecountries appears to have stabilised somewhat over the last two decades with the variance offluctuations reducing dramatically relative to the period 1976–1985. This reduction in thevariance of remittance growth could be related to the stabilisation of government policy andcurrencies over time. An example of such instability affecting remittance flows is the Sri Lankancase where in 1977, the election of the United National Democratic Party led to a change inmigration policy, causing a surge in labour exports and thus remittances (Eelens andSpeckmann, 1990). This, combined with government reforms of the Sri Lankan exchange ratesystem during the same period resulting in a currency devaluation (Balakrishnan, 1980), aneconomic boom in the labour-scarce oil producing economies of the Middle East, and the pushfactors of prolonged ethnic conflict and slow growth in the Sri Lankan rural economy (WorldBank, 2004), explains the spiking nature of remittances in the late 1970s and growth thereafter.Formal and informal remittance transfer channels could help explain why between 1980 and

1991 there is a relative stagnation in remittance growth in India. Informal remittance channelscan involve money carried from place to place by individuals or couriers, or, it could involve ahawala service network which is informal and provides cash payouts across borders at a fraction

Figure 2. Growth in remittances (in percentages), 1976–2006

Table 2. Average growth rates in remittances, 1976–2006

Period Bangladesh India Sri Lanka

1977–1981 83.0 33.6 82.61982–1986 16.8 0.2 7.81987–1991 6.4 9.6 6.21992–1996 12.0 24.6 14.01997–2001 9.0 10.8 7.22002–2006 21.8 13.0 14.8Mean 24.8 15.3 22.1


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of the cost of formal methods. Formal networks such as banks and foreign exchange bureaus aremore popular in robust and liberalised economies with strong financial sectors (Sander andMaimbo, 2005: 65). As India was not financially liberalised until the 1990s when multipleexchange rate controls were lifted, there would have been an incentive to use informal means ofremittance transfer up to this point (Jha et al., 2010). Using informal transfer methods wouldcause an under reporting of remittances in India up to the 1990s.

With nearly one half of Bangladesh’s offshore labour employed in Saudi Arabia (Siddiqui,2004), Bangladesh too experienced the benefit from growth in West Asia during the 1970s. Thisexplains their large growth in remittances during the late 1970s in line with the rising oil prices ofthe time. There was a significant plateau in remittance growth in the period leading up to andduring the Gulf War from 1988–1991. This was remedied, however, with Bangladesh workersinvolvement in post-war reconstruction (Siddiqui, 2004) which is reflected by steady remittancegrowth from 1992–1994. With Saudi Arabia as a majority employer, availability and quantity ofwork for Bangladeshi migrant workers is at the mercy of pricing fluctuations in the oil industry.When compared to crude oil prices, increases and decreases in remittance growth is correlatedto increases and decreases in oil prices. The periods 1977–1981 and 1988–1991, as previouslymentioned, are good indicators of this, as well as the strong growth in remittances from 2002which is in line with a sharp rise in oil prices in the same period.

(b) Remittances as a Source of Export Income

Columns 5–7 of Table 1 present the trends in remittances as a percentage of export income inBangladesh, India and Sri Lanka. Figure 3 highlights the sheer size of the proportion remittancesoccupy in the export earnings of the three countries, and Table 3 presents these values at samplemeans at various sub-periods. As can be seen, for all three countries, the period up to andincluding 1979 shows steady growth in remittances as a percentage of export income before amajor jump in 1980, with Sri Lanka more than doubling remittances (from 6.1% to 14.2%),while Bangladesh and India came close to doubling over the course of one year (from 26.1% to39.7% and 18.4% to 32.1% respectively). The rising oil price in the mid 1970s is a contributingfactor to this growth, bringing increased wealth into exporting countries in West Asia and theGulf region. As a result of this increased wealth, development programmes including

Figure 3. Remittances as a proportion of export income (%): 1976–2006


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construction of roads, schools, hospitals, houses and other commercial complexes wereundertaken (Kuthiala, 1986). Increased wealth also meant many households in oil rich areaswere less willing to participate in more medial tasks such as cleaning, cooking and householdmaintenance and could now afford full-time maids and grounds keepers. This resulted in a spurtin demand for semi-skilled and unskilled workers for which India, Sri Lanka and Bangladeshwere well placed to meet.Bangladesh shows the greatest reliance on remittances as a form of export income growing

from approximately 6 per cent in 1976 to 50 per cent since 2003. India and Sri Lanka likewisehave grown in their dependence on remittance income from humble beginnings in 1975 with bothcountries attributing approximately one third of their export earnings to remittances in the yearssurrounding 2006.

(c) Remittances and Economic Growth

Columns 8–10 of Table 1 present the trends in remittances as a percentage of GDP inBangladesh, India and Sri Lanka.As can be seen, remittances as a percentage of GDP inBangladesh increased steadily from 0.8 per cent in 1977 to 8.8 per cent in 2006; in India theincrease is very moderate increasing from 0.8 per cent in 1977 to only 3 per cent in 2006, while inSri Lanka the percentage had a sudden jump from 0.5 percent in 1977 to 3.8 per cent in 1980,then 6.1 per cent in 1982, then fell for a few years and increased steadily from 5.6 per cent 1992 to7.6 per cent in 2006. Such steady increase in the remittances as a percentage of GDP inBangladesh and Sri Lanka is expected as there was a steady shift in an increased labour forcelooking for jobs in host countries and the sudden jump in Sri Lanka in the late 1970s to early1980s is due to changes in government policies. However, in the case of India, even though therewere steady increases in the labour force moving to other countries, it did not show a majorincrease in the remittances as a percentage of GDP as the amount of labour force movedoverseas is not a large proportion of the overall Indian population.In general, it is believed that remittances help a developing country’s economic growth and

development by helping to offset the rising trade deficit, to build up foreign exchange reservesand to increase disposable income. It has been found that remittances help promote growth inless financially developed countries by providing a substitute for inefficient or non-existent creditmarkets, thus allowing consumers to reduce credit constraints and find an alternative wayto finance investment (Giuliano and Ruiz-Arranz, 2009). Having access to credit can helpincrease investment opportunities in areas of developing countries that previously producedlittle, leading to growth and a positive trend relationship between GDP and remittances asshown in Figure 4.Remittances also encourage economic growth when they are used for financing children’s

education and welfare expenses such as health care (Chimhowu et al., 2005). Investing in childeducation and welfare will increase labour productivity in the long term which in turn impactspositively on growth. This longer term approach could also help explain why the GDP appearssomewhat insulated from the short term fluctuations in remittances in Figure 4. Even if the

Table 3. Average remittances as a proportion of export income (%): 1977–1981 to 2002–2006

Period Bangladesh India Sri Lanka

1977–1981 28.3 23.8 10.51982–1986 63.9 26.9 25.71987–1991 55.9 20.4 25.71992–1996 37.6 23.0 25.21997–2001 32.1 32.3 22.92002–2006 45.6 32.8 32.1Mean 43.9 26.5 23.7


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remittances are spent on consumption or real estate, there are still multiplier effects and increasesin demand for goods stimulated by these activities (Chimhowu et al., 2005), once again showingthe positive link between remittances and GDP.

In Figure 4, India requires some further explanation as its remittances do not trend as smoothlyas Bangladesh and Sri Lanka. As discussed earlier in Section 3, there is a period from 1980 to 1993where remittances to India stagnate. Apart from this anomaly there is a clear positive trendrelationship between remittances and GDP with the final exception to this being a spike inremittances per capita in 2003. An explanation for this positive spike in 2003 is Resurgent IndiaBonds, which were launched in 1998 and matured in 2003. A large portion of these bonds wereredeemed and retained in India, instead of being repatriated abroad in foreign currency. Thatamount retained was thus recognised as remittances, resulting in the 2003 spike (Chishti, 2007).

In general, for a number of reasons, a country’s economic growth can influence remittances.For example, as stated earlier, on the one hand when a country’s economy is not performing

Figure 4. Remittance per capita and GDP per capita: Bangladesh, India and Sri Lanka, 1975–2006


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well, this may lead to a high level of unemployment and people will begin to look for jobs outsidetheir country and hence an increase in home country remittances. On the other hand, if the homecountry economy grows, the financial position of its citizens would improve and, people whocould not afford to travel overseas earlier to find jobs, may be able to travel to a host countrynow, which would result in the country receiving more remittances. Either way, economic growthinfluences remittances.

4. A Preliminary Data Analysis of Remittances and Economic Growth

As can be seen from Figure 4, there is an upward trend in both series and therefore, the means ofthe time series are changing over time indicating that both series in their original form may notbe stationary. The plots of the first-differenced series of per capita remittances and economicgrowth (in logarithmic form) suggest no evidence of changing means, indicating that the percapita remittances and economic growth series may be integrated of order one, that is, both timeseries are I(1). To validate these findings statistically, we formally test the stationarity propertiesof these two series using the Augmented Dickey-Fuller (ADF) unit-root test.We apply the ADF test to the per capita remittances and economic growth series separately.

We carry out the estimation of the models using the econometric software SHAZAM and testthe presence of unit roots using the systematic procedure described in Enders (1995). Theresults of the Augmented Dickey-Fuller (ADF) test for the stationarity of the two originalseries are presented in Table 4. As can be seen, both time series have at least one unit rootand hence are non-stationary in their original form, except for the remittance series inSri Lanka.We now test for the stationarity of the first difference of both series by applying the ADF test

on the first difference series. The results are presented in Table 5. As can be seen, both series arestationary in their first difference form. This means both series are I(1).Even if the two variables, per capita remittances and economic growth series, individually are

I(1), it may be possible that a linear combination of the two variables may be stationary. If weare modelling a linear relationship between per capita remittances and economic growth series,even if each of them individually are non-stationary (that is I(1)), as long as they areco-integrated, the regression involving the two series may not be spurious. Thus, we nowinvestigate whether the two series are co-integrated and have a long run equilibrium relationship.We now employ the Engle and Granger (1987) procedure, which is based on testing for a unit

root in the residual series of the estimated equilibrium relationship by employing the Dickey-Fuller test. Therefore, the null and alternative hypotheses are:

H0: The residual series has a unit root (or per capita remittances and economic growthseries are not co-integrated)

HA: The residual series has no unit root (or per capita remittances and economic growthseries are co-integrated)

Rejection of the null hypothesis would mean that the two series, per capita remittances andeconomic growth series, are co-integrated.The results are presented in Table 6 and clearly show that both the least square residual series

are non-stationary and hence the series per capita remittances and economic growth series arenot co-integrated, indicating that there is no long-run equilibrium relationship between percapita remittances and economic growth series in all three countries.

5. Testing for Granger Causality

From the analysis so far, we found that both of the series, remittances and growth, are I(1) andare not cointegrated. Therefore they have no long-term relationship. They may nevertheless be


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Table

4.ADF

test

resultsforaunitrootontheoriginalseries

Bangladesh

India

SriLanka

Model

(Rem

ittance)

Null

hypothesis

Critical

value

Data-based

valueofthe

test

statistic

Results

Data-based

valueofthe

test

statistic

Results

Data-based

valueofthe

test

statistic

Results

Constantandtrend

H0:g¼

073.13

73.10

Donotreject

H0

72.43

Donotreject

H0

74.23

RejectH

0

Constantandtrend

H0:a 0¼

g¼

05.34

5.08

Donotreject

H0

3.15

Donotreject

H0

Constantandnotrend

H0:g¼

072.57

71.96

Donotreject

H0

71.44

Donotreject

H0

Constantandnotrend

H0:a 0¼

g¼

03.78

3.41

Donotreject

H0

6.01

RejectH

0

Noconstantandnotrend

H0:g¼

071.62

0.59

Donotreject

H0

(Usingz-distribution)

H0:g¼

0711.2

71.86

Donotreject

H0

Conclusion

Log{per

capitaremittance}has

aunitrootandtheseries

isnon-stationary

Log{per

capitaremittance}has


isnon-stationary

Log{per

capita

remittance}does

nothave


isstationary

Bangladesh

India

SriLanka

Model

(GDP)

Null

hypothesis

Critical

value

Data-based

valueofthe

test

statistic

Results

Data-based

valueofthe

test

statistic

Results

Data-based

valueofthe

test

statistic

Results

Constantandtrend

H0:g¼

073.13

0.50

Donotreject

H0

71.04

Donotreject

H0

72.39

Donotreject

H0

Constantandtrend

H0:a 0¼

g¼

05.34

7.88

RejectH

05.21

Donotreject

H0

3.13

Donotreject

H0

Constantandnotrend

H0:g¼

072.57

2.78

Donotreject

H0

0.45

Donotreject

H0

Constantandnotrend

H0:a 0¼

g¼

03.78

29.32

RejectH

021.18

RejectH

0


H0:g¼

071.62


H0:g¼

0711.2

1.39

Donotreject

H0

0.26

Donotreject

H0

Conclusion

Log{per

capitaGDP}hasa

unitrootandtheseries

isnon-stationary

Log{per

capitaGDP}hasa


isnon-stationary

Log{per

capitaGDP}hasa


isnon-stationary


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Table

5.ADF

test

resultsforaunitrootonthefirstdifference

oftheoriginalseries

Bangladesh

India

SriLanka

Model

(Rem

ittance)

Null

hypothesis

Critical

value

Data-based

valueofthe

test

statistic

Results

Data-based

valueofthe

test

statistic

Results

Data-based

valueofthe

test

statistic

Results

Constantandtrend

73.13

73.83

RejectH

072.19

Donotreject

H0

73.43

RejectH

0

Constantandtrend

5.34

2.74

Donotreject

H0

Constantandnotrend

72.57

72.29

Donotreject

H0

Constantandnotrend

3.78

2.78

Donotreject

H0


71.62

72.05

RejectH

0


711.2

71.86

Donotreject

H0

Conclusion

DLog{per

capita

remittance}does

nothavea


isstationary

DLog{per

capitaremittance}does

nothaveaunitrootandtheseries

isstationary

DLog{per

capita

remittance}does

nothavea


isstationary

Bangladesh

India

SriLanka

Model

(Economic

growth)

Null

hypothesis

Critical

value

Data-based

valueofthe

test

statistic

Results

Data-based

valueofthe

test

statistic

Results

Data-based

valueofthe

test

statistic

Results

Constantandtrend

73.13

73.24

RejectH

073.42

RejectH

073.45

RejectH

0

Constantandtrend

5.34

Constantandnotrend

72.57

Conclusion

DLog{per

capitaGDP}does

nothaveaunitrootandthe

series

isstationary

DLog{per

capitaGDP}does

nothaveaunitrootandthe

series

isstationary

DA

Log{per

capitaGDP}

does

not1haveaunitroot

andtheseries

isstationary


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Table

6.Testforco-integrationofremittancesandeconomic

growth

series

Bangladesh

India

SriLanka

Model

(Residuals)

Critical

value

Data-based

valueofthe

test

statistic

Results

Data-based

valueofthe

test

statistic

Results

Data-based

valueofthe

test

statistic

Results

Constantandtrend

73.50

71.17

Donotreject

H0

71.51

Donotreject

H0

71.88

Donotreject

H0

Constantandtrend

73.04

72.74

Donotreject

H0

72.37

Donotreject

H0

71.61

Donotreject

H0

Estim

atedmodels

Growth

t¼5.47þ0.13Rem

ittance

t

Rem

ittance

t¼726.24þ4.93Growth

t

Growth

t¼5.27þ0.33Rem

ittance

t

Rem

ittance


t

Growth

t¼5.78þ0.21Rem

ittance

t

Rem

ittance


t

Conclusion

Theresidualseries

haveaunitroot.

Hence

theremittance

andeconomic

growth

series

are

notco-integrated

Theresidualseries

haveaunitroot.

Hence

theremittance

andeconomic

growth

series

are

notco-integrated

Theresidualseries

haveaunitroot.

Hence

theremittance

andeconomic

growth

series

are

notco-integrated


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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 describedby a VAR system in first differences. In general, the VAR system can be used to capture theevolution and the interdependencies between multiple time series. The VAR system is moresuitable for ouranalysis as the direction of the causal relationship between remittances andeconomic growth is unknown and it is also expected that past values of both variables could havea significant impact on their current values.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 klags 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 thefinal system to be used is a VAR(4) for Bangladesh and India, and VAR(3) for Sri Lanka. Weestimate the VAR(4) system in the following form with all variables in first-difference form andtest various hypotheses:

Remt ¼ a01 þ a11Remt�1 þ a21Remt�2 þ a31Remt�3 þ a41Remt�4 þ b11Growtht�1

þ b21Growtht�2 þ b31Growtht�3 þ b41Growtht�4 þ e1t ð1Þ

Growtht ¼ a02 þ a12Remt�1 þ a22Remt�2 þ a32Remt�3 þ a42Remt�4 þ b12Growtht�1

þ b22Growtht�2 þ b32Growtht�3 þ b42Growtht�4 þ e2t ð2Þ

We test whether Growtht71, Growtht72, Growtht73 and Growtht74 do not appear in theRemittances equation to test Growth does not cause Remittances, and Remittancest71,Remittancest72, Remittancest73 and Remittancest74 do not appear in the Growth equation totest Remittances does not cause Growth. In the case of Sri Lanka, we use a VAR(3) model andsimilar 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 : b11 ¼ b21 ¼ b31 ¼ b41 ¼ 0

Thus, a rejection of the null hypothesis H0 would indicate that Growth causes Remittances in theGranger sense.Similarly the null hypothesis to test ‘non-causality’ that ‘Remittances does not cause Growth’

is that:

H0: a12 ¼ a22 ¼ a32 ¼ a42 ¼ 0

We perform the above estimation in SHAZAM and Table 7 presents the results. As can be seenfrom row 1 of Table 7 (for testing the null hypothesis, H0: Growth 6¼4Remittances), thep-values are 0.59 for Bangladesh and 0.50 for India, which are greater than the level ofsignificance, 0.05, and the p-value for Sri Lanka is 0.00 which is less than 0.05. Hence we areunable to reject the null hypothesis that ‘Growth does not cause Remittances’ at the 5 per centlevel of significance for Bangladesh and India, but reject for Sri Lanka. Looking at row 2 ofTable 7 (for the testing of H0: Remittances (4Growth), the p-value for this test is 0.04 forBangladesh, 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 Growthin the Granger sense at the 5 per cent level of significance for Bangladesh and Sri Lanka, but areunable to reject it for India.


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6. Conclusion

In this article we have investigated the causal relationship between remittances and economicgrowth in Bangladesh, India and Sri Lanka using data for the period 1976 to 2006. For thisinvestigation 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 andeconomic growth, are both I(1) and are not co-integrated. We then investigated the causalitybetween remittances and economic growth. The results show that there is only a one-way causalrelationship from remittances to economic growth in Bangladesh; there is no causal relationshipbetween growth in remittances and economic growth in India; but in Sri Lanka, a two-waydirectional causality is found. While our analyses in both series are stationary only in firstdifference and hence our findings are more valid in the short run, the results nonetheless holdimportant implications.

As indicated above, our results establish that remittances play a significant role in thepromotion of economic growth in Bangladesh. The causality of remittances on economic growthin Bangladesh could be due to several factors, including the multiplier effect, due to increases inexpenditure. Additionally, despite remittance spending on investment being low, even a smallportion can help to alleviate liquidity constraints and directly contribute to growth. This findingis in line with the findings of Adelman and Taylor (1990), Durand et al. (1996) and Faini (2007).This is especially compelling for Bangladesh given that employment overseas helps somewhat inalleviating unemployment pressures at home. Our empirical results reveal therefore thatappropriate policy to explore more foreign employment and more proficient use of remittanceswould help the economic development of Bangladesh. While a number of significant changeshave been implemented already in promoting remittances, such as the floating of the exchangerate in 2003 and the increased pressure in cutting down the informal Hundi system of moneytransfer, it is evident that remittances are not yet being utilised in a manner conducive tomaximum growth and development. As can be seen from Figure 4, in Bangladesh, growth in percapita GDP is very slow compared to the growth in per capita remittance. Therefore, theeconomic conditions in Bangladesh may not be strong enough to impact significantly on people’smovement overseas to find better employment.

The results regarding the link between remittance of income in the case of Sri Lanka are veryconvincing. There is a two way directional causality indicating that remittances promoteeconomic growth and vice versa. Migrants from Sri Lanka are unique from other countries in

Table 7. Results of Granger Causality Test between remittances and economic growth

Null hypothesis p-value ofthe F-test

Conclusion at the 5% level

Bangladesh(1) H0: Growth 6¼4Remittanceðb11 ¼ b21 ¼ b31 ¼ b41 ¼ 0Þ

0.59 Do not reject H0

That is, economic growth does not cause remittance(2) H0: Remittance 6¼4Growthða12 ¼ a22 ¼ a32 ¼ a42 ¼ 0Þ

0.04 Reject H0

That is, remittance causes economic growthIndia(1) H0: Growth 6¼4Remittanceðb11 ¼ b21 ¼ b31 ¼ b41 ¼ 0Þ


That is, economic growth does not cause remittance(2) H0: Remittance 6¼4Growthða12 ¼ a22 ¼ a32 ¼ a42 ¼ 0Þ


That is, remittance does not cause economic growthSri Lanka(1) H0: Growth 6¼4Remittanceðb11 ¼ b21 ¼ b31 ¼ 0Þ

0.00 Reject H0

That is, economic growth does cause remittance(2) H0: Remittance 6¼4Growthða12 ¼ a22 ¼ a32 ¼ 0Þ

0.01 Reject H0

That is, remittance does cause economic growth


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that most come from families above the poverty line (Sriskandaraja, 2003). As the moneyreceived from remittances is not necessary for survival, most Sri Lankan households choose touse the funds for the education of family members, particularly young men. As education levelsincrease, output follows in a similar trend. In addition, remittances are used by households tomake small capital investments, with such funds playing a large part in financing industrygrowth. Remittances add to the country’s revenue more than double what it receives from thetourism industry, one of its most important industries, allowing for economic growth. As theeconomy grows, household income levels increase, causing more people to become financiallyable to migrate, thus a richer household is more likely to be given remittances (Ratha, 2003). Thisadditional migration allows for the increase in remittance income for the families remaining inSri Lanka. Thus, in Sri Lanka, growth causes remittances and remittances cause growth.The empirical findings on India suggest that growth does not cause remittances and in the same

vein, remittances do not cause growth. India’s migrants are numerous and are spread worldwide.But remittance income is not a significant proportion of GDP in India, relative to both Bangladeshand Sri Lanka. As can be seen from columns 8–10 of Table 1, between 1977 and 2006, remittanceshave increased from 0.7 per cent to 3.5 per cent of GDP in India, while corresponding figures forSri Lanka and Bangladesh increased from 0.5 per cent to 8.1 per cent and 0.8 per cent to 8.8 percent, respectively. However, this does not undermine the importance of remittances to the Indianeconomy. At the household level, injection of remittance income by the expatriates doessignificantly improve the economic well-being of millions of families in India which are notcaptured by a highly aggregated analysis like our study. In this respect, further research should becarried out in the case of India, for example, further investigation on transfer methods ofremittances to see whether there is any under reporting of remittances or is there any difference inour finding for India as a whole against using individual state level data and so forth.Despite the varying results regarding whether or not remittances cause economic growth and

vice versa, there is no doubt that movement of labour globally contributes to growth. It isestablished in the international economics literature that the movement of labour between twocountries increases output both globally and in the labour sending country (Appleyard andField, 1998). Overall, it cannot be denied that remittances are very important to the economiesof Bangladesh, India and Sri Lanka.

Acknowledgements

The authors would like to thank Professor K.W. Clements of the University of WesternAustralia, and the editor and two anonymous referees of this journal for their comments on anearlier version of the article.

Note

1. Initially, we intended also to include Pakistan in our study. However, due to lack of reliability of data on relevant

variables considered in this study, Pakistan was eventually dropped from our analysis.

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Documents

Remittances and Economic Growth: Empirical Evidence from Bangladesh, India and Sri Lanka