Ŕ periodica polytechnica Remittances and their impact on
Social and Management Sciences Economic Growth
21/1 (2013) 3–19
doi: 10.3311/PPso.2152 Adela Shera / Dietmar Meyer
http:// periodicapolytechnica.org/ so
Creative Commons Attribution
RESEARCH ARTICLE
Received 2013-01-30
Abstract
In the worldwide economy, remittances represent one of the
major international flows of financial resources. Worker remit-
tances constitute an increasingly important mechanism for the
transfer of resources from developed to developing countries,
and remittances are the second-largest source, behind foreign
direct investment, of external funding for developing countries.
Sometimes the flows of remittances can exceed the flows of for-
eign direct investment (FDI). Yet, literature on worker remit-
tances has so far focused mainly on the impact of remittances
on income distribution within countries, on the determinants of
remittances at a micro-level, or on the effects of emigration and
remittances for specific countries or regions.
This paper tries to study the impact of remittances on var-
ious macroeconomic and developmental aspects for the econ-
omy. This study aims to observe the impact of remittances on
economic growth, using a panel data set of 21 developing coun-
tries, during the period 1992–2012. These countries have expe-
rienced a major increase in remittance inflows, and at this time
accounts for the bulk of total remittance receipts, compared with
other regions. The paper is then to review the theoretical as well
empirical literature devoted to remittances, in order; first, to se-
lect the arguments that can be applied to the countries and sec-
ond, to identify empirically if there are significant relationships
between remittances and GDP per capita in these countries.
Keywords
emigration · workers’ remittances · economic growth · panel
data · fixed-effects · random-effects
Adela Shera
Faculty of Economics, University of Tirana, Albania
e-mail: adela_shera@hotmail.com; adelashera.unitir.edu@gmail.com
Dietmar Meyer
Department of Economics, Budapest University of Technology and Economics,
Hungary
e-mail: dmeyer@kgt.bme.hu
Remittances and their impact on Economic Growth
1 Introduction
Emigration is one of the most important issues in the con-
temporary global economy. It is estimated that over 110 million
people now reside outside the country of their birth (United Na-
tions, 2002). This clearly has major economic and political im-
plications for both the sending and receiving countries. Coppel
et al. [29] identify four major consequences of international pop-
ulation movements. There are more than 215 million1 interna-
tional migrants in the world. Recorded remittances received by
developing countries, estimated to be US$325 billion in 20102 ,
far exceed the volume of official aid flows and constitute more
than 10 percent of gross domestic product (GDP) in many de-
veloping countries. Cross-country analysis and evidence from
household surveys suggest that emigration and remittances re-
duce poverty in the origin communities. Remittances lead to in-
creased investments in health, education, and small businesses.
At the same time, the loss of skills associated with emigration
can hamper development and delivery of basic services in send-
ing countries. The Diaspora of developing countries can be a
source of capital, trade, investment, knowledge, and technology
transfers. Firstly, there is the effect that emigration has on the
host country’s labor market. Although the possible adverse ef-
fects that emigration can have on the wage and employment lev-
els of natives are typically examined, emigration may also have
a role to play in reducing skill shortages in certain key sectors
of the economy. Secondly, emigration is likely to influence the
budgetary position of the receiving country since the amount re-
cent arrivals receive through health, education and welfare sys-
tems is unlikely to exactly balance the increased tax revenues
from new workers. Thirdly, it is argued that emigration may
be a solution to the ageing population problem that faces many
OECD countries. Finally, emigration can have a major eco-
nomic impact on the source country. These effects can either
be negative, in terms of brain drain (though a brain drain can be
beneficial if it creates incentives for human capital investment in
the source country), or positive since migrants’ remittances are
thought to be an important economic development tool for many
1 World Bank data, 2012 World economic report.
2 Migrant countries reports, World Bank data 2012
2013 21 1 3
labor exporting countries. Also, in an integrated world economy
an increase in the growth driven by innovation benefits for ev-
eryone. The overall balance of these effects is therefore likely
to have a major influence on the emigration policies that are im-
plemented, both in the source and host countries.
Emigration of workers allows receiving countries to fill their
labor market shortages while from the sending country’s per-
spective one of the main benefits of emigration stems from the
transfer of money from migrants to their families at home, which
has a positive effect on the balance of payments. Notwithstand-
ing the several benefits of migration, a large strand of literature
has also highlighted the negative aspects as well, primarily that
of the brain drain. However, one argument put forward is that
the remittance flows from emigrants to the home country tends
to compensate for any human capital loss. This flow of money
across borders has profound social and economic impacts on
various aspects of the home countries. In particular, remittances
promote access to financial services for the sender and the recip-
ient, thereby increasing financial and social inclusion. For many
countries, remittances are the main source of external finance
after foreign direct investment and make up between 5 and 30
percent of their GDP (Mitra et al. [79]). Given the large size
of aggregate remittance flows, they should be expected to have
significant macroeconomic effect in the economy. Given this,
understanding the factors that determine this flow of money are
important to analyze and contextualize the net benefits of emi-
gration.
The analysis of the variation in remittances flows can be ap-
proached from different frames of references. One of the most
popular and widely used is the framework outlined by Lucas and
Stark [70] who explored the motivations underlying these flows.
The motivations to remit can be explained as a combination of
economic and social motivations, such as self-interest, altruism,
investment, loan repayment and bequest motives, which deter-
mine the transfer of resources between the emigrants and the
household members at home. These transfers can serve varied
purposes in households, such as meeting the basic needs of the
family at home; serving as payments for services rendered to
the emigrant; payoffs of an insurance scheme that protects re-
cipients from income shocks; returns on the investments made
by the household in the migrant’s human capital; migrant’s in-
vestment in inheritable assets; or various other combinations
thereof. The role that these transfers play in the household de-
termines the motives underlying them and hence can provide
an ‘entry-point’ to understand the complexity of household ar-
rangements involved in emigration. However, despite the vast
existing literature on remittance behavior, there is limited re-
search of this aspect for Eastern European countries, particu-
larly those with very high outmigration rate. As highlighted by
Dustmann and Mestres [40], the form of emigration plays an
important role on the motivations to remit as those who plan to
return to the home country have a different objective of emigra-
tion than those who plan to stay permanently in the destination
4 Per. Pol. Soc. and Man. Sci.
country.
Emigrant remittances are truly a force to be reckoned with
in the global economy. These private unrequited transfers of
money for the family members from migrants leave behind, of-
ten send a few hundred dollars at a time nonetheless add up to
billions of dollars annually. Consequently remittances repre-
sent the largest international flows of financial resources. The
category workers’ remittances in the balance of payments best
represents what economists have in mind when modeling remit-
tances. Remittance should not be taxed directly. Consumption
based taxation provides the optimal incentive structure to max-
imize the benefits of remittances, whereas labor income taxa-
tion exacerbates the labor leisure incentives of remittances and
encourages the use of inflation as an indirect tax. Remittance
receiving countries should be advised to shift towards consump-
tion based tax to mitigate possible negative effects on economic
growth, minimize the level of distortion generated by fiscal and
monetary policy, and benefit from any tax induced increase in
investments resulting from remittances. Remittances can lead
to reduced country risk and government debt. In addition to in-
crease household savings, significant remittances inflows can di-
rectly or indirectly increase the revenue base, thereby reduce the
marginal cost of raising revenue. Remittances may reduce the
government incentive to maintain fiscal policy discipline. They
are not necessarily associated with an increase on domestic in-
vestments or a more efficient allocation of domestic investments.
Remittances receivers rationally substitute unearned remittances
income for labor income, and since labor and capital are com-
plementary goods in production, this negatively affects the rate
of capital accumulation. Remittances pose a moral hazard prob-
lem by reducing the political will to enact policy reform. Com-
pensatory remittances that insure the public against adverse eco-
nomic shocks and insulate them from government policy reduce
households incentives to pressure government to implement re-
forms to facilitate economic growth. Remittances can therefore
delay nodded upgrades to the public infrastructure both by re-
ducing public demand for such upgrades and by decreasing the
like hood of a crisis that would make such upgrades necessarily.
2 Review of Literature
There is a growing body of literature in recent years that
has examined the economic effects of remittances (Ozden and
Schiff [87]). These studies serve to underscore the increasing
importance of remittances provided by migrant workers from
developing countries working in other countries. For instance,
Ratha [95] emphasizes the growing importance of remittances
as a source of external funds for developing countries. Edwards
and Ureta [42] examine the effect of remittance on education in
El Salvador and report that remittances have an important effect
on school retention. The empirical evidence on the effect of re-
mittances on economic growth, poverty, and income inequality
has shown mixed results. For instance, Chami et al. [27], cov-
ering 113 countries found that remittances had a negative effect
Adela Shera / Dietmar Meyer
on growth. The authors of the study attribute this negative effect
on the moral hazard problem that remittances create. Essen-
tially, the study concluded that income from remittances allows
receiving families to decrease their own work and productivity,
which then translates into a reduction in the labor supply for the
developing country.
In a recent study conducted by IMF (2005)3 [58] about the
impact of remittances on growth over an extended period (1970-
2003) for 101 developing countries found no statistical link be-
tween remittances and per capita output growth, or between re-
mittances and other variables such as education or investment
rates. However, this inconclusive result attributed to measure-
ment difficulties arising from the fact that remittances may be-
have countercyclical with respect to growth. Faini [44] and
Ang [13] found that the impact of remittances on growth is
positive. Faini [44] argues that remittances overcome capital
market imperfections and allow migrant households to accumu-
late positive assets. Ang [13] shows the relationship between
workers’ remittances and economic growth at the national and
at the regional levels in the case of Philippines. He found that
at the national level remittances do influence economic growth
positively and significantly. When he broke down his analysis
at the regional level to confirm the national results, he found
that mixed results giving rise to his anecdotal observations that
remittance do not positively affect economic growth. In sum,
he concludes that remittances have to be translated to value-
added activities and investments which are more foundational
sources of development and growth. Glytsos [49] using data
for 1969-1998 for Egypt, Greece, Jordan, Morocco, and Portu-
gal shows that the impact of remittances on output varies over
time and across countries. For Egypt, Jordan, and Morocco the
growth-generating capacity of rising remittances characteristic
is smaller than the growth-destroying capacity of falling remit-
tances. Therefore the large fluctuations in the real value of re-
mittances contribute to large fluctuations of output growth and
cause instability in the economies concerned.
Giuliano and Ruiz-Arranz [51] gathered a sample of 73 coun-
tries during the 1975–20024 periods, then calculated five-year
averages for all variables used in their study to smooth out
cyclical variations. Again, remittances were defined as the sum
of workers’ remittances, employee compensation, and migrant
transfers. This study conducted OLS as well as fixed-effects
panel estimates, and through a system generalized method of
moments (SGMM) procedure used internal instruments to ac-
count for possible endogeneity. The study’s basic specification
regressed per capita GDP growth on the total remittances–to–
GDP ratio, conditioning on the initial level of GDP per capita,
the investment rate, population growth, the fiscal balance as
a percentage of GDP, years of education, a measure of open-
ness, and inflation. This specification did not find total re-
3 IMF Economic report 2005
4 World Bank report 2005
Remittances and their impact on Economic Growth
mittances to be significantly related to growth. However, the
authors also explored possible interactions between the total
remittances–to–GDP ratio and financial deepening, as a way of
testing whether remittances might enhance growth by relaxing
credit constraints. Indeed, the authors found significant nega-
tive interaction terms and interpreted these results as indicative
of the credit constraint hypothesis; total remittances appeared
to have positive effects on growth only in countries with small
financial sectors where presumably credit constraints would be
more pervasive.
Another study, by Catrinescu and others [26], incorporated in-
stitutional variables into the analysis, which covered 114 coun-
tries during the 1991–2003 period. Catrinescu and colleagues
conducted OLS cross-sectional and various static and dynamic
panel regressions of per capita GDP growth on the (log of) total
remittances–to–GDP, controlling for initial GDP per capita, ra-
tios of gross capital formation and net private capital inflows to
GDP, and such institutional variables as the United Nations Hu-
man Development Index, six governance indicators as in Kauf-
mann, Kraay, and Mastruzzi [62], and risk ratings from the Inter-
national Country Risk Guide (ICRG). Overall, their study found
a robust positive relationship between growth and gross capi-
tal formation, as well as between growth and some of the in-
stitutional variables. The study also found some evidence of
a positive relation- ship between growth and total remittances,
although this relationship was not very robust and, as the au-
thors acknowledge, relatively mild. Finally, the World Bank
(2006) [114] conducted cross- country growth regressions on a
data set of 67 countries measured over 1991–2005. The control
variables included (logs of) initial GDP per capita, the secondary
school enrolment ratio, the ratio of private domestic credit to
GDP, the ICRG political risk index, the ratio of real imports
and exports to GDP, the inflation rate, real exchange rate over-
valuation, government consumption, and time period dummies.
An SGMM estimation was performed, in which the instrument
for remittances was a set of “migration” instruments formed by
computing the product of the share of a country’s migrants going
to each of its top five OECD country destinations (as of 2000)
and a measure of the respective OECD country’s economic per-
formance, such as GDP per capita, the GDP growth rate, or the
unemployment rate. These instruments reflect the idea that in-
come in the host country appears to be a key driver of remit-
tances. The inverse of the distance between the migrants’ des-
tination country and the remittance-receiving country was also
used in place of emigration shares in the migration instruments
described above to form “distance” instruments. The growth re-
gressions found a consistently positive relationship between the
total remittances–to– GDP ratio and GDP growth, both when
investment was included and when it was excluded from the es-
timations. When investment was excluded, however, the coef-
ficients lost their significance. The authors also calculated the
contribution of total remittances to growth rates and found that
it was small.
2013 21 1 5
 A later exercise in the same World Bank study included in-
teraction terms for remittances and education, remittances and
financial depth, and remittances and institutional quality indica-
tors in three separate growth equations that had the same spec-
ification as the growth equations examined previously, with the
argument that remittances augment growth in the presence of
complementary policies that enhance education, financial mar-
ket depth, or institutional quality. The World Bank study found
a negative and significant coefficient on the total remittances–
to–GDP ratio, but positive and significant coefficients on each
of the interaction terms. The study argued that this implies a
net positive impact of total remittances on GDP, when the com-
plementarities are included. In addition, the study included an
estimate of total remittances’ impact on investment, finding a
similar pattern of coefficients.
3 Motivations and Consequences of Remittances
Many migrants send remittances back to their home country.
Some do it in favor of themselves and some do it in favor of their
family and friends in the home country. In order to understand
remittances there are two main approaches for analyzing remit-
tances: the “portfolio” approach and the “altruism” approach
(IMF [58, p. 78])5 . These approaches present two main chan-
nels for remitting behavior. The theoretical debate about the de-
terminants of remittances was triggered by Lucas and Stark [70]
with their ground-breaking paper “Motivations to remit: Evi-
dence from Botswana”, which is still the basis of the current
discussion and extensions. Lucas and Stark studied remittances
on a household level and hypothesized the main determinants to
be “pure altruism”, “pure self-interest” and “tempered altruism
or enlightened self-interest”. Any kind of contractual arrange-
ments between the migrant and household left behind can be in
the latter category, for example co-insurance, exchange-motives,
loan repayment. The theoretical motives and their effects on re-
mittances are summarized in Table 1. We give a more detailed
discussion of the motives below.
It is natural to assume that remittances are sent to the family
left behind due to altruistic feelings of the migrant. This can be
modeled in a Becker type setting where the migrant derives posi-
tive utility from the consumption of the family. The migrant thus
cares about poverty, shocks, etc. of the family and consequently
sends remittances. In this case, there is a positive relationship
between adverse conditions of the receiving household and re-
mittances sent, see Table 1. Remittances should increase with
migrant income (the migrant has more to share) and altruism
and decrease with recipient income (Funkhouser [45]). How-
ever, income does not necessarily have a linear effect. As Cox,
Eser and Jimenez [30], demonstrate too, that income may have
a different effect at different points of the income distribution.
In contrast to altruism, self-interest is also a motivation to re-
mit. In this case a migrant sends remittances with the aspiration
5 IMF report 2005
6 Per. Pol. Soc. and Man. Sci.
to inherit, to demonstrate laudable behavior as an investment
for the future or with the intent to return home. If a migrant
wants to invest at home, the household can be a trustworthy and
well-informed agent. If a migrant intends to return home, he
may already invest in housing, livestock etc. and will ask the
family to be the agent. The migrant may also send remittances
to invest in his reputation at home. Inheritance may be used
as a blackmailing device by the household head to receive re-
mittances. According to this theory, remittances increase with
the household’s assets and income, the probability of inheriting
(dependent on the age of parents, number of siblings, etc.), the
migrant’s wealth and income, and decreases with risk aversion.
Only in the case of the aspiration to inherit, can self-interest
be distinguished from altruism in the migrant’s behavior and a
larger income and or wealth of the household should lead to
more remittances.
Finally, in a three generation setting, remittances may be sent
to parents to ensure that the remitter’s own children also take
care of him in old age (Cox & Stark [32]), known as the demon-
stration effect. Care and transfers have to be visible to the grand-
children generation for maximum effect. A less extreme view
of the motivations to remit is tempered altruism. In this case
the migrant and the family at home mutually benefit from mi-
gration, through some kind of implicit contractual arrangement.
Altruism and self-interest can nevertheless play a role here, by
making the contracts self-enforcing. The contractual arrange-
ments discussed here are coinsurance, loan repayment and ex-
change for services. Another type of contractual agreement be-
tween the household and family is loan repayment, for example
repaying human capital investment or the cost of migration. A
household finances a potential migrant’s education if the family
implicit lending rate is higher than the market interest rate and
the youth borrowing rate is higher than the family implicit lend-
ing rate (Poirine [92]). During the next time period the migrant
is able to find a better-paid job in the city or abroad due to the
education acquired and will send remittances to repay the family
for the initial investment. At this stage the migrant might also
become a lender, by financing other migrant family members,
which increases overall remittances.
The U-shaped time profile of remittances is shown below in
Figure 1. In this case, the family contract has the aim of increas-
ing income instead of reducing uncertainty.
In practice, only paying-back can be measured and there
should be a positive link between the migrant’s education level
and remittances. This could also be interpreted as altruism how-
ever due to the close link between education and income. A fi-
nal contractual arrangement is the exchange motive (Cox [31]).
Here transfers in the wider sense are paid to the household at
home for services provided (e.g. child care). The theory can
also be applied to remittances, whereby remittances buy various
types of services, usually by temporary migrants (Rapaport and
Docquier [94]). If the migrant’s income increases, remittances
increase. If the household’s income increases, thus making the
Adela Shera / Dietmar Meyer
 Tab. 1. Theoretical Determinants of Remittances

Effect of . . . on level household migrant household migrant education level intent to no. of migrants time
of remittances income income shock risk level of migrant return in HH

Pure altruism − + + + − −
Pure altruism − + + + − −
Pure self-interest + +
Co-insurance − + +
Loan repayment +/− + + +, later −
Exchange motives +/− + +
Strategic behaviour − + +

Source: Lucas and Stark [70, p. 185]

again indistinguishable from altruism. The level of migrants’

Source: Based on Poirine [92]
Fig. 1. Profile of remittances
services. more expensive, remittances can decrease or increase
depending on the migrant’s elasticity of demand. If the mi-
grant’s demand for the services is elastic, fewer services will be
demanded and remittances decrease. If demand is inelastic, the
same services will be bought, but at higher price, which leads to
more remittances, despite the higher income of the household at
home. Higher unemployment in the home country should mean
fewer remittances since less money is then needed to make those
at home perform their service (the opposite effect is found for al-
truism).
The strategic model, first explained by Stark [106] and later
by Stark and Wang [108], stems from a strategic migration deci-
sion made because of wage differentials. Since high skilled mi-
grants usually have a larger amount to gain by migrating, they
are typically the first to go and then unskilled workers follow. As
individual productivity is unobservable in the rich country, mi-
grants are paid the average productivity of the group with which
they are identified. For this reason, skilled workers may have
an incentive to remit money home to keep unskilled workers
in their home country, since migration of these workers may
mean depressed wages for the skilled migrants (Docquier and
Rapaport [37]). The strategic behavior extension says that re-
mittances increase with income and education of the migrant
and with low income at home (Holst and Schrooten [54]), thus
remittance flows depends on both the migrants’ ability, i.e.their
income and the savings from income, and their motivation to re-
mit savings back to the home country. Of course, the willingness
to remit is also determined by the duration of migration (how
long do migrants intend to stay abroad, temporarily or perma-
nently?), the family situation of migrants (single, married, with
or without children?), and network effects (do migrants move
alone, with family members, and do they keep attachments to
those left behind?) (For the growing importance of network
effects see Munshi [82]). One way of looking at the determi-
nants of remittance flows is by analyzing the motives that mi-
grants have to remit money. The literature distinguishes between
pure altruism, pure self-interest, informal agreements with fam-
ily members left in the home country and portfolio management
decisions. As Stark [105] points out, no general theory of remit-
tances exists. The studies that analyze this phenomenon provide
useful descriptive evidence and results from empirical research,
but they only explain it partly, and are characterized by certain
geographical, socio-cultural and temporal limitations.
The consequences of remittances are determined by the pur-
pose of migration and remitting. Remittances increase the in-
flow of foreign exchange to home countries and thereby increase
the demand on domestic currencies. When remittances later is
used for consumption or investment it further bring impact on
the home economy as either increase in consumption or as in in-
crease in investment. The effects from the increased demand on
the home currency are not clear. Some research shows that the
real exchange rate (RER) can appreciate as an effect of remit-
tances (See for example Bourdet and Falck [22]) and give rise
to the Dutch Disease. The theory of Dutch Disease sees capi-
tal inflow cause appreciation on RER, which makes the export
sector less competitive and domestic consumption favor trad-
able imported goods and non tradable domestic products. This
change has a negative effect on GDP if tradable sectors are more
productive than non tradable sectors. Countries with high un-
employment or underemployment are less likely to experience
Dutch Disease (McKinley [78, pp. 2-4]). Whether remittances
would be sent with the intentions of a portfolio investment or al-
truistic helpfulness the remittances will affect the economy dif-

Remittances and their impact on Economic Growth 2013 21 1 7

ferent. Capitals that are used in portfolio investment increase the
economic activity since investments are done with the intentions
to generate profits and productivity, in the same matter as FDI
does. Capitals sent in the mind of altruistic helpfulness do not
bring any demand for profits and productivity. Whether the re-
mittances are dominating altruistic there is more likely that the
inflow will have smaller effect on the economic activity. The ef-
fect could even become negative whether the capital makes the
receiver less productive than the productivity the capital gener-
ates from being used. The idea that remittances work as com-
pensation capital for poor economic performance was supported
by Chami et al. [28, p. 77] which found negative correlation be-
tween the size of remittances and the home country’s GDP for
the period 1970-1998.
The reason for the negative correlation between the size of
remittances and GDP is due to the moral hazard and asymmet-
ric information. The receivers are assumed to have the same
income no matter if they work or not since remittances compen-
sate for low income. The receivers then maximize the utility
by spending more time for leisure since it becomes cheaper in
an opportunity cost perspective. The remitter’s utility is thereby
assumed to be a function of their net consumption and the re-
ceivers’ utility meanwhile the receivers’ utility is a function of
their work effort and the size of the remittances. The model
also assumes the presence of asymmetric information; the re-
mitter cannot observe the receivers’ work effort, which induces
the moral hazard problem in remittances. This model explains
that there may be a problem with decreased productivity when
remittances are present and it states that remittances may not be
the best tool for development and economic growth.
On the other hand increased remittances per GDP re-
duce the aggregate output volatility in the home country
(IMF [58, p. 77]). Increased remittances may have a multi-
plier effect on GDP which dampening economic crises and re-
cession. The capital inflow has positive impact in countries with
high unemployment, even when most of it goes to consumption
(Maimbo and Ratha [73, p. 5]). Remittances give the receiver a
higher disposable income, and higher disposable income has a
spending effect, which has a positive multiplier effect on GDP.
In the long run the higher capital inflow gives possibilities to ac-
cumulate capital through domestic saving and investment which
have a positive effect on GDP (Bourdet and Falck [22, p. 7]). Re-
mittances can be used to finance basic consumption and improve
health conditions. Remittances are also acknowledged to have
a positive impact on education in the home country (Bugamelli
and Peterno [23, p. 5]). These improvements may have positive
effects on poverty in the home country.
4 Macroeconomic Effect of Remittances
In contrast to the effect of remittances in poverty alleviation,
there is not much consensus in the context of the effect of re-
mittances in macroeconomic level. It has still been a debate
whether remittances has a positive, negative or any effect in
8 Per. Pol. Soc. and Man. Sci.
macroeconomic growth. Chami, Fullenkamp and Jahjah devel-
oped a model which examines the relationship between remit-
tances and per capita GDP growth using standard population-
averaged cross-section estimation (Chami, Fullenkamp and Jah-
jah [27]). In 2005, they have developed the model and con-
cluded that the remittances tend to be negatively correlated with
GDP growth, suggesting that they are compensatory in nature
(Chami, Fullenkamp and Jahjah [28]). Then in 2009, Bara-
jas et al. concludes that at best, worker’s remittances have no
impact on economic growth (Barajas et al. [16]). Bettin and
Zazzazo say that remittances has contributed little to economic
growth in remittances-receiving economies and may have even
retarded growth in some. They concluded that they cannot find
a significant positive impact of remittances on long-term growth
and often find a negative relationship between remittances and
growth (Bettin and Zazzaro [19]). There are some major rea-
sons for the researchers to claim remittances do not have posi-
tive macroeconomic effects. Firstly, remittances are said to may
cause a situation similar to the Dutch disease. Acosta and Lartey
found that whether altruistically motivated or otherwise, an in-
crease in remittances flows leads to a decline in labor supply
and an increase in consumption demand that is biased toward
non-tradables. The higher non-tradable prices serve as incentive
for an expansion of that sector, culminating in reallocation of la-
bor away from the tradable sector - a phenomenon known as the
Dutch disease (Acosta and Lartey [1]). Secondly, Chami, Ful-
lenkamp and Jahjahha pointed out that the remittances would
create a moral hazard, lessening the incentive to work. This
would reduce the productivity of the country, giving negative ef-
fect in developing growth (Chami, Fullenkamp and Jahjah [28]).
Thirdly, Bettini and Zazzaro considers that partial reason why
remittances have not spurred economic growth is that they are
generally not intended to serve as investments but rather as so-
cial insurance to help family members finance the purchase of
life’s necessities(Bettini and Zazzaro [19]). As I have explained
in the preceding column, most of the remittances are not in use
for investment.
A possibility has been pointed out that if the remittances be
used as just consumption rather than investment, growth would
not be gained (Ghosh [47]). However, against the conclusion of
Chami, Fullenkamp and Jahjah [28], Mansoor and Quillin have
stated that the remittances appear to have a positive and statisti-
cally significant impact on growth (Mansoor and Quillin [75]).
In the paper, it was addressed that the model developed by
Chami, Fullenkamp and Jahjah [28] was faulty. Based on their
model, improvements were made such as adding institutional
variables which were considered important. Due to these mod-
ifications, it has made conclusion with completely opposing re-
sult. In addition, it has emphasized that remittances would lead
to positive economic growth whether through increased con-
sumption, savings, or investment, mentioning empirical studies
had indicated that remittances lead to positive economic growth.
In this respect, we can retrieve some analytical models from
Adela Shera / Dietmar Meyer
macroeconomics that will allow us to understand and gauge
the weight and impact of remittances depending on the specific
character they assume. Analytically, based on these models we
can establish a distinction between two broad categories of re-
mittances: the so-called wage remittances (family) and the so-
called capital remittances (productive).
• The first correspond to direct transfers for family use, whether
for consumption (wage remittances), savings for future family
consumption or family emergencies, or to cover the expenses
of the reproduction of family customs and traditions implied
by the reproduction of cultural relationships.
• Productive remittances, on the other hand, correspond to var-
ious forms of private or social investment, which do not go
through the family budget. This basic distinction is not fortu-
itous; it is derived from a macroeconomic conceptual frame-
work which allows us to conceptualize and gauge the possi-
ble impacts of both these categories of remittance. Indeed,
from macroeconomic theory we can identify the sphere of in-
cidence and the possible impacts of each type of remittance
on the basis of its particular function as an economic category.
In the case of wage remittances, for example, they contribute
to sustaining the income-spending balance of homes. The im-
pact can be perceived in two different and complementary ways.
• By contributing to family consumption, they contribute to el-
evating the standard of living and welfare of receiving homes,
and at the same time have an effect on the dynamics of eco-
nomic inequality and the conditions of poverty.
• This same contribution to home spending creates multiplier
effects in the rest of the local, regional and national economy.
Nonetheless, the same model shows us clearly and precisely
that we should not mistake these multiplier effects and well-
being with the impact that remittances could have directly as
an instrument of development. As for capital remittances,
macroeconomics shows that they contribute to the savings-
investment balance. As a source of investment, we can con-
sider productive remittances as an instrument of economic
growth which, together with other investment funds (foreign
direct investment, private domestic investment, public invest-
ment, etc.), forms the basis of any development process.
We are not dealing just with different categories in terms of
their origin, but especially in relation to their function and eco-
nomic significance for the countries that receive them. Indeed,
we cannot confuse this impact of capital remittances on eco-
nomic growth with a hypothetical impact on the welfare of the
population and/or reduction of poverty, which is associated more
with wage remittances. Considering these distinctions regarding
the economic significance of remittances, we now present an an-
alytical model which contextualizes and at the same time allows
us to illustrate the macroeconomic relations associated with each
category of remittances (wage or capital), and from which we
Remittances and their impact on Economic Growth
can conceptualize and estimate the possible economic impact
of each of them. What is relevant in this analytical-conceptual
model is that it is based on macroeconomic theory and offers a
framework for understanding the impact of remittances, accord-
ing to the different modalities of concrete categories of remit-
tances.
It allows us to understand how and why wage remittances can
contribute (or not) to reducing poverty in receiving homes, or
influence the distribution of income and welfare levels of the
population. (See Figure 2.)
Thus emigration and remittances are seen as a consequence
of underdevelopment, not as a manifestation of the global econ-
omy that integrates and subordinates these emigrating regions
into the global and postindustrial economy. Moreover, migra-
tion and remittances are also seen as an opportunity for these
underdeveloped economies, as a resource that, if well-managed,
would allow them to overcome the structural conditions or pre-
cariousness, poverty and inequality that led to labor emigra-
tion. Thus, under conditions of a lack of economic growth
and sources of investment, remittances become an unusual al-
ternative, whether through the multiplier effects, or directly as
a source of financing for productive investment. In conditions
of poverty and social precariousness, remittances are held up as
an income opportunity that allows for improvement in the levels
of wellbeing of the population and thus overcome conditions of
poverty. Our view, on the other hand, parts from a more com-
prehensive perspective, in which not only the conditions of the
countries that export labor matter, but also or perhaps especially,
the conditions of the receiving countries of emigration In this
perspective, emigration is no longer solely a problem of and for
the Third World but is an inherent phenomenon of globaliza-
tion and as such, must therefore incorporate the phenomena and
transformations of the economies of the developed and highly
industrialized countries, transformations that directly influence
the configuration of migration processes and remittance flows in
the contemporary world.
In this sense, the social and economic significance of remit-
tances in today’s world cannot be understood without taking into
consideration the character and significance that international
migration now assumes. Moreover, according to various au-
thors, international migration in today’s world cannot be under-
stood without taking into consideration the structural changes
the globalization of the world’s economy has generated in the
system of international economic relations (Castles and Miller,
1993; Naïr, 2006; Sassen, 1998). If migrations constitute a sys-
tem of transference of labor in a globalized world, from the
Third World to the economies of the developed world, remit-
tances represent a system of wage transfers, not only in an in-
verse sense, but inherent to this global process that frames cur-
rent international migrations, in at least two senses.
• Remittances are a fraction of the wages and remunerations
of the migrant labor force in those global markets. They are a
2013 21 1 9
 !"#$%%&'(")*&'+*%,"$!*$#-&(%*.'*"(.'.#$(*/!.0%,*
12*

*
Fig. 2. Effects of wage and capital remittances *
* Remittances
*
*
*
* *
*
P;78DH*:678<<;>@65* -:=?4@<8C6*:678<<;>@65*
*
0;96*B4>?5* $>C65<76><5*B4>?5*
*
P;78DH*<:;>5B6:5* "M<6:>;D*5;C8>95
*
*
*
-;H76><5*
* Q;D;>@6* Q;D;>@6* P+$*
!6><5*
* 8>@=76* 5;C8>95* +=765<8@*$>C65<76><5
.<36:*B;78DH*
* 5E6>?8>9* 8>C65<76><5* -4GD8@*$>C65<76><5*
8>@=765

#4D<8EDH8>9*6BB6@<5*
-=C6:<H*;>?*$>6A4;D8<H "@=>=78@**9:=J<3*
)=@8=6@=>=78@* )<;G8D8<HF*67ED=H76><*
*
J6DB;:6* 6<@**+6C6D=E76><*
*
*
* *
Source: %345*
Chami, 6789:;<8=>* ;>?* :678<<;>@65*
R., C. Fullenkamp and S.;:6* 566>* [28]
Jahjah ;5* ;* @=>56A46>@6* =B* 4>?6:?6C6D=E76><F* >=<* ;5* ;*
7;>8B65<;<8=>*=B*<36*9D=G;D*6@=>=7H*<3;<*8><69:;<65*;>?*54G=:?8>;<65*<3656*6789:;<8>9*:698=>5*
8><=*<36*9D=G;D*;>?*E=5<8>?45<:8;D*6@=>=7HI*#=:6=C6:F*789:;<8=>*;>?*:678<<;>@65*;:6*;D5=*566>*
;5* ;>* =EE=:<4>8<H* B=:* <3656* 4>?6:?6C6D=E6?* 6@=>=7865F* ;5* ;* :65=4:@6* <3;<F* 8B* J6DDK7;>;96?F*
part of the pay that migrant labor receives, which has the same at the same time, the necessary sums and volumes necessary
J=4D?* ;DD=J* <367* <=* =C6:@=76* <36* 5<:4@<4:;D* @=>?8<8=>5* =:* E:6@;:8=45>655F* E=C6:<H* ;>?*
8>6A4;D8<H*<3;<*D6?*<=*D;G=:*6789:;<8=>I*%345F*4>?6:*@=>?8<8=>5*=B*;*D;@L*=B*6@=>=78@*9:=J<3*
macroeconomic function as any other wage: the reproduction for promoting a genuine process of social mobility do not flow
;>?* 5=4:@65* =B* 8>C65<76><F* :678<<;>@65* G6@=76* ;>* 4>454;D* ;D<6:>;<8C6F* J36<36:* <3:=493* <36*
of the labor force. What is unusual in this case74D<8ED86:*6BB6@<5F*=:*?8:6@<DH*;5*;*5=4:@6*=B*B8>;>@8>9*B=:*E:=?4@<8C6*8>C65<76><I*$>*@=>?8<8=>5*
is that the (the following diagram illustrates this idea).
=B* E=C6:<H*
reproduction of the labor force occurs in binational contexts ;>?* 5=@8;D* E:6@;:8=45>655F* :678<<;>@65* ;:6* 36D?* 4E* ;5* ;>* 8>@=76* =EE=:<4>8<H* <3;<*
;DD=J5* B=:* 87E:=C676><* 8>* <36*we
Firstly, D6C6D5* =B* J6DDG68>9*
identify those=B* <36* E=E4D;<8=>* ;>?*
remittances <345* =C6:@=76*
oriented to financ-
and in globalized labor markets, which are sustained by the
@=>?8<8=>5* =B* E=C6:<HI* .4:* C86JF* =>* <36* =<36:* 3;>?F* E;:<5* B:=7* ;* 7=:6* @=7E:636>58C6*
ing various aspects of family reproduction. Among
E6:5E6@<8C6F*8>*J38@3*>=<*=>DH*<36*@=>?8<8=>5*=B*<36*@=4><:865*<3;<*6ME=:<*D;G=:*7;<<6:F*G4<*;D5=*
these re-
establishment of transnational communities and families. Re-
=:* E6:3;E5* 65E6@8;DDHF* <36* @=>?8<8=>5* =B* <36* :6@68C8>9* @=4><:865*
mittances we can identify those that finance daily consump- =B* 6789:;<8=>* $>* <385*
mittances are thus the form in which this fractionE6:5E6@<8C6F*
of migrant 6789:;<8=>* 85* >=* D=>96:* 5=D6DH* ;* E:=GD67* =B* ;>?* B=:* <36* %38:?* 0=:D?* G4<* 85* ;>*
tion (present consumption), those that permit the purchase of
8>36:6><*E36>=76>=>*=B*9D=G;D8N;<8=>*;>?*;5*54@3F*745<*<36:6B=:6*8>@=:E=:;<6*<36*E36>=76>;*
wages is transferred to their families and communities of ori-
;>?* <:;>5B=:7;<8=>5* =B* <36* 6@=>=7865*
durable consumption=B* <36* ?6C6D=E6?*
goods, those ;>?* 3893DH*
that 8>?45<:8;D8N6?*
contribute to @=4><:865F*
financing
gin for family and community social reproduction,<:;>5B=:7;<8=>5*<3;<*?8:6@<DH*8>BD46>@6*<36*@=>B894:;<8=>*=B*789:;<8=>*E:=@65565*;>?*:678<<;>@6*
just as any
unforeseen expenditure or family health emergencies, unfore-
other wage income in these same communities (orBD=J5*8>*<36*@=><67E=:;:H*J=:D?I*
other com-
$>*<385*56>56F*<36*5=@8;D*;>?*6@=>=78@*589>8B8@;>@6*=B*:678<<;>@65*8>*<=?;HO5*J=:D?*@;>>=<*
seen debts, among others, and those that make up a kind of
munities). Remittances are undoubtedly a wage fund; G6* 4>?6:5<==?*
this is J8<3=4<* <;L8>9* 8><=* @=>58?6:;<8=>* <36* @3;:;@<6:* ;>?* 589>8B8@;>@6* <3;<*
present
8><6:>;<8=>;D* 789:;<8=>* >=J*saving for
;554765I* financing
#=:6=C6:F* future<=*
;@@=:?8>9* consumption,
C;:8=45* ;4<3=:5F*as well as those
8><6:>;<8=>;D*
their significance and function as a macroeconomic variable.
that could represent types of family capital, such as financing
• Remittances are not only a part of the process of *the
transna- children’s education, or construction, remodeling and/or home-
tional reproduction of the migrant labor force but also of the buying. Secondly, we can identify those remittances oriented
structural conditions of the social exclusion and labor precar- to financing various aspects and dimensions of the social repro-
iousness faced by this labor force. That is to say, when an- duction of families and communities. Among these remittances
alyzing the economic and social significance of remittances, we can mention those spent on family ceremonies and relations,
we cannot ignore this global context of exclusion and social such as family celebrations (quince anis, that is, 15th birthday
segregation that characterizes migrant labor insertion as they parties, weddings, baptisms, among others) and those that fi-
(remittances) are a direct product of that global context. This nance community ceremonies and relations, such as religious
structural framework of migrants’ exclusion and social seg- festivals, community celebrations, social infrastructure, among
regation is without a doubt what allows us to differentiate many others.
between the social character and significance of remittances
received by developing countries and those received by indus- 5 The indirect economic effects of remittances on
trialized economies of the First World. Thus, remittances are migrant-sending countries
not only a wage fund but also correspond to the wage income Most emigration impact studies have focused only on the di-
of workers who combine a labor insertion of high vulnera- rect social and economic effects of migration, that is, the im-
bility and precariousness in the United States with conditions pact on migrants and their households. However, remittances
of poverty, marginalization and social vulnerability in their may also have significant impacts on non-emigrant households,
countries of origin. In other words, remittances flow from and hence may reshape sending communities as a whole (Tay-
precarious and vulnerable workers to their families who live lor [110, p. 65]). Such indirect effects are usually not cap-
in conditions of poverty in contexts of social marginalization. tured by remittance-use studies. For instance, research has
In this context, it is not strange that remittances should be ori- tended to negatively evaluate consumptive expenses as non-
ented fundamentally to financing family consumption, con- developmental. However, consumptive expenses, provided that
tributing to maintaining a minimum standard of living while they occur locally, can have positive impacts by providing non-

10 Per. Pol. Soc. and Man. Sci. Adela Shera / Dietmar Meyer
 !"#$%%&'(")*&'+*%,"$!*$#-&(%*.'*"(.'.#$(*/!.0%,*
12*

*
%34* 5467* 899:;8<3* 7;* =>?4:678>?* 734* @A9;:78><4* ;B* :4A@778><46* C;=D?* 54* 7;* <;A98:4* 734A
migrants with labor and income. This is confirmed by empirical vestments
C@73* ;734:* and4E74:>8D*
6;=:<46* ;B* officialB@>8><@>FG*
aid for development. Remittance
6=<3* 86* B;:4@F>* inflows 9;:7B;D@;
?@:4<7* @>H467A4>76G*
evidence that consumption by emigrant households can lead,@>H467A4>76* 8>?* ;BB@<@8D*
via represent the 8@?* B;:* ?4H4D;9A4>7I*
second !4A@778><4*
most important @>BD;C6*
source :49:464>7*financ-
of external 734* 64<;>?* A;67
@A9;:78>7*6;=:<4*;B*4E74:>8D*B@>8><@>F*7;*734*?4H4D;9@>F*<;=>7:@46G*@AA4?@874DJ*8B74:*B;:4@F>
multiplier effects, to higher incomes for non-migrant households ing to the developing countries, immediately after foreign direct
?@:4<7*@>H467A4>76I*
(Adelman et al. [6]; Durand et al. [39]). The same holds * true investments.
Figure 3:*);=:<46*;B*4E74:>8D*B@>8><@>F*@>*?4H4D;9@>F*<;=>7:@46*K1LLMNOP1PQ*K$>*R)S*5@DQ*
for so-called “non-productive” investments. For example, aca-
demics and policy makers have almost universally bemoaned the
high amounts of money that migrants tend to spend on housing.
This is partly because such “diatribes by academics and policy
makers against migrants for their profligate and unproductive
ways” (Taylor et al. [109, p. 411]) reflect common elitist views
on the irrational spending behavior of lower classes, which in
any case have a weak or absent empirical basis. Various empiri-
cal studies have reported that construction activities can generate
considerable employment and income for non-migrants (Taylor
*
!"#$%%&'(")*&'+*%,"$!*$#-&(%*.'*
et al. [109]). This also applies to many "(.'.#$(*
other /expenses
!.0%,* ****************
such );=:<4T*+878*B:;A*0;:D?*U8>VG*$#WG*."(+*
* 12*
as feasts and funerals (Mazzucato et al. [77]). In this way,)78:7@>F*B:;A*1LLMG*B;:4@F>*?@:4<7*@>H467A4>76*:49:464>7*734*A8@>*6;=:<4*;B*4E74:>8D*B=>?@>F*
the Fig. 4. Sources of external financing in developing countries (1994–2010)
benefits of remittances might accrue to households other B;:*
34563378*569*:6;<*=4>?@?;<*?A=65@>*B7*=C4;?D?9E*949FA?EC69@>*G?@:*36B4C*69D*?954A<H*%:?>*?>* than?4H4D;9@>F*
(In US$ <;=>7:@46I*
bil) %34* 64<;>?* A;67* @A9;:78>7* 6;=:<4* ;B* 4E74:>8D* B@>8><@>F* 8:4
:4A@778><4*@>BD;C6G*C3@<3*;>*8H4:8F4*@>*734*8>8DJX4?*94:@;?*:49:464>7*899:;E@A874DJ*YPZ*;B*
549I?CA<D* theB7*ones
<A=?C?563*
that <;?D<95<*
directly @:6@* 549>JA=@?49*
receive B7* <A?EC69@*
them (Taylor [110]). :4J><:43D>* 569*
ex- 3<6D8* ;?6*
These734*W+$*BD;C6*KW@F=:4*MQI*%34*A8@>*8?H8>78F46*;B*734*@>BD;C6*:4<4@H4?*86*:4A@778><46*8:4*734@:*
AJ3@?=3?<C* <II<5@>8* @4* :?E:<C* ?954A<>* I4C* 949FA?EC69@* :4J><:43D>* K&D<3A69* <@* 63H* 1LMMN*
penses increase consumption levels that may—by easing 6785@D@7JG* <;>7:8*
capital <J<D@<8D@7J*
Starting from 8>?* 6=678@>85@D@7JG*
1994, 4H4>*investments
foreign direct @>* 734* <8646* ;B* FD;58D* 4<;>;A@<*
represent the 8>?
+JC69D* <@* 63H* 1LLO6PH* %:<* >6A<* :43D>* @CJ<* I4C* >4F5633<D* Q949F=C4DJ5@?;<R* ?9;<>@A<9@>H* S4C*
B@>8><@8D* <:@646I* %3464* <38:8<74:@67@<6* ;B* :4A@778><46* 8:4* A8@>DJ* ?=4* 7;* 734* 9:464><4* ;B
<T6A=3<8*656D<A?5>*69D*=43?57*A6U<C>*:6;<*63A4>@*J9?;<C>6337*B<A469<D*@:<*:?E:*6A4J9@>*4I*
and risk constraints on local production—in turn facilitate local main source of external funding for developing countries. The
8D7:=@67@<* A;7@H46* B;:* 64>?@>F* A;>4J* 3;A4I* U46@?4* 73464* <38:8<74:@67@<6G* :4A@778><4* BD;C6G
A49<7* @:6@* A?EC69@>* @<9D*
investments by @4* >=<9D* 49*and
migrants :4J>?9EH* %:?>* ?>* =6C@37*
non migrants alikeB<56J><*
(Stark>J5:* QD?6@C?B<>*
<;>7:8:J*
[104]; 7;* B7*
secondB;:4@F>*
most?@:4<7* @>H467A4>76*
important 8>?* of
source 9;:7B;D@;*
external@>H467A4>76G*
financing:49:464>7*
are remit- <89@78D* BD;C6
656D<A?5>* 69D* =43?57* A6U<C>* 6E6?9>@* A?EC69@>* I4C* @:<?C* =C4I3?E6@<* 69D* J9=C4DJ5@?;<* G67>R*
C@73;=7*8>J*B=7=:4*;5D@F87@;>6*B;:*:498JA4>76I*-;:7B;D@;*@>BD;C6*8:4*734*D4867*6785D4*6;=:<4*;B
K%6734C* <@* Stark and Bloom
63H* 1LLOVW11P* [107]).
C<I3<5@* 54AA49*In<3?@?>@*
this ;?<G>*
way, 49* expenditure on>=<9D?9E*
@:<* ?CC6@?4963* housing tance
B<:6;?4C* 4I*inflows, which on average in the analyzed period represent
4E74:>8D*B=>?@>FG*?=4*7;*734@:*3@F3*H;D87@D@7J*;H4:*?@BB4:4>7*4<;>;A@<*<J<D46I*%34*A8@>*A;7@H4
34G<C* 536>><>8* G:?5:* ?9* 697* 56><*
and consumption may:6;<*
have 6* G<6U* 4C* 6B><9@*
significant <A=?C?563*effects
multiplier B6>?>H* X6C?4J>*
the <A=?C?563*
in;B*734*9;:7B;D@;*@>H467A4>76*@6*:48<3@>F*9:;B@785@D@7J*@>*734*<;=>7:J*;B*@>H467A4>7G*C3@<3*A8V46
approximately 50% of the FDI flows (Figure 4). The main ad-
>@JD?<>* :6;<* C<=4C@<D* @:6@* 549>@CJ5@?49* 65@?;?@?<>* 569* E<9<C6@<* 549>?D<C6B3<* <A=347A<9@* 69D*
734A*>;7*4H4>DJ*69:48?*@>*?@BB4:4>7*?4H4D;9@>F*<;=>7:@46G*8>?*3@F3DJ*?494>?4>7*;>*734*<=::4>7*
wider economy.
?954A<*I4C*949FA?EC69@>*K%6734C*<@*63H*1LLOPH*%:?>*63>4*6==3?<>*@4*A697*4@:<C*<T=<9><>*>J5:* vantages of the inflows received as remittances are their stability,
4<;>;A@<* 6@7=87@;>* @>* 734* 98:7@<=D8:* <;=>7:J* ;B* @>74:467I* &6* 8* :46=D7* 734J* 8:4* 3@F3DJ* =>6785D4G
6>*I<6>@>*69D*IJ9<C63>*K#6YYJ56@4*<@*63H*Z[[OPH*$9*@:?>*G678*@:<*B<9<I?@>*4I*C<A?@@695<>*A?E:@* contra cyclicality and sustainability, even in the cases of global
8>?*4H4>*>4F87@H4*@>*6;A4*J48:6I*.BB@<@8D*8@?*B;:*?4H4D;9A4>7*:49:464>76*<89@78D*BD;C6*C@73;=7
655CJ<* @4* :4J><:43D>* 4@:<C* @:69* @:<* 49<>* @:6@* D?C<5@37* C<5<?;<* @:<A* K%6734C8* 1LLLPH* %:<><*
8>J*;5D@F87@;>6*B;:*B=7=:4*:498JA4>76*8>?*C@73*<4:78@>*?4F:44*;B*6785@D@7J*;H4:*734*J48:6I*U=7*
<T=<9><>* ?95C<6><* 6 How549>JA=@?49*
big are remittance flows? <6>?9E* 56=?@63* 69D* C?>U* 549>@C6?9@>*
3<;<3>* @:6@* A67\B7* economic and financial crises. These characteristics of remit-
=6=8DDJ* 734J*49*8:4* <;>6@?4:4?* 86* 8* D@A@74?* 8>?* 3@F3DJ* ?494>?4>7* 6;=:<4* ;B* 4E74:>8D* B=>?@>FG
34563* =C4DJ5@?49\?9* Over the@JC9*
pastI65?3?@6@<*
few years34563*
the?9;<>@A<9@>*
true size of B7*remittances
A?EC69@>* 69D*has 949*come
A?EC69@>* 63?U<* are mainly due to the presence of altruistic motives for
tances
C3@<3*<8>>;7*9:;A;74*6=678@>85D4*4<;>;A@<*F:;C73I*
K)@6CU* 1LM[N* )@6CU* 69D* ]344A* 1LM2PH* $9* @:?>* G678* <T=<9D?@JC<* 49* :4J>?9E* 69D* * 549>JA=@?49*
to light. They have become the most real and least controver-
A67*:6;<*>?E9?I?569@*AJ3@?=3?<C*<II<5@>*?9*@:<*G?D<C*<5494A7H* sending money home. Beside these characteristics, remittance
*
* sial link between migration and economic development. Total * flows, contrary to foreign direct investments and portfolio in-
* *
amount of remittances, from year to year, have increased signif- vestments, represent capital flows without any future obligations
!" #$%&'()*+*+,'--)./+01$%23 Figure 4:*-:@H874*<89@78D*BD;C6*1LLPNOP1P*
icantly. According to the latest available data published by the for repayments. Portfolio inflows are the least stable source of
.;<C*@:<*=6>@*I<G*7<6C>*@:<*@CJ<*>?Y<*4I*C<A?@@695<>*:6>*54A<*@4 3?E:@H*%:<7*:6;<*B<54A<*@:<*
World Bank, the total amount of officially recorded remittances *
external funding, due to their high volatility over different eco-
A4>@* C<63* 69D* 3<6>@* 549@C4;<C>?63* 3?9U* B<@G<<9* A?EC6@?49* 69D* <5494A?5* D<;<34=A<9@H* %4@63
were US$ 2 billion in 1970, reaching US$ 135 billion in 2000 nomic cycles. The main motive of the portfolio investments is
6A4J9@*4I*C<A?@@695<>8*IC4A*7<6C*@4*7<6C8*:6;<*?95C<6><D*>?E9?I?569@37H*&554CD?9E*@4*@:<*36@<>@
6;6?36B3<*and D6@6*US$
=JB3?>:<D* B7* @:<*in04C3D*
456 billion 2008.]69U8* Then, @:<*they
@4@63*fell
6A4J9@* 4I* 4II?5?6337*
slightly to US$ C<54CD<D*
reaching profitability in the country of investment, which makes
C<A?@@695<>*G<C<*^)_*Z*B?33?49*?9*1L`[8*C<65:?9E*^)_*1a2*B?33?49*?9*Z[[[*69D*^)_*W2O*B?33?49
429 billion in 2009 and again started to grow to US$
?9*Z[[MH%:<98*@:<7*I<33*>3?E:@37*@4*^)_*WZL*B?33?49*?9*Z[[L*69D*6E6?9*>@6C@<D*@4*EC4G*@4*^)_ 449 billion them not evenly spread in different developing countries, and
WWL*B?33?49*?9*Z[1[8*D<>=?@<*@:<*<II<5@>*4I*@:<*E34B63*<5494A?5*5C?>?>H*%:<*<>@?A6@<>*I4C*Z[11
in 2010, despite the effects of the global economic crisis. The highly dependent on the current economic situation in the par-
C<65:*^)_*WMa*BH*
* estimates for 2011 reach US$ 483 b. (See Figure 3.) ticular country of interest. As a result they are highly unstable,
Figure 2: 04C3DV*!<A?@@695<>F?9I34G>8*1L`[FZ[11*K<>@?A6@<P*K$9*^)_*B?33?49P* and even negative in some years. Official aid for development
represents capital flows without any obligations for future repay-
ments and with certain degree of stability over the years. But
usually they are considered as a limited and highly dependent
source of external funding, which cannot promote sustainable
economic growth.
According to the latest World Bank (December, 2011) data
for 2011, the largest re cipient countries of remittance flows are:
India, China, Mexico, Philippines, France, Pakistan, Germany,
** Bangladesh, Belgium and Spain. It is evident that the list of top
*******************)4JC5<V*04C3D*]69U*Z[1Z*
20 remittance recipient countries includes high-income coun-
Fig. 3. World: Remittances-inflows, 1970–2011 (estimate) (In US$ billion) tries as France, Spain, Germany and Belgium, but the amount of
* received remittances as a share of the GDP, in these countries,
The best approach to understand the importance of remit- is insignificant. As one would expect, in 2010 remittances re-
tances would be to compare them with other sources of exter- ceived by the top 10 developing recipient countries represented
nal financing, such as foreign direct investments, portfolio in- 45 percent of the total remittance inflows. This is not unusual

Remittances and their impact on Economic Growth 2013 21 1 11

 !"#$%%&'(")*&'+*%,"$!*$#-&(%*.'*"(.'.#$(*/!.0%,*
12*

!"#$%%&'(")*&'+*%,"$!*$#-&(%*.'*"(.'.#$(*/!.0%,* 34567789:4;* 69* )<=7>48;7* "=3<?4* 6;* 7<* 4@?34;;* 7>45* 8;* 8* ;>834* <A* /+-* BC6D=34* EFG* C3<5* 7>4
12*
A6D=34*E*67*6;*4H6I497*7>87*7>6;*?43:497*6;*5<34*7>89*;6D96A6:897J*89I*69*;<54*:<=97364;*67*348:>4;*
EKJL* ?43:497* B4GDG* #<MI<H8* 69* NOOPFG* 067>* 7>4* 4@:4?76<9* <A* Q<;968* 89I* ,43R4D<H698J* S>434
Moldova and Republic of Macedonia). Remittance inflows de-
7>4*I878*;><S;*8*I4:348;69D*7349I*<H43*7654*B8;*8*34;=M7*<A*/+-*D3<S7>*69*34:497*T483;J*89I
M<S*:<H438D4*<A*34567789:4;*AM<S;FJ*8MM*<7>43*:<=97364;*>8H4*;78UM4*34567789:4*69AM<S;*<H43*7>4
clined in 2009 in almost all of the analyzed countries (with the
?436<I* NOOOVNOO2* B&MU8968J* )43U68* 89I* Q=MD8368FJ* <3* 8* :<9769=8M* 7349I* <A* D3<S7>* B!<58968J
#<MI<H8*89I*!4?=UM6:*<A*#8:4I<968FG*!4567789:4*69AM<S;*I4:M694I*69*NOOW*69*8M5<;7*8MM*<A
exception of Serbia and R. Macedonia), due to the global crisis
7>4* 898MTR4I* :<=97364;* BS67>* 7>4* 4@:4?76<9* <A* )43U68* 89I* !G* #8:4I<968FJ* I=4* 7<* 7>4* DM<U8M
that caused remittance inflows in developing countries to fall by
:36;6;*7>87*:8=;4I*34567789:4*69AM<S;*69*I4H4M<?69D*:<=97364;*7<*A8MM*UT*XGN*?43:497G*
*
5.2 percent.
Figure 5Y* !4567789:4* 69AM<S;* 8;* 8* ;>834* <A* /+-V;4M4:74I* :<=97364;* A3<5* )<=7>48;7* "=3<?4*
BNOOOVNO11F*B69*ZF*

*
)345678*0359:*+7;793<=7>?*$>:@6A?35B*A>:*/93CA9*"63>3=@6*#3>@?35B*
*
&6635:@>D* ?3*
Fig.?E7*
5. 9A?7B?*
Private0359:*
capitalFA>G*
flowsH+767=C75I*
1990–2010 JK11L* :A?A* M35* JK11I* ?E7* 9A5D7B?* 576@<@7>?*
634>?5@7B* 3M* 57=@??A>67* M93NB* A578* $>:@AI* (E@>AI* #7O@63I* -E@9@<<@>7BI* P5A>67I* -AG@B?A>I* )<=3:4Y*0<3MI*Q89[*I878J*(49738M*U89[*<A*)43U68J*(49738M*U89[*<A*#<MI<H8*89I*(49738M*U89[*<A*&MU8968*B\89=83TJNO1NFG*
/75=A>QI* FA>D9A:7BEI* F79D@4=* A>:* )<A@>R* $?* @B* 7;@:7>?* ?EA?* ?E7* 9@B?* 3M* ?3<* JK* 57=@??A>67 *
576@<@7>?*having
634>?5@7B*in@>694:7B*
mind E@DES@>63=7*
that 8 of those 634>?5@7B* AB* P5A>67I*
countries are)<A@>I* /75=A>Q*
included in A>:*
theF79D@4=I
*!4567789:4*69AM<S;*69*NOOW*>8I*89*4AA4:7*<9*34I=:69D*7>4*:=33497*8::<=97*I4A6:67*UT*8M5<;7*K*
Fig. 6. Remittance inflows as a share of GDP-selected countries from South-
7654;*69*#<MI<H8J*N*7654;*69*)43U68J*89I*8M5<;7*N*7654;*69*&MU8968G*.9*7>4*<7>43*>89IJ*67*6;
C4?* ?E7* A=34>?* 3M* 5767@;7:* 57=@??A>67B* AB* A* BEA57* 3M* ?E7* /+-I* @>* ?E7B7* 634>?5@7BI* @B*
group
@>B@D>@M@6A>?R* &B*of topN349:*
3>7* 20 emigration countries
7O<76?I* @>* JK1K* in the5767@;7:*
57=@??A>67B* world.CQ* The?E7*most im-
?3<* 1K* <UH6<=;*
east
:7;793<@>D 7>87*(2000–2011)
Europe 34567789:4;J* S>49* (in %)7>4T* 834* 5<;7MT* ;?497* <9* 65?<37;J* :89* UT* 7>45;4MH4;* :34874
738I4* I4A6:67;G* "H49* 69* 7>87* :8;4J* 67* 6;* :M483* 7>87* ;=:>* I4A6:67;* 834* ;4MAVA6989:69D* 89I* ?<;4* 9<*
576@<@7>?*634>?5@7B*57<57B7>?7:*TU*<7567>?*3M*?E7*?3?A9*57=@??A>67*@>M93NBR*%E@B*@B*>3?*4>4B4A9
portant receiving countries by a share of remittances in GDP in 7>3487* 7<* U8M89:4* <A* ?8T5497;* ;78U6M67TG* &9<7>43* S8T* 7<* ;><S* 7>4* 65?<3789:4* <A* 34567789:4
EA;@>D* @>* =@>:* ?EA?* V* 3M* ?E3B7* 634>?5@7B* A57* @>694:7:* @>* ?E7* D534<* 3M* ?3<* JK* 7=@D5A?@3>* 69AM<S;*6;*7<*:<5?834*7>45*S67>*<7>43*7T?4;*<A*:8?678M*AM<S;G*%>4*:>837;*69*Figure
Remittance inflows in 2009 had an effect on reducing the5cur- ;><S*7>4*
634>?5@7B*2010
@>* ?E7*(World Bank,
N359:R* %E7* December,
=3B?* 2011), were:
@=<35?A>?* 5767@;@>D* Tajikistan,
634>?5@7B* Lesotho,
CQ* A* BEA57* 3M* 57=@??A>67B* @>
:<5?<;676<9* <A* :8?678M* AM<S;* 69* ;6@* )<=7>48;7* "=3<?489* :<=97364;* .9MT* 69* Q=MD8368* 89I*
/+-* @>* JK1K* H0359:* FA>GI* +767=C75I* JK11LI* N7578* %AW@G@B?A>I* rent account deficit by almost 4 times in Moldova,
!<58968J* 34567789:4* 69AM<S;* 834* 389[4I* U4>69I* A<346D9* I634:7* 69H4;75497* 8;* 8* ;<=3:4* 2 times in <A
Samoa, Moldova, Kyrgyz Republic and Nepal. X7B3?E3I*
Remittance)A=3AI*in-#39:3;AI
4@74398M* A=9I69DG* $9* <7>43* A<=3* :<=97364;* B&MU8968J* Q<;968* 89I* ,43R4D<H698J* #8:4I<968* 89I
YQ5DQZ*!7<4C9@6*A>:*'7<A9R*!7=@??A>67*@>M93NB*@>*?E7B7*634>?5@7B*A57*=357*?EA>*JK*<7567>?*3M* Serbia, and almost 2 times in Albania. On the other hand, it
flows in these countries are more than 20 percent of GDP. From #<MI<H8F*34567789:4;*834*;6D96A6:897MT*M83D43*7>89*<7>43*7T?4;*<A*:8?678M*AM<S;G*%>6;*6;*69*M694
/+-R*P53=*?E7*D534<*3M*JT*634>?5@7B*?EA?*EA;7*57=@??A>67*@>M93NB*AC3;7*1K*<7567>?*3M*/+-I*2
634>?5@7B*the
C793>D* ?3* ?E7* 57D@3>* 3M* "453<7* isS67>* 697439876<98M* 4@?43649:4J* S>6:>* :<9A635;* 7>87* ?<<343* 89I* ;58MM43* :<=97364;* 34:46H4
obvious that remittances, when they are mostly spent on im-
group of 24 countries thatA>:* (7>?5A9*
have &B@AI* NE@97*
remittance U* 3M* ?E7=*
inflows aboveC793>D*
10 ?3*34M876H4MT*
?E7 M83D43* 34567789:4;G* $9AM<S;* A3<5* ?<37A<M6<* 69H4;75497;* 834* 94DM6D6UM4* UT* ;6R4J
)34?E7AB?*"453<7*57D@3>*H#39:3;AI*Y3B3;3I*F3B>@A*A>:*,75Z7D3;@>AI*&9CA>@A*A>:*)75C@ALR* 69I6:8769D*8*>6D>*M4H4M*<A*=9I43I4H4M<?5497*<A*7>4*;4:<9I83T*;7<:[*4@:>89D4*583[47;*69*7>4;4
ports, can by themselves create trade deficits. Even in that case,
* percent of GDP, 7 countries belong to the region of Europe and :<=97364;G*
* it* is clear that such deficits are self-financing and pose no threat
Central Asia, while 5 of them belong to the Southeast Europe re- *
!"#" $%&'(()*+%,'*-./0,'*1/2(3%),(425/6% toFigure
balance of payments
6:* !4567789:4* 69AM<S;* 89I* stability.
<7>43* :8?678M*Another way to:<=97364;*
69AM<S;* V ;4M4:74I* showA3<5* the )<=7>48;7*
im-
gion (Moldova, Kosovo, Bosnia and Herzegovina, Albania and "=3<?4*BNOOOVNOOWF*B$9*])^*56MM6<9F*
)34?E7AB?* portance
"453<7* @B* 3>7* 3M* ?E7* =3B?* 5797;A>?* 57=@??A>67* 576@<@7>?* 57D@3>B* @>* ?E7* N359:R* %E7 of remittance inflows is to compare them with other
Serbia).
=A@>*57AB3>B*M35*?E@B*A57*?E7*9A5D7*>4=C75*3M*7=@D5A>?B*?EA?*?E@B*57D@3>*EAB*A9NAQB*657A?7:I*?E7* types of capital flows. The charts in Figure 5 show the com-
=3?@;7B* M35* 7=@D5A?@3>S=A@>9Q* 763>3=@6A99Q* :7?75=@>7:I* AB* N799* AB* ?E7* B?53>D* MA=@9Q** ?@7B
NE@6E*?E7*7=@D5A>?*<3<49A?@3>*B?@99*=A@>?A@>B*N@?E*?E7*634>?5Q*3M*35@D@>R*%E7*=3B?*@=<35?A>? position of capital flows in six Southeast European countries
6.1 Remittances inflows in Southeast Europe
576@<@7>?B*3M*57=@??A>67BI*A=3>D*?E7*)34?E7AB?*"453<7A>*634>?5@7BI*A578*#39:3;AI*F3B>@A*A>: Only in Bulgaria and Romania, remittance inflows are ranked
,75Z7D3;@>AI* Southeast Europe
&9CA>@AI* )75C@AI* is one!3=A>@AI*
F49DA5@AI* of the most relevant3M*remittance
A>:* !7<4C9@6* #A67:3>@AR* &B*re-BE3N>* @>
?AC97* 1I* cipient
?E7* ?3?A9*regions
A=34>?*in3M*the
57=@??A>67* behind foreign direct investment as a source of external fund-
world. @>M93NB*
The main H63=<7>BA?@3>*
reasons for3M*this7=<93Q77BI*
are the N35G75B[
57=@??A>67B*A>:*=@D5A>?*?5A>BM75BLI*35*3M*64557>?*?5A>BM75BI*>7?*H:7M@>7:*@>*A6635:A>67*N@?E*?E7 ing. In other four countries (Albania, Bosnia and Herzegovina,
large number
F.-* :7M@>@?@3>LI* of?E7*
@B* 3>7* 3M* emigrants that this
=3B?* @=<35?A>?* region
@?7=B* 3M* ?E7*has always
CA9A>67* created,A>:* ?E7Q
3M* <AQ=7>?BI*
9A5D79Q*63>?5@C4?7*@>?3*<53;@:@>D*B4B?A@>AC97*CA9A>67*3M*<AQ=7>?BI*7B<76@A99Q*M35*63;75@>D*?E7* Macedonia and Moldova) remittances are significantly larger
the motives for emigration-mainly economically determined, as
:7M@6@?B* @>* ?E7* M357@D>* ?5A:7R* %E7* B@=<97B?* NAQ* ?3* 7O<9A@>* ?E7* @=<35?A>67* A>:* ?E7* B@Z7*than3M other types of capital flows. This is in line with interna-
well as the strong family ties which the emigrant population still
tional experience, which confirms that poorer and smaller coun-
maintains with the country of origin. The most important recip-
* tries receive relatively larger remittances. Inflows from portfo-
ients of remittances, among the Southeast European countries,
lio investments are negligible by size, indicating a high level of
are: Moldova, Bosnia and Herzegovina, Albania, Serbia, Bul-
underdevelopment of the secondary stock exchange markets in
garia, Romania, and Republic of Macedonia. As shown in Ta-
these countries.
ble 1, the total amount of remittance inflows (compensation of
However, despite their positive contributions to foreign ex-
employees, workers’ remittances and migrant transfers), or of
change earnings and national income, remittances could also
current transfers, net (defined in accordance with the BOP def-
have their downside. Extensive and continuing inflows of re-
inition), is one of the most important items of the balance of
mittances sometimes can lead to a significant appreciation of
payments, and they largely contribute into providing sustainable
the real exchange rate and therefore a loss in the relative ex-
balance of payments, especially for covering the deficits in the
port competitiveness of price sensitive tradable goods. Although
foreign trade. The simplest way to explain the importance and
the empirical evidence of negative effects from remittances on
the size of remittances in Southeast Europe is to express them
terms of trade and growth are limited, usually these negative
as a share of GDP (Figure 3). From the Figure 3 it is evident
effects exist in cases of small and open economies which are,
that this percent is more than significant, and in some countries
at the same time, large remittance receiving countries. For ex-
it reaches 34.7 percent (e.g. Moldova in 2006). With the excep-
ample, one IMF report finds the significant appreciation of the
tion of Bosnia and Herzegovina, where the data shows a decreas-
exchange rate in Moldova as a result of the extensive remittance
ing trend over time (as a result of GDP growth in recent years,
inflows (IMF [58]). Lucas [71] argues that Albania greatly ben-
and low coverage of remittances flows), all other countries have
efited from remittances as a source of foreign exchange and as
stable remittance inflows over the period 2000-2008 (Albania,
a safety net for the poor people, but this has also postponed the
Serbia and Bulgaria), or a continual trend of growth (Romania,
depreciation of its currency and thus potential export growth.

12 Per. Pol. Soc. and Man. Sci. Adela Shera / Dietmar Meyer
 !"#$%%&'(")*&'+*%,"$!*$#-&(%*.'*"(.'.#$(*/!.0%,*
12*

*
a) Albania b) Bosnia and Herzegovina

*
c)Bulgaria d) R.Macedonia

e)Moldova f)Romania

*
*******)345678*0359:*;<=>*:<?<@*$#A*:<?<@*';!#*:<?<*BC<=4<5D@*EF1EGH*
*
*
Fig. 7. Remittance inflows and other capital inflows – selected countries from Southeast Europe (2000–2009) (In US$ million)
,3I7J75@* :7KLM?7* ?N7M5* L3KM?MJ7* 63=?5MO4?M3=K* ?3* P357MQ=* 7R6N<=Q7* 7<5=M=QK* <=:* =<?M3=<9*
The mainM=63S7@*
interests 57SM??<=67K* 6349:*
of the central bank in <9K3* N<J7* ?N7M5*
the recipient coun-:3I=KM:7H*
7 The use"R?7=KMJ7* <=:* 63=?M=4M=Q*
of Remittances M=P93IK* 3P
in Albania
tries is how to capture the remittances inflows, but the main in- Remittances from expatriates in foreign currency, which were
terest of the researchers is how to capture the basic influences of vital importance for the majority of the Albanian population,
*
and consequences of these flows, or what are their effects in became more than a typical phenomenon for Albania in the re-
general. The most important influence of the remittance flows, cent years and one of the main items that financed the great
on which most of the discussions has been led, is whether these imbalance between the export of goods and the import of ser-
flows are inflationary, and whether they generate relative price vices. It is a well-known fact that the emigration phenomenon
changes, causing reallocation of domestic resources (MPRA Pa- on a large scale became evident for the very first time by mid
per, May, 2010). 1990. Since 1992, even earlier, these remittances that in the ter-
minology of the balance of payments are known as “remittances
from expatriates” became more and more significant besides the

Remittances and their impact on Economic Growth 2013 21 1 13

 W=7* 34I43369>* 7H* 7E4* X)#)* 1QQU* 8CH=7* @GU* F43:497* HI* 34567789:4;* 834* =;4<* IH3*
69B4;75497*69*7E463*HA9*C=;694;;*89<*7E4*5H;7*F837*HI*7E45*UUGY*F43:497*834*=;4<*C=6J<69>*H3*
345H<4J69>*8*EH=;4G*
*
Figure 7Z*!4567789:4;*7349<;*69*&JC8968*
*
high level of state transfers at that time. Though not reliable
and correct data are available, it is estimated that in the neigh-
boring countries live and work about 800 thousand Albanians,
that represent all the categories of population. The Albanian re-
ality of the early ‘90s and the last year situation, speak for an
immigration tendency of the free labor force. Notwithstanding
the advantages and disadvantages, such a phenomenon has ab-
sorbed to a great extent the poverty of the Albanians. The small
size of the country made the standard of living, consumption,
savings; investments reflect immediately evident improvements *******************)H=3:4Z*0H3J<*W89M*1Q21*
*
on one hand and render possible the external equilibrium of the $9*;F674*HI*7E87L*89H7E43*34:HB43D*HI*7E4;4*34567789:4;*69*;656J83*A8;*;EHA9*H9*7E4*IHJJHA69>*
Fig. 8. Remittances trends in Albania
D483;G* )69:4* 7E4* C4>69969>* HI* 7E4* 2??Q[;L* 456>3876H9*34F34;497;*8*;6>96I6:897* FE49H549H9* 69*
economy on the other hand. )H=7E48;7*"=3HF4*P)""SG*!4567789:4;L*7E4*5H94D*;497*EH54*CD*56>3897;L*834*H94*HI*7E4*5H;7*
B6;6CJ4* :H9;4\=49:4;* HI* 456>3876H9G* &::H3<69>* 7H* 7E4* 0H3J<* W89M* P1QQUSL* 34567789:4;* 834*
Households used remittances for various purposes, during 38F6<JD* is also increasing,
69:348;69>* I3H5* ]22?*from C6JJ6H9*60% in7H*1997
69* 2??K* ($71 69*
]Y2K* C6JJ6H9* billion) to F3HFH376H9*
1QQKG* %E4* 75% in HI*
34567789:4;*7H*<4B4JHF69>*:H=97364;*6;*8J;H*69:348;69>L*I3H5*@Q^*69*2??K*P]K2*C6JJ6H9S*7H*KR^*
2007 ($240 billion). Four East European countries are among
1996, 22 percent of remittances were spent on food and cloth- 69*1QQK*P]1_Q*C6JJ6H9SG*`H=3*"8;7*"=3HF489*:H=97364;*834*85H9>*7E4*AH3J<a;*5869*34:6F6497;*HI*
ing. Another 13 percent was used to buy furniture and household *************************************************
the world’s main recipients of remittances as percentage of gross
U
*0H3J<*W89ML*(H=973D*!4FH37*1Q22*
appliances, while 18 percent was used to buy or build housing domestic product (GDP), namely Albania, Armenia, Bosnia and
units, partially easing the severe housing shortages in Albania. * Herzegovina, and Moldova. Remittances of Albanians living
A further 20 percent was invested in family businesses. Thus, abroad were down by 8.2 percent for the first three months of
remittances equaling $170 million were used in productive in- 2011 compared to the same period in 2010. According to data
vestments during 1996, approximately twice the level of foreign published by Albania’s Central Bank, remittances in the three
aid to, or foreign direct investments in, Albania that year. Ac- month period ending March 31 were Euro 157 million. Remit-
cording to the LSMS 2005 the highest percentage (27 percent) tances, which have been a driving force for the Albanian econ-
of total remittances during 1996 was saved by the recipient. This omy for the last 20 years, have shown a declining trend in the
high rate of saving was probably influenced by the high interest last couple of years.
rates promised by the pyramid schemes prevalent at that time.
Although these schemes collapsed in early 1997, it would be 8 Impact of Remittances on Economic Growth
a mistake to assume that the remittances invested in them were Whereas views on the impact of international remittances on
lost. Indeed, the schemes collapsed because they paid early in- social and economic development in migrant-sending societies
vestors out of funds provided by later investors and eventually have recently inclined toward the positive side, the impact of
end-with no assets. Thus, remittance monies invested in pyra- remittances on national economic growth and employment are
mid schemes would have been paid out to early investors and rather unclear (World Bank [114, xiii]). The consequences of
used for con1sumption or business formation. for a discussion remittances on long-term economic development are not well
of the role of remittances in the Albanian pyramid schemes, see understood (Kapur [60, vii]). There seems to be no conclu-
Korovilas [65]. In the course of 1992–1997, entered in the form sive evidence to sustain either neoclassical or dependency the-
of current transfers USD 2.8 billion6 , of which 1.9 billion are a ory, because relevant studies have yielded contradictory find-
contribution of the Albanian migrants. It is estimated that after ings. Other studies are less upbeat and mention the potentially
reaching the climax in 1996, the remittances from expatriates adverse effects of remittances in that they create a strong dis-
reduced by half in 1997 because of the pyramid schemes phe- incentive for domestic savings and support private consumption
nomenon. of (imported) goods instead of financing investment, which can
But referring to the LSMS 2008 about 6.8 percent of remit- potentially hamper competitiveness and increase trade deficits
tances are used for investment in their own business and the (Kireyev [64]). There are some indisputable welfare effects of
most part of them 88.3 percent are used building or remodeling migrant remittances. First, remittances are an important source
a house. of income for many low and middle-income households in de-
In spite of that, another recovery of these remittances in sim- veloping countries.
ilar was shown on the following years. Since the beginning Second, remittances provide the hard currency needed for im-
of the 1990’s, emigration represents a significant phenomenon porting scarce inputs that are not available domestically and also
in Southeast Europe (SEE). Remittances, the money sent home additional savings for economic development (Ratha [95]; Tay-
by migrants, are one of the most visible consequences of emi- lor [110]; Quibria [93]). But the magnitude of the development
gration. According to the World Bank (2008), remittances are impact of remittances on the receiving countries was assumed by
rapidly increasing from $119 billion in 1997 to $317 billion in many scholars to depend on how this money was spent. Thus,
2007. The proportion of remittances to developing countries a significant proportion of the literature studies the use of re-
6 World Bank, Country Report 2011 mittances for consumption, housing, purchasing of land, finan-
cial saving and productive investment. There is no doubt that

14 Per. Pol. Soc. and Man. Sci. Adela Shera / Dietmar Meyer
spending on entrepreneurial investment has a positive direct ef-
fect on employment and growth. However, other scholars docu-
mented that even the disposition of remittances on consumption
and real estate may produce various indirect growth effects on
the economy. Most of the theoretical researches considering the
multiplier effects of remittances use models that capture both
migration and remittances effects on welfare. They consider re-
mittances as a possible offset to the decline in output suffered by
developing countries, caused by the loss of trade opportunities
as a result of emigration. The results show that if low-skilled
migrants emigrate, the welfare of the source country rises in
the case that remittances are in excess of the domestic income
loss. If highly-skilled persons emigrate and/or if emigration is
accompanied by capital, remittances have a welfare increasing
effect for the non-migrants only when the capital/labor ratio of
the source economy remains unchanged or rises. If the capi-
tal/labor ratio falls, the welfare effect is indeterminate or even
negative (Quibria [93]).
The effect of remittances in the economic growth depends
on the way which they are spent. If remittances are spent for
consumption, the welfare impact of remittances depends on the
relative factor intensities of traded and non-traded goods (Dja-
jic [36]). The empirical evidence indicates that multiplier ef-
fects can substantially increase gross national product. Thus
for example every “migradollar” spend in Mexico induced a
GNP increase of USD 2.69 for the remittances received by ur-
ban households and USD 3.1 for the remittances received by
rural households (Ratha [95]). In Greece, remittances gener-
ated at the beginning of the 1970s a multiplier of 1.77 in gross
output, accounting for more than half of the GDP growth rate.
Furthermore, high proportions of employment were supported
by remittances: 10.3% in mining, 5.2% in manufacturing and
4.7% in construction. And the capital generated by remittances
amounts to 8% of the installed capacity in manufacturing. Of
particular interest is the finding that spending on consumption
and investment produced similar multipliers of respectively 1.8
and 1.9. And contrary to common opinion, expenditure on hous-
ing was found to be very productive, with a multiplier of 2 (Glyt-
sos [48]). By carrying out an econometric test on data from
11 Central and Eastern European countries, Léon-Ledesma and
Piracha [68] found that remittances significantly contribute to
the increase of the investment level of the source economies.
Drinkwater et al. [38] attained similar results through a study
of 20 developing countries. Moreover, their results showed that
remittances also diminished unemployment, but insignificantly.
Remittances do not only have positive effects on the source
economy. If remittances generate demand greater than the econ-
omy’s capacity to meet this demand, and this demand falls on
non-tradable goods, remittances can have an inflationary effect.
In Egypt, for example, the price for agricultural land rose be-
tween 1980 and 1986 by 600% due to remittances (Adams [5]).
Along with the positive effects remittances had on Jordan’s
economy, in the years 1985, 1989 and 1990, they seem to
Remittances and their impact on Economic Growth
have intensified recession very strongly and generated negative
growth rates of over 10%. Other potential negative welfare im-
plications of remittances are the encouragement of continued
migration of the working age population and the dependence
among recipients accustomed to the availability of these funds.
All these could perpetuate an economic dependency that under-
mines the prospects for development (Buch et al. [21]).
Finally, because remittances take place under asymmetric in-
formation and economic uncertainty, it could be that there exists
a significant moral hazard problem leading to a negative effect
of remittances on economic growth. Given the income effect of
remittances, people could afford to work less and to diminish
labor supply. Using panel methods on a large sample of coun-
tries Chami et al. [27] found that remittances have a negative
effect on economic growth (which according to the authors in-
dicates that the moral hazard problem in remittances is severe).
The long-run motivation for attracting increased remittance in-
flows is to promote economic growth and development in recip-
ient countries. In line with this ambition, understanding of the
appropriate channels through which remittances influence eco-
nomic performance is essential to formulating sound policies to
maximize their overall impact on an economy. The major po-
tential channels of the positive effects of remittance inflows on
the growth and development prospects of developing economies
include how these remittances impact on domestic investment,
balance of payments, ease domestic credit constraints, exports,
diversification of economic activities, levels of employment and
wages, human capital development and technological progress.
On the contrary, remittance inflows may also have adverse ef-
fects on the growth and development prospects of developing
economies in a number of ways.
One of the critical negative effects of increased remittance in-
flows on a developing economy is the infection of the Dutch
Disease through reduction in international competitiveness. A
continuous and significant inflow of remittances can lead to in-
crease in demand for the domestic currency. This increase in
demand for non-tradable may further lead to the appreciation
of the domestic currency, hence real appreciation of the ex-
change rate, which in turn reduces the international competitive-
ness of the country’s exports whilst imports are made relatively
cheaper. In effect, remittances may, through a number of mech-
anisms, exacerbate the balance of payments position in the long-
run Ahlburg [8], later Brown and Ahlburg [9], have argued that
remittances undermine productivity and growth in low-income
countries because they are readily spent on consumption likely
to be dominated by foreign goods than on productive invest-
ments. Theoretically, the degree of impact of remittance inflows
on external competitiveness of a receiving-developing country
may vary depending upon some specific characteristics. For
instance, because unemployment is high in many developing
countries, there may not be any significant increase in the pro-
duction costs of export commodities even in the face of an in-
creased demand for non-tradable.
2013 21 1 15
 Can remittances alone trigger economic growth? Probably data estimation, an empirical exposition of which is provided
not. Although remittances play an increasingly vital role in in equation (2) below. where Yit
securing and actually improving the livelihoods of millions of
people in the developing world, it would be naive to expect Yit = λi + γt + (Xit )ϕ + ψit
that remittances alone could solve more structural development
Yit is the natural logarithm of real GDP per capita in country
obstacles such as an unstable political environment, misguided
i at year t, and Xit is a vector of the explanatory variables (re-
macroeconomic policies, lack of security, bureaucracy, corrup-
mittances, investment in physical and human capital, trade, for-
tion or deficient infrastructure.
eign direct investment, final consumption expenditures, inflation
Also, legal insecurity of property tends to have devastating
and Fixed capital Formation) for country i = 1, 2, . . ., m and at
effects on people’s ability and willingness to invest (see De
time t = 1, 2, . . ., T , φ a scalar vector of parameters of β1 , . . ., β7 ;
Soto [34]). However, if development in origin countries takes
ψit is a classical stochastic disturbance term with E[ψit ] = 0
a positive turn, if countries stabilize politically and economic
and var[ψit ] = σε02 , λi and γt are country and time specific ef-
growth starts to take off, then migrants are likely to be among
fects, respectively. Instead of a priori decision on the behavior
the first to join in and recognize such new opportunities, rein-
of λi + γt , different types of assumptions are separately imposed
forcing these positive trends through investing, circulating and
on the model and the one that gives robust estimates is chosen.
returning to their origin countries.

8.1.1 Empirical Results and Interpretations

8.1 An Empirical Model of Economic Growth with Remit-
Several versions of equation 2 are tested in order to obtain a
tances
model which yields robust results and best fits the data. Accord-
In the economic growth literature, researchers have been in-
ingly, column 1 of Table 2 presents the estimation results of a
terested in the rate at which countries close the gap between
quasi fixed-effects panel with heteroskedasticity corrected stan-
their current positions and their desired long-run growth path.
dard errors, whereas column 2 presents the estimation results for
To determine the responsiveness of income growth rate to remit-
the random- effects model with bootstrap standard errors. The
tances and the traditional the sources of economic growth such
correction for heteroskedasticity and the presence of the initial
as investment in physical (GCFit) and human capital (ENRit),
income converts the pooled regression with heteroskedasticity
openness of the economy as measured by the ratio of the sum
corrected standard errors into a quasi fixed-effects model. Apart
of imports and exports to the GDP, often proxy by the terms of
from the magnitude of the coefficients, the results reported in
trade (TOTit), foreign direct investment (FDI), and the impact
columns 1 and 2 are comparable.
of the initial per capita income (INYit), we first specify a simple
double log-linear Cobb-Douglass production function as: Tab. 2. Fixed Effects method

ln GDPit = β1 + β2 ln REMit + β3 ln GCFit + β4 ln T RDit + Variable Estimation Std.error t test p-value

β5 ln ENRit + β6 ln FDIit + β7 ln FConit + β8 ln INFit + ε Remit 0.1431056 0.0128312 11.1529 ∼0

FDI 0.069603 0.0251166 2.7712 0.0056
Where ln GDPit is the natural log of real GDP per capita and SchoolEn 0.6420787 0.0596872 10.7574 ∼0
ln REMit is log of remittances per capita in US$; ln GCFit TradePercGDP 0.1274885 0.03076883 4.1434 ∼0
is the log of gross fixed capital formation as a percent of Final_consum −0.7812326 0.1113710 −7.0147 ∼0
Inflat −0.0540485 0.0168475 −3.2081 0.00144
real GDP used as a proxy for investment in physical capital;
CapFixPercGDP 0.5075144 0.0784339 6.4706 ∼0
ln ENRit is log of secondary school enrollment used as mea-
sure of investment in human capital which has a positive effect Notes: balanced panel (n = 21, T = 21, N = 441). Fixed effect method.
on the economic growth of developing countries (Schultz [101]; R-Squared = 0.65146. Dependent variable: ln (GDP per Capita).

Romer [97]; Lucas [72]; and Barro [17]). FDIit is the log of
foreign direct investment used to capture the effect of external
sources of capital on growth; T RDit is the log of the terms of
trade for each country under consideration, measured by the
ratio of the export to import price indices to capture the im-
pact of trade, or openness of the economy on economic growth.
ln FCONit is log of a measure of the Final Consumption expen-
ditures. Hence, we expect the sign of the Final Consumption
expenditures to be negative. ln INFit is log of a measure of the
Inflation rate. Hence, we expect the sign of the Inflation to be
negative.
To estimate the parameters corresponding to variables of in-
terest from the data under consideration, we employ a panel
A comparison of the consistent quasi fixed-effects model with
the efficient random-effects model using the Haussmann speci-
fication test, rejects the random-effects estimates at p<0.05 in
favor of the quasi fixed-effects estimates. We thus base the dis-
cussion of our findings on the more robust quasi fixed effects
results reported in column 1 of Table 3. Broadly, the results
reveal the expected relationship between the GDP per capita in-
come (GDPit ) and the explanatory variables i.e., the variables
representing the sources of growth have the expected signs ac-
cording to the a priori predictions. All the coefficients represent
elasticity’s since we estimated a double-logarithmic model.

16 Per. Pol. Soc. and Man. Sci. Adela Shera / Dietmar Meyer
 Tab. 3. Random Effects method
to time fluctuations in the economic performance of Albanian
Variable Estimation Std.error t test p-value economy are appealing.
Intercept 1.7951198 0.1801136 9.9666 ∼0
Remit 0.1401268 0.0127048 11.0294 ∼0 Conclusion
FDI 0.071263 0.0250181 2.8485 0.004392585 The main goal of this study is to investigate the effect of re-
SchoolEn 0.6262605 0.0587121 10.6666 ∼0 mittances relative to the other external sources of capital such as
TradePercGDP 0.1549137 0.0157636 9.8273 ∼0 foreign direct investment on the economic growth in Albanian
Final_consum −0.7940381 0.1096914 −7.2388 ∼0
economy. The results show that remittances do have positively
Inflat −0.0577497 0.0167906 −3.4394 0.0006395
CapFixPercGDP 0.5137754 0.0781985 6.5701 ∼0
impact on the growth of the GDP per capita of Albanian coun-
try. We have found that a 1 percent increase in remittances lead
Notes: balanced panel (n = 21, T = 21, N = 441). Random effect method. to a 0.14 percent increase in the GDP per capita income.
Adj. R-Squared = 0.64039. Dependent variable: ln(GDP per Capita). Furthermore, large-scale emigration can have a deleterious ef-
fect on domestic labor markets in specific sectors such as higher
R> gW <- plm(GDP_per capita~X_MATRIX,
education, government services, science and technology, and the
data=DATA,model="Within") manufacturing and services, especially where those migrating
R> gr <- plm(GDP_ per capita~X_MATRIX, to other countries are largely skilled workers who are difficult
data= DATA,model="random") and expensive to replace. Migrant transfers in the form of re-
R> phtest(gr, g1) mittances can ease the immediate budget constraints of families
Hausman Test
by bolstering crucial spending needs on food, health care, and
data: GDP_GROWTH~X_MATRIX
chisq = 21.33, df = 8, p-value = 0.006311
schooling expenses for their children.
alternative hypothesis: one model is inconsistent
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