What impact do remittances have on stimulating overall economic growth? Remittances can be used for consumption and investment which further stimulates demand for goods and services, as well as contribute to financial development. On the other hand, they can create dependence in recipients and cause real exchange-rate appreciation which adversely affects domestic production.
The answer is an empirical one which we can answer using available data. Our findings echo recent economic research which shows that remittances, even when not invested directly, can have an important multiplier effect.
In our study, we focused only on the magnitude of the impact of remittances on aggregate demand in Bangladesh and calculated the traditional Keynesian multiplier effect, that is how much income is generated from every remittance dollar, following the approach adopted by Nicholas Glytsos by estimating a consumption function, an investment function, and an imports function. To estimate the parameters we used data from the Bangladesh Bureau of Statistics national accounts covering the period 1981-2010. We ran simple Ordinary Least Squares regressions to estimate the structural parameters. Here is a summary of our results:
- In the consumption regression, the sign of the regression coefficient on disposable income is positive, implying that remittance contributes to consumption. The regression coefficient is significant at 1%. The marginal propensity to consume is 0.53. This means that doubling of workers’ remittances and national income increase consumption by approximately 53%.
- The estimated investment equation has a highly significant coefficient of the income variable, which reflects profits. The value of the coefficient indicates the propensity to invest and it confirms the notion that remittances do lead to an increase in investment—the coefficient is 0.42 indicating that doubling of workers’ remittances and national income increase investments by approximately 42%.
- The estimated coefficient of the import equation is 0.69 and significant. This coefficient shows the value of the marginal propensity to import. Doubling of workers remittances and national income increases imports by 69%
These results suggest that remittances do augment consumption and investment and thereby have an important role in stimulating the economy. We use these coefficients to compute the multiplier effects of remittances. This multiplier naturally gives the unit potential impact of remittances, but the magnitudes of overall effects on growth depend on the size of remittances, their annual changes and pre-existing productive capacity in the economy. The short run multiplier is 1.35 and the long run multiplier is 2.07. It means that a $100 increase in remittances increases aggregate demand by $135 in the short run and by $207 in the long run when the lagged effects fully work their way through the economy, given excess capacity.
International and regional evidence indicates that “migradollars” can substantially increase GNP. Bangladesh’s multiplier is in fact the lowest in South Asia compared with 4.08 in India, 3.56 in Pakistan, 2.62 in Sri Lanka, and 1.9 in Nepal. In Mexico, it is 2.69 for urban households and 3.17 for rural. In Greece, remittances from the 1970s have been shown to account for more than half of the GDP growth rate. Of course, an economy must have the capacity to meet the additional demand generated by remittances or they can be inflationary.
Simply stated, remittance greases and adds wheels to the economy. This piece has summarized evidence on grease. Coming up: international evidence on remittance adding wheels.
Photo credit: Arne Hoel/World Bank