Paper

Remittances, Financial Development, and Growth

Analyzing impact of remittances on growth

This paper studies the links between remittances and growth, focusing in particular on how local financial sector development influences a countrys capacity to take advantage of remittances.

Despite the increasing importance of remittances in total international capital flows, the relationship between remittances and growth has not been adequately studied. The study uses a newly-constructed dataset for remittances covering about 100 developing countries.

The study also explores some common myths about remittances and suggests that they are predominantly profit-driven and mostly pro-cyclical. It states that:

  • Remittances are not only consumed, but also used for investment, particularly in countries where the financial sector does not meet the credit needs of local entrepreneurs;
  • Remittances respond as much to economic incentives and investment opportunities in the home country as to altruistic or insurance motives;
  • Remittances boost growth in countries with less developed financial systems by providing an alternative way to finance investment and helping overcome liquidity constraints;
  • Remittances are more likely to discourage labor supply in more financially developed countries.

About this Publication

By Giuliano, P. & Ruiz-Arranz, M.
Published